Reward programs are shitcoins. Low-paid, not-worth-the-effort, permissioned, frivolous, useless shitcoins. #1530254  #869415

It’s actually worse than that. Yesterday, Matt Levine of Money Stuff had this great rendition of other financial products that are oddly (“irrationally”) priced such that slick, maximizing consumers can take advantage of them — but actually, what usually happens is that most customers miss out, and in the “missing out” the scheme/shitcoin issuer/bank/insurance company etc makes its winnings.

Incredible. It’s aaaall coming together now.

We start with loyalty programs; everybody knows them, everybody has stray "points" from some health store or clothing apparel line or airline; everybody hates them.

Loyalty/rewards programs work by fooling the consumer...tit-for-tat, "giving" them something of value such that they a) return (=free marketing), b) spend in particular ways (=directly on website, this product instead of that, this airline instead of that), c) allows issuing company itself some seigniorage -- e.g., Starbucks finances some 7% of its balance sheet via points/deposits on their coffee app. Levine includes the hypothetical "maximizer"

If you use each card optimally, the bank will not make much money on your account; it might even lose money. The bank might be paying you more in rewards than it makes in transaction fees. The bank is giving you a deal that is too good, a deal that might bankrupt it if everyone took the deal. But almost nobody does this. Most people just have one or two or three credit cards, and they use them for all of their stuff, and they mostly get the average reward payment and it’s fine. Some of them do even worse; they forget about the rewards and they expire, say. Some people are on the Reddit forums trying to optimize their rewards, but that’s fine.

Every so often a bank will mess this up and lose money. [...] But for the most part it works out well. Competitive pressure forces banks to offer deals that would be good if consumers used them optimally, and to rely on the fact that consumers mostly don’t.

That's the idea: preying on irrationality/time-constrained consumers bound to make an optimizing mistake... and bam, there we are having screwed them over/eeked out a tiny bit more revenue from them! Muuu-haaa-haaa!

Life insurance

Most people know this story, too. Life insurance is too cheap:

Life insurance is often underpriced: If you buy 20-year term life insurance, your total monthly premiums over 20 years will probably add up to less than (1) your death benefit times (2) the actuarial probability that you will die during those 20 years. If 10,000 people signed up for term life insurance and paid all of their premiums, the insurance company would probably lose money.

The insurance companies are not idiots. They can offer underpriced insurance because many people do not pay all their premiums. They buy term life insurance, they pay premiums for a while, and then they stop: They need the money for other purposes, their circumstances change, they stop paying and the policies lapse. They do not “optimally exercise” their life insurance policies; they let them lapse when they shouldn’t.

You make an ever so slightly EV-negative bet, hoping that the other guy will fuck up and turn it positive. Very neat business model.

This should be a funny arbitrage to run:

You could imagine an extremely efficient world in which everyone took out millions of dollars of underpriced life insurance and immediately turned around and sold it at a profit to Apollo, which then made a lot of money at the expense of insurance companies, which then had to significantly raise the premiums they charged for life insurance. This mostly did not happen in the real world, in part for legal-risk reasons, but in large part because people are busy.

MORTGAGES

Yes, fuck the boomers and their houses. #1468968, #1554892

We all know banks bundle mortgage service with a bunch of other stuff: mandatory savings into inferior products, cards, account fees, kids' account fees, blah-blah-blah... meaning they can offer the main product (=mortgage) at extremely attractive rates.

That, plus the underpriced option idea, are some reasons why mortgages are so goddamn cheap and financially beneficial.

surely the most important example is the 30-year fixed-rate mortgage prepayable without penalty. In the US, if you want to buy a house, a bank will probably lend you 80% of the value of the house at a fixed interest rate of, say, 6.65%. If interest rates go up, you don’t care: You pay 6.65% for 30 years. If interest rates go down, though, you can refinance at any time: You can go to a bank, take out a new 30-year fixed-rate mortgage at 4.5% or whatever, and use the money to pay back the old mortgage. You have a valuable interest-rate option: You have locked in a maximum interest rate for 30 years, but you have no minimum rate. In some approximate sense, you’ve got a floating-rate mortgage with a rate cap struck at today’s rates. 

"And the bank will sell you that option quite cheaply: That 6.65% rate you’d pay on a 30-year mortgage is lower than the yield on Meta Platforms Inc.’s 30-year bonds"

WHYYY this happening, in my beautiful efficient economy? Rug the spammers, stop polluting the chain...

Why do banks underprice this option? The basic answer is “because people do not optimally exercise it.” For one thing, when rates go down, people often do not refinance (or otherwise prepay) their mortgages. They are busy! They have a lot going on, refinancing takes time and is a pain, they do not trust mortgage bankers or want to spend a lot of time dealing with them, mortgages are confusing and it is hard to understand whether refinancing is a good deal. They are not checking in on interest rates every day, waiting for the optimal time to refinance. They’re getting tons of junk mail from mortgage companies saying “The Optimal Time to Refinance is NOW,” but that sounds fake and they throw it away.

Also:

Mortgage rates have gone up a lot since 2020, which has led to complaints and proposed solutions — like assumable or portable mortgages — that would allow people to avoid suboptimal prepayment. But if people could easily avoid suboptimal prepayment, mortgage rates would be higher.

THE AI-TO-THE-RESCUE TWIST:

Here was the funny conclusion:

If you have three credit cards, an AI plug-in in your browser could automatically choose the most rewarding one for each online transaction. Or: Instead of “solving a complicated system of partial differential equations” to decide whether to refinance your mortgage, you just tell your AI “hey AI let me know when I should refinance my mortgage,” and the AI solves the equations and pings you when it’s time. Or: You could set up an AI agent to browse high-yield savings account offerings each day and move your money to the best one. When some US regional banks ran into trouble a few years ago, people attributed the scale and speed of the problem to the rise of the internet and social media: With social media, you could quickly learn rumors about a bank’s instability; with online banking, you could quickly move your money from an unstable bank to a safer one. “Game’s the same, just got more fierce,” said the vice chairman of the Federal Deposit Insurance Corp. Agentic AI could make it fiercer.

"A lot of the consumer financial industry is based on consumer irrationality and inattention. Consumer financial products are built, and priced, for a world in which rationality and attention are scarce."

AI could create a world in which rationality and attention — not human rationality and attention, but some bot that can search the web and do math — are abundant. What will that mean for credit cards and life insurance and mortgage rates?

Aaaaah, Den thinks with a glimmer of hope in his monkey eyes: rewards programs die off or slim down; that mortgages become less favorable, tax-incentivized and otherwise; that life insurance and other financialized games (looking at nobody in particular...#1532501) become less attractive, less pervasive.

...but ah, Arwen's sweet voice soothes him, then it is a good dream.