Monday, May 14, 2018

Warning Lights

When you see a warning sign, should you take action, or assume the warning is wrong?

When I was a kid, my brother bought a 1965 Jeep Wagoneer, with a snow plow.  It was powered by the OHC "Tornado" inline six, with a three-on-the-floor.  It wasn't a bad car/truck, with not too much rust, but it was about 10 years old at the time and near the end of its design life back then.   It didn't help that it was being driven by a teenager.  This was before the Wagoneer became a "luxury SUV" in the era before SUVs existed.

My brother had two speeds - stopped and full-throttle.   And when he drove it, it was always foot-to-the-floor.  One night, we were out driving it - aimlessly, as teenagers and poor people tend to do - and the temperature and oil lights came on.  I pleaded with him to stop the car, but he said, "Oh, those lights are probably broken!" and downshifted it and gave it more gas.

The deal was, he didn't have ten cents to his name - my Dad in fact paid for the car.   So he didn't want to think it needed oil, because he couldn't afford it.  It was better to assume the oil light was broken.

I finally made a deal with him - pull into the next gas station, and if it needed oil, I'd pay for it with my paper-route money (what little I had that he didn't steal from me).   It was a poor bargain, as when we lurched into the Gulf station, it turned out to need four quarts of oil.  What it didn't burn, it leaked, as it turned out.

And while I ended up paying nearly $4 for the oil at gas-station prices, at least I didn't have to walk home twenty miles that night.   Of course, the poor Jeep didn't last long under my brother's care - nor did the next one my Dad bought for him, although that one seized when my Dad refused to pull over when the transmission got stuck in first and over-revved and overheated the engine.   Like Father, Like Son - car abuse seemed to run in the family.

But it is an interesting phenomenon.  I've been watching "P3D" flight simulator reconstructions of airplane crashes or FS reconstructions on on YouTube.  They are strangely compelling.  What is interesting about the videos, is that in most cases, the pilots had a chance to land the plane or take some action, but instead ignored warning alarms and tried to "figure out" the problem, often wasting precious minutes calling their maintenance department and trying to find someone to help them turn off the alarm.   When the stall alarm comes on, it is no time to be calling the help desk in India!

But I guess it is human nature - to ignore alarms or try to figure out if they are real or fake.   And the more a system sets off false alarms, the more people ignore them - the boy-who-cried-wolf syndrome.  In some of these accident reconstructions, it is reported that pilots turned off circuit breakers for various alarm systems, such as the takeoff configuration alarm.  You take off with the flaps up, and well, bad things happen quickly.

And in complex systems, it is possible that false alarms sound.   Modern cars set off the "check engine" light seemingly on a whim.  When the OBD-2 cars came out in the mid-1990's, many owners were righteously pissed-off when they took their car to the dealer and paid $80 to reset a "check engine" light, only to be told the problem was a loose gas cap.   They haven't really fixed that problem, although the Hamster has instructions on the gas cap door on how to reset the CE light if the gas cap was loose.   It is sort of a "patch" to the problem, not a real fix.

But as a result, people tend to ignore "check engine" light warnings more.   More of the-boy-who-cried-wolf effect.  Or take these signs for "construction zones" where no construction is going on, or "lane closed ahead" and you pull over into the other lane, only to feel like an idiot when everyone passes you on the right and it turns out there is no closed lane, just lazy construction workers who failed to take down the signs.

And that is a real danger to road maintenance crews.  Because I am seeing this more and more these days, and more and more people seem to be ignoring these sort of signs, until they can see for themselves that actual lanes are closed and construction equipment is present.   Crying wolf has real and negative real-world consequences.

Similarly, in finances, we tend to ignore warning signs.   Our net worth drops down, and we ignore this - if we even bother to calculate it in the first place.   Our debt load increases, and we assume this is OK - we can continually refinance our debts, juggling them from credit card to home-equity loan.  So long as the monthly payments are made, we're doing OK, right?

And I can say from experience, that I fell into that trap.  When you are young and starting out, you get a paycheck and use it to pay the rent, the car payment, the cable bill, and the groceries.  Maybe if there is a little "left over" you go out to eat on Saturday night, or buy a new shirt at the mall.   If there is nothing left over you put it on a credit card and will pay for it later - somehow.

We become trained to think of money in terms of weekly and monthly installments, instead of something we own.   So over time, we get into this monthly "cash-flow" mindset, which might be inevitable when you are 25 years old, own nothing, and have a large monthly rent or mortgage payment to make.   But over time, you have to get out of that mindset, or you end up in a spiral dive into the ocean - like those planes on the P3D simulator.

And maybe the same is true of markets.   We hear a lot of background noise - alarms - about the market these days, but ignore them.   The plane is still flying - and climbing - the alarm must be broken!   Never mind that we are losing cabin pressure and everything seems fine, only because we are succumbing to hypoxia.  That darn alarm must be broke again!  Call maintenance and ask them what to do.   What you should do is land the plane, dummy!

So, every day the market doesn't crash is a day that the bulls can cry, "the warning light is broken!  See, nothing bad has happened!"