Concussions and Santa Claus Amnesia

This crazy weekend reminded me of my frequent visits to the ER as a kid. I had 4 concussions by the time I was 12. Two of them happened on vacation. My concussions are part of our entire family lore. Yinh claims, based on her independent interviews with my family, that it was actually 5. I maintain it was only 3. Mom says 4 which is the number that has stuck. We’ll never know. This was in the day that you’d bump your head and everyone would try to keep you awake for the next day as if you were now a Seal trainee during Hell Week.

Family oral histories are dotted with apocryphal stories. Playing telephone as a kid could have told you that. The dubious nature of old stories is actually a narrower instance of a rule that says most of what you know is actually bullshit. Your parents told you things their parents told them. And parents are constantly lying to their kids. But this really becomes obvious when you become a parent and realize how many untruths you say just to get through the day. I had my fair share this weekend as I told Max we were going to “get some medicine” as I pack an overnight bag to head to the hospital. It didn’t hurt that Zak, 6, was in the audience.

It’s almost impossible to not want to re-examine every fact that has calcified in your mind since youth once you accept this. And you can’t not accept it without suffering some version of what I will call “Santa Claus amnesia”. The analogy is clear if you follow Michael Crichton’s explanation of Gell-Mann amnesia:

Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”

Somehow we suspend our disbelief that our longest-running pieces of knowledge aren’t from our most dubious sources: our parents. Don’t begrudge them. It’s not their fault. It was truly out of love.

Zak and Max if you read this one day, know that that you shouldn’t die on any hills for anything I’ve ever said to you. Other than the fact that your parents love you.

And to my own parents. I don’t believe a lot of what I was told. But I love you. Thanks for taking me to the ER a lot. I know what that was like now.

Investing Is Biology Not Physics

Since the 1980s, there has been a tradition of Wall Street luring physicists from academia. Option math has more in common with the laws of thermodynamics than it does with accounting. But if the nature of markets themselves resembled any science it would be biology. Markets are governed by predator-prey dynamics. Models are adaptive. The actors learn. Doublethink and tradecraft.

In physics, the rules are fixed. No matter how many of us use the laws of gravity to keep firmly planted on planet Earth, gravity doesn’t get crowded. It keeps me just as bound to its surface as it did the Neanderthals. In markets, if I raise a bunch of money by showing people that selling volatility “harvests” a risk premium and the strategy continues to work then people will give me money to do it even more. So the strategy’s assets will grow both via inflows and via returns. The only problem is that to continue delivering the same performance on the larger asset base the strategy needs to sell ever more options. Assumptions of market liquidity when a strategy manages X will not hold when the strategy manages 10x or 100x. That’s about as close as we get to a physical law in finance.

The nature of liquidity is biological. It is subject to the whims of masses. It is the physical point where the backtest meets reality. Reality is a recursive, perma-learning system, with constraints and desires whose steers are pulled by investors, politicians, and corporations.

One of the best discussions I’ve ever listened to about what this looks like in practice is investor Andy Redleaf on Ted Seides’ Capital Allocators podcast. Redleaf has been in the game for over 40 years and was an early options market maker when they were listed in the 1970s. Since then he has followed opportunities that present themselves as markets change. A true agnostic on the hunt for profitable niches. Especially niches with structural reasons for being extra profitable. The advantage of this approach is that when the reasons go away, you know it is safe to cut and run. The disadvantage is that you cannot be a one-trick pony. You need to keep finding easy games.

For the full discussion of market history, where sources of edge often lurk, investing challenges today, and why he bought a bank check out the episode including my notes. (Link)

Susquehanna took their understanding of markets as biological to a logical recruiting conclusion — hire game players. Poker, Magic, chess, sports bettors. All games that require multi-order thinking and adapting to your environment. If you know anyone with a strong game background (and ideally some programming chops) check out Moontower reader Metaling Mage’s call for an intern. He’s a former Susquehanna PM.

You can reach out to him for details but it’s safe to say based on where he is now that this is could be one of the most selective Wall Street internships on the markets side of the business.

A Note From The ER

Since I don’t really write nor overly care about current events I’m gonna postpone what I was gonna write about this week and thank you in advance for indulging something a bit off-the-cuff and personal.

The last 2 months my family Whatsapp chat has been an emergency room on a full moon night. No less than 6 surgeries or hospitalizations ranging from an eye surgery on a 6-year old to my 85 yr old grandmother’s emergency hip surgery this week. This is close family. Every person shares 1/4 to 1/2 my dna (this expression is probably not biologically true but just as we gloss over misspelled words, you can identify what relations this refers to almost perfectly). It’s been a bit of bad luck clustered around the start of 2020.

On Friday, I called my house shortly after getting to work. I wanted an update from my mother-in-law on Zak’s fever. He was home from school Thursday and Friday. Turns out he was still asleep at 8am, but now Max (3.5 yrs old) was sick. With Yinh just getting ready to return from Japan, I was calling the workday early and heading home to pitch in. When I got home Zak was awake and on the mend but now Max was pathetic and clearly having a rough go of it. Earlier in the week, his preschool closed for 2 days because all the teachers got strep. It was an easy decision to take him to the pediatrician for some antibiotics.

At the doctor’s office, they run some tests and see he also has flu ‘A’. We didn’t do flu shots for the kids. Bad us. And since his breathing is a bit strained we head home with albuterol as well as antibiotics and Tamiflu. Parents will relate.

At home the Tamiflu makes him vomit but even more annoying is the nebulizer sessions don’t seem to slow down his rapid breathing. I call the after-hours line and the doctor on-call tells me to count his breaths in one minute. Around 60. At 50 or more she’d recommend going to the ER. So we pack a bag and off we go to John Muir in Walnut Creek. Now there isn’t going to be a scary reveal otherwise I wouldn’t write about it, so let’s diffuse that now. However, his chest x-ray shows budding pneumonia as well.

While he’s battling on 3 fronts, he is doing well. They administer oxygen and IV. Standard stuff. Parents of kids with asthma can double relate. He’s responsive to the treatments. But all things considered, we are staying the night. Actually, at least 2 nights and as I write this I’m not sure if there will be more. The ordeal started Friday so it will take a few days to peak and since pneumonia might be viral the antibiotics can’t kill two birds with one stone as they are already indicated for strep. By staying in the hospital, his immune system can get some extra support. He’s doing fine and just needs time.


As you can imagine, this is a very long day. And from the moment we checked into the ER until we were in our room for the night it was about 4 hours. There was a lot of downtime in that period. A few hopefully constructive takeaways:

1) Find a positive angle 

When I texted Yinh that I was in the ER I knew she wouldn’t open the texts until she landed for her layover in Japan. No matter how unalarming I write this text, the facts of the matter are going to induce panic. While the parent that’s present has to make realtime decisions and actually deal with logistics, the parent thousands of miles away, in my opinion, is in a worse emotional situation. She feels helpless and there is no amount of female empowerment that can suppress “working mom guilt” in a moment like that. I have the benefit of seeing that Max seems to be doing ok which is hard to believe when you are across the world and hear he has strep, flu, and pneumonia. I also have the advantage of seeing the staff’s composure and methods firsthand. I can see their reassurances firsthand and enjoy the impression that they are in control. My words, no matter how calm, are not going to stop her otherwise routine-ish flight from being the longest one of her life.


I only needed to imagine being in her shoes to reframe the ordeal as one in which I was thankful to be present. I felt fortunate to have the role I was dealt which sure beats self-pity or any other useless emotion. Every bit of uplifting perspective you can seize during emergencies is worth striving for.

2) Bedside Manner

The care at John Muir from the nurses, to the pediatrician they called in, to the overnight doctors on the peds floor was outstanding. As far as tactics, transparency, and explanations they seemed supremely competent. I felt Max is in great hands. But that feeling comes from more than competence. It’s the way they present themselves. The bedside manner. I feel invited into the process but more as a board member. While I have ultimate say, it’s clear that the folks in the trenches know what’s best. Despite that, they are never arrogant or dismissive of my thoughts yet also firm about what is called for. Combine this with the composure and even-handedness that they exhibit and it’s a masterclass in communication.


Crisis or simple brushfire, when dealing with non-experts, mind your bedside manners. Be a pro. How would an ER doctor act?

3) Focus

With a long weekend coming up and no travel plans, we were looking forward to a hike with friends, some downtime, and a chance to cross some chores off the list. Max had other plans. From the moment you decide you are going to the time warp known as the ER, you know your plans are over. More than that, all external stimuli fade to the background. The contrast is unreal. Chat messages, your reading queue, obligations, and whatever you were kind of working on in your brain’s standby mode simply fades to grey. The only thing in bold colors is the task at hand — get Max what he needs. It’s a very focusing experience. Circumstances aside for a moment. It was a state of presence I felt good in. I don’t think it’s quite the same “flow” that silent-mode advocates strive for. It’s almost the sense that nothing but what’s in front me matters. It’s the same feeling I had the day my kids were born. I think it’s a healthy feeling but it might also be irresponsible or nihlistic. I suspect that people who climb or surf big waves have found a way to bottle it. Interested in your thoughts on this.


Your “presence” capacity has headroom. Find ways to access it.

How You Say It > What You Say

It’s date night. You’ve been wanting to try the new spot. It’s crowded. The reward for a wait would be a cozy table pressed against your neighboring diners. Hmm. Nothing is more grating on the ears than the courtship ritual of hipsters on a date whose evening insurance policy is just a right-swipe away. Makes for feckless banter.

But you’re both feeling good. Showered. About as groomed as you’ll be on a weekend. The kids are watching iPad at home, grandma’s on sentry duty. The radio dealt Billie Jean on the way over. So you play it cool. Take the seats at the bar. Your cocktails arrive in front of you. Pause to cheers and snap an “ussie”. In the time it takes to upload it to the ‘Gram, Google settles your question — Elvis sold more records than MJ.

Phones down, back to one another. You’re discussing “who is the real king of pop”. Units-sold is just one aspect and you aren’t the types to waste time arguing facts so you deferred to the internet. More back and forth. You’re sparring with pads on. Exchanging taps. “Good point”. “True”. It’s a dance of its own. If only the hipsters could hear you. I imagine they’d cringe like a psychiatrist hearing the words “life coach”. Nevertheless, the playful dispute stays smooth until Kris responds, “Actually…”

End scene right there.

Here’s a happiness hack for you:

Read the damn room.

This date night debate is for zero stakes. It’s not about truth. It’s not the setting for a Juilliard-level surgery of pop music psychohistory. There’s nothing to gain from appealing to expertise. To invite the feeling of resignation that says every matter is already solved. How many fights could have been avoided if this moment were re-imagined? Why should the verbal monopolize the focus? There are so many other stimuli serving the moment. It’s a tyranny of intellect that the words are mistaken for the real communication that was going down.

If you can read between the lines, you’d know that I blew up a date-night by being a jerk. I was dense. Now I’ve been married too long to have done this obstinately. I hope I don’t have an insecure need to be “right”. I’m quite aware there’s a broad plane across which reasonable people can disagree. This was second level stuff.

This was about subtlety in the way I made her feel during a benign disagreement (it wasn’t about Elvis). If you are actively trying to be agreeable but come off condescending you might be mansplaining. Even if you are correct, assuming it’s a matter that has a correct, what’s the point? Reason is a slave to the passions as David Hume put it. Action springs from feeling not logic. To be effective, whatever that means in context, remember that how you say is often more important than what you say.

It’s no secret that body language and tone are tells. Non-verbal communication is an “honest” biological signal because it’s hard to fake. This week I have some fun links to help you think about how we communicate.

70% of how you look, 20% of how you sound, only 10% is what you say

  • Check out Eddie Izzard from one of my favorite all-time comedy specials Dress to Kill (Link; start at 2:20)

The Scariest Accent

  • Another from a favorite comedy skit. Trevor Noah breaks down the scariest accent. He makes a clever insight on how we perceive a foreign language vs a foreign accent. (Link)

How Not To Sound Like An Evil Robot

  • I can be so guilty of this. A short and funny guide to word choice by Slatestar. (Link)

Ecological Rationality 

  • Ecological rationality is defined as knowing which heuristic works in which environment.  Professor Kahneman is rightly lauded for being the father of behavioral psychology. It’s a field that points out all the failure modes and blind spots in our shortcut thinking. You’d think the field was settled given how large Kahneman looms. But the work of Gerd Gigerenzer says otherwise, redeeming our so-called biases in real-world settings. His disagreements with Kahneman are often quite technical and therefore less polarizing than some would like to portray. I most like how it exposes a false paradigm where rationality is pitted against mental heuristics.

Many smart, successful people fail in rationality tests inside a lab because rationality is defined rather narrowly. It’s logical rationality – about not violating some law of logic or probability. But, outside the lab, in the real-world, we cannot do well with just with logical rationality, we need ecological rationality – the kind of thinking that helps us get what we want in an environment that’s uncertain and dynamic. (Link)


  • The single biggest problem in communication is the illusion that it has taken place. — George Bernard Shaw
  • Never offend people with style when you can offend them with substance. — Sam Brown

Podcast Episodes

  • One of my top 10 podcast episodes ever is Patrick O’Shaughnessy interviewing Eric Maddox, the US interrogator in Iraq whose work led us to Saddam. Must listen. (Link)

This week we explore a rare and underappreciated skill through the lens of an incredible story. My guest is Eric Maddox, whose name you probably don’t know but won’t soon forget. Just trust me that you need to listen to this entire episode, and listen carefully—because that is what the episode is ultimately all about: how to listen to others, with care and empathy, in the age of distraction.

  • How To Improve Your Speaking Voice. World-renowned voice coach Roger Love goes on Art of Manliness (Link)

Roger explains why having a clear, confident, pleasant speaking voice is important for success in your career and your life, the biggest ways people sabotage their voice, including voice fry, uptalk, and being nasally, and how these issues can be addressed and eliminated. Roger also shares how to speak in a more masculine way, and why you’re probably not speaking loudly enough. 


  • Why singing and speaking are basically the same
  • Why the voice you have is not necessarily the voice you were born with
  • The reason so many people dislike hearing their own voice
  • The most common vocal bad habits
  • The rise of uptalk (valley talk), and how it’s different from going up in melody
  • What role does anatomy play in our speaking voice?
  • Why men try to artificially lower their voice, and the physical risks of doing so
  • Brass tacks tips for improving your voice
  • What is voice fry? Why are people doing it?
  • How to avoid sounding angry
  • Why people almost always speak quieter than they should
  • Why you mumble and how to fix it
  • Why your voice is more important than your words

Illusions, Empathy, and the Hackability of Perception

“Hey, what happened to the dinosaurs? Weren’t they just here?” Maybe comets killed the dinosaurs, maybe they tripped and fell. What’s the difference? We’ll never know. We couldn’t solve the Kennedy Assassination, we had films of that. Good luck with the Stegosaurus.”

–Jerry Seinfeld from his 1993 book SeinLanguage

As a teen, I read that book probably 20 times. My brain was full of Seinfeld takes thanks to the book basket next to our bathroom toilet. The book is still in that bathroom more than 25 years later.

Good luck with the stegosaurus

I remember having that exact reaction in the wake of the “dress illusion” that swept the internet nearly 5 years ago.  You can be staring at the same picture as your neighbor and disagree on the color. Then in 2018 the yanny/laurel debate exposed how different our audio perceptions are. These illusions are unsettling. If we can’t agree on what appears plainly before us, what hope is there for mutual understanding on issues.

It’s a cynical thought. And I’m not sure it’s wrong. The minimum amount of structural disagreement that would exist if everyone agreed on the same facts is disturbingly high. Call me naive, but this was a dark realization. And once you notice how futile striving for agreement is, the world does nothing to help you unsee it.

The Hackability of  Perception 

Scott Alexander writes:

“I’ve been focusing a lot lately on the idea of the Bayesian brain and its input channels. Some input channels, like vision, are high-bandwidth; we get so much data about the real world that we usually see pretty much what is really there.

Other channels, like pain, are low bandwidth. This is why the placebo effect works – we get so little data about how much pain is coming from different parts of our bodies that even our strongest percepts are wild guesses, where we fill in the gaps with predictions and smooth away conflicting evidence. If our predictions change – ie we know we just got morphine and morphine lowers pain – then the brain will happily change its guesses. This would never happen with vision – I can’t use the placebo effect to make you think an orange crayon is blue – but pain is low-bandwidth enough that it works.

Vision, with all of its flaws, represents a ceiling on perceptive fidelity. Sensations like pain are lower bandwidth. Vision is hackable but less so than pain. And unfortunately, logic and reason are even more hackable.

He continues:

Reason is one of the lowest-bandwidth channels of all, which is why biases are so omnipresent and rational debate so rarely changes anyone’s mind. Most people revert to their priors – the beliefs of their tribe or the ones that fit their common sense – and you have to provide an overwhelming amount of rational evidence before the brain notices anything amiss at all.” (Link)

And then the lesson appeared.

The Real Meaning of Empathy

I’ve often thought of empathy as being able to put yourself in another’s shoes. Commiseration for what you have not experienced but could imagine. Pain, loss, anxiety. We can relate to these feelings. But that is only half of what it means to be empathetic.


Because you presume that the other person’s sense of loss correlates with how you would feel in the same scenario. But if you can’t agree on what color the dress is, how can you know how Mary feels when she loses her dog? True empathy requires tremendous humility. You are not living their loss through your eyes but accepting that your eyes are irrelevant. In a world in which we simply will never agree, empathy that is contingent on being able to relate is an empty virtue.

These illusions teach us that sometimes we can’t relate. Empathy needs to be ok with that.

For the past few years, I have seen illusions as a heat check. They are as humbling as they are entertaining. Magic shows, mentalists, and illusions are a constant reminder that our perceptions are heuristics that can be exploited. And if our thoughts are built upon our perceptions, we should afford them leeway in proportion to how much error lives in what we see, hear, and remember. Humility is not optional if you value honesty.

Paul Graham has described our minds as a compiled program that we’ve lost the source code to. It works, but we don’t know why.

How Do We Protect Ourselves From Illusions

1) Recognize we are not natural fact-checkers. Be humble since you are usually not thorough. (Link)

2) Be aware of biases

Nick Maggiulli highlights:

  • The peak-end rule: we tend to focus on the most intense and the most recent parts of a memory when judging an experience. Professor Dan Ariely has pointed out that this flies in the face of conventional wisdom to rip band-aids off quickly. He was a survivor of severe burns and used this knowledge in advising nurses about the daily removal and redressing of his bandages.
  • The serial-position effect: People tend to remember the first things (primacy) and the last things (recency) in a list, but tend to forget the middle things. Nick cleverly demonstrates this with the following example:
    • You sluhod be albe to raed tihs snetnece tohguh amlsot ervey wrod is spleeld icorenlrcty.

3) Appreciate that your memory is not a video camera

Professor Dan Gilbert on our memories being edited and unreliable:

“We try to repeat those experiences that we remember with pleasure and pride, and we try to avoid repeating those that we remember with embarrassment and regret. The trouble is that we often don’t remember them correctly. Remembering an experience feels a lot like opening a drawer and retrieving a story that was filed away on the day it was written, but…that feeling is one of our brain’s most sophisticated illusions. Memory is not a dutiful scribe that keeps a complete transcript of our experiences, but a sophisticated editor that clips and saves key elements of and experience and then uses these elements to rewrite the story each time we ask to reread it.”
Taking advantage of illusions

The Placebo Effect

We already saw how the placebo effect can be used to trick the low-bandwidth input channel of pain. Dan Ariely has claimed that the “mind is so powerful as evidenced by the placebo effect. The link between expectations and beliefs is astounding.”

Scott Alexander (a psychiatrist by trade) recaps the explanation of the placebo effect from Surfing Uncertainty and when you would expect it to be most effective:

Perceiving the world directly at every moment is too computationally intensive, so instead the brain guesses what the world is like and uses perception to check and correct its guesses. In a high-bandwidth system like vision, guesses are corrected very quickly and you end up very accurate (except for weird things like ignoring when the word “the” is twice in a row, like it’s been several times in this paragraph already without you noticing). In a low-bandwidth system like pain perception, the original guess plays a pretty big role, with real perception only modulating it to a limited degree (consider phantom limb pain, where the brain guesses that an arm that isn’t there hurts, and nothing can convince it otherwise). Well, if you just saw a truck run over your foot, you have a pretty strong guess that you’re having foot pain. And if you just got a bunch of morphine, you have a pretty strong guess that your pain is better. The real sense-data can modulate it in a Bayesian way, but the sense-data is so noisy that it won’t be weighted highly enough to replace the guess completely. 

If this is true, the placebo should be strongest in subjective perceptions of conditions sent to the brain through low-bandwidth relays. That covers H&G’s pain and nausea. (Link)

An example from my recent trip to the Lawrence Hall of Science

Consider this statement again:

In a low-bandwidth system like pain perception, the original guess plays a pretty big role, with real perception only modulating it to a limited degree

In the virtual reality exhibit currently on display, there is a recording playing. I’ve reproduced it here. If you’d like to play along, have a friend silently mouth the word “far” in sync with the recording. If you look at them while they do this, that’s exactly what you’ll hear. If you look away, you’ll hear what I actually recorded. In the exhibit, they show a silent video with 2 people mouthing different words. As you flip your gaze between them you hear what they are mouthing although the recording is always saying the same word.

More fun illusions

Here are 2 optical mind benders I’ve collected over the years.

  • The cafe wall (Link)
  • Sinusoidal waves (Link)

Music Appreciation Channels

My favorite YouTube channels are about music appreciation

1. Ryan and George are Lost in Vegas. (Link)

These 2 guys are R&B and hip-hop enthusiasts who have discovered rock and metal. Their followers submit songs for them to do reaction videos and they have amassed a million followers who tune in to see their commentary. It’s like a play-by-play for songs you know. Despite not being musicians themselves, you only need to see a few videos to realize they have innate musicality and perceptive ears. But the best part of these videos is how enthusiastic and endearing they are. It’s easy to see why they have become popular enough to quit their day jobs. I’ve been watching them for a couple of years and it’s cool to watch their palette widen and see what songs they will give their highest honor…”playlist!”

While I dig so many of their videos, including their breakdowns of Rush, Rage Against the Machine, Van Halen, and Metallica songs their’s nothing like watching them lose their minds over a song that you also love. They do plenty of hip-hop and even country songs.

Here are some of my favorites:

  • Alice in Chains: Rooster (Link)
  • Chris Stapleton: Tennessee Whiskey (Link)
  • Black Sabbath: War Pigs (Link)

And here’s a more recent one with their higher production backdrop…and is a great way to wade into the brilliance of Tool’s recent album which I’ve raved about before.:

  • Tool: Pneuma (Link)

2. Rick Beato’s Everything Music channel (Link)

Rick is a producer and multi-instrumentalist who represents the opposite end of Ryan and George’s amateur appreciation. Rick will dive into music theory and teach you what makes certain songs great. Everything from ear training to detailed top 20 lists. If you are a big music fan, music nerd, or musician this channel could keep you busy enough to displace Netflix. His home studio is ridiculous and he can sidestep getting blocked by music labels since he can easily just demonstrate the music being discussed on his own.

A great place to start:  “What Makes This Song Great?” series (Link)

Here’s a look at his other playlists. His son Dylan has perfect pitch and gets his own playlist full of his own party tricks.

Facing A New Decade

Facing A New Decade

With a new decade looming you are being bombarded with listicles, resolutions, and all manners of reflection. We can’t help but pause when faced with a year ending in a zero. Ascribing significance to base 10 years seems a bit arbitrary, but I’ll play along for a moment.

Taking Inventory

At the start of this decade, I was living in Long Island City. I had my own trading business by then, banked more money than I could have imagined possible just a decade earlier (trust me this says more about my 21-year-old imagination than my 31-year-old paychecks), and very recently married. Facebook was still new to me. We were mailing DVDs with Netflix. If I go back and look at my Google photo album from 10 years ago, it’s sparse. I looked back at my Google calendar from 2010. Crickets.

A lot changes in a decade. I don’t even have a DVD player now. I have been in the Bay Area for 8 years. My Nextdoor profile rhetorically wonders “How long do you need to live in CA before you’re no longer a New Yorker?”. After recently celebrating my 10 year wedding anniversary and 17th year overall with Yinh, I have now spent an equal amount of time with my partner as my nuclear family pre-college. In 2010, our circle of friends had very few babies. Today my 3-year-old is one of the runts of our friends’ combined litter. Today my life is rich with kids, so many nieces and nephews by both blood and bond.

But the passage of time carries everyone forward. My parents, wife’s parents, aunts and uncles, and yes even one of each of Yinh and my grandmothers are 10 years older.

We are children of a generation who gave birth young. We will be much older grandparents than our parents are today. We spent some extra time in our 20s hustling maybe. Or just having selfish fun. Tradeoffs I suppose but no sense in regrets. It’s natural to consider what I might be writing 10 years from now. When I’m 51. My oldest son will be taking the SAT. I’m already older than my mom was when I took the SAT! I’ll be shuttling Max to and from his freshman year of high school in between my doctor-recommended prostate exams and colonoscopies.

Another Year, Another Whisker

Projecting your life forward is never sentimental. Mawkishness only works in reverse. When you are young, looking forward is about ambition and hope. More money. More freedom. A house of your own. But when you cross your actuarial midpoint, the exercise drifts towards melancholy. We’ve seen enough to realize that joy balances on the head of a pin. The unannounced wind will invariably come. If you haven’t heard it whip yet, you’ve heard the tales of its force.

If this sounds sad, it’s because you compared this outlook with the illusions of youth. When you were young, you were naively impervious. I suspect this is a design feature. A timed release of feigned wisdom which you had not yet earned. Of physical beauty which belied your insecurity. When a 24-year-old bro advertises his fitness as a mate, we know nature’s mimicry transcends snakes and butterflies. When you are older, you can spot the fake.

If your beliefs from ten years ago embarrass you, congratulations. You’ve grown. Growth is paradoxical. It comes with both assuredness and humility. It must be humbling. You just learned how wrong your past self could be. But it’s also a hint. You don’t need to pretend anymore. It’s ok to be wrong. More than ok actually. Do you ever wonder what beliefs you carry today that will make future-you cringe? Squirm if you must, but let yourself grow.

A Gift Lies Ahead

Herein lies the beauty of looking ahead — grace.

You may get to be someone’s shelter from the wind. An honor to which even a precocious youth can find no shortcut. It’s as if life’s greatest privilege is reserved for the aged. For those who see their chance to serve as a reward for the mistakes they’ve made. When getting older makes you realize everything is ephemeral, then you can finally enjoy it. When you think you have forever, the present never feels urgent. If you could live forever, nothing would matter. Scarcity, far from a constraint, is actually liberation.

So rather than lament what you will inevitably lose, do what you can today to enhance the memories which are yours forever.

I say all of this knowing that in 10 years I will look back and think about how stupid I was about some things I think today. But that’s just another thing to look forward to.

Is There Actually An Equity Premium Puzzle?

The equity risk premium, or ERP, is defined as the excess return you get for investing in stocks over the risk-free rate. Simply, it’s the premium return you earn in exchange for dealing with path. The fact that you might experience a 20% drawdown every few years (with U.S. equity markets currently sitting on all-time highs it’s hard to believe that just 1 year ago the SP500 had a 20% drawdown). I admit this “no pain, no gain” explanation sounds a bit weird.

Student: Hey prof, why do I get paid extra for buying stocks instead of t-bills?

Master: Because if you weren’t offered a discounted price to buy stocks you wouldn’t. Duh.

Proof by induction can be unsatisfying. To be fair, my use of the word proof is straining its English definition. Instead, it’s typical to hear ERP referred to in the context of a puzzle since some economists with calculators decided that this roughly 6% historical premium has been excessive compared to what they would expect even risk-averse investors to demand.

Enter the Witch

But what if I told you that there is actually no ERP and therefore no puzzle. Well, you’d accuse me of heresy since I’m directly contradicting widely accepted financial orthodoxy. After all, I’m ignoring the fact that equities have in fact outperformed t-bills by a wide margin.

Let’s look at that assertion again — equities have outperformed t-bills by a wide margin.

Well, what do we mean by equities? Single stocks or indexes? This is where I let the witch take over. The heretic, BreakingTheMarket who states:

The Equity Premium Puzzle has lasted for 37 years without anyone recognizing the market index doesn’t represent stocks.

Mistaken Equivalency

Turns out the existence of an ERP depends on your definition of equities and an index of equities is just not just equities. It’s a strategy. An index is a rule-based weighting that rebalances intermittently. The difference cannot be overstated. Why?

“Stocks” and the “Stock Market Index” are not the same thing and never have been. One is an asset class, the other is a trading strategy of that asset class. They don’t behave the same and don’t have the same properties, return, or standard deviation. You can’t use one to replace the other.

The math makes it clear.

When you compare the geometric return of stocks not a stock index you do not find an ERP!

The key here is that the historical volatility or standard deviation of single stocks is .33 which is about twice what it has been for U.S. stock indices. He makes the case that a .55% premium is much more in line with what economists would predict or just dismiss it as noise.

Enjoy the full post Solving the Equity Premium Puzzle, and Uncovering a Huge Flaw in Investment Theory. (Link)

How This Ties Together With What We Have Learned In The Past

As you digest this, there should hopefully be a comforting reinforcement of past ideas, namely:

  • When we deal with multiplicative processes, like returns that compound wealth, we care about geometric or logreturns not arithmetic returns because of the “volatility drain”. (Link)
  • Portfolio components are not perfectly correlated so when we rebalance, we capture a premium geometric return. (Link)
  • The imperfectly correlated aspect of a portfolio contributes to what Fernholz called the excess growth component that diversification earns when you are in logreturn space. (Link).

If we presume stock index volatility is only 17% (as opposed to the 33% for single stocks), we can use napkin math to make additional observations.

  • Index ERP is closer to 6% – .5 * (.17^2) = 4.56%…the extra 4% represents Fernholz’s “excess growth rate”. This is why some pros refer to diversification as the only “free lunch” in investing.
  • The average cross-correlation of stocks in an index can be approximated by the ratio of index variance to average weighted stock variance. Using our estimates (.17^2) / (.33^2) = .27 which is in the ballpark of where long term average SP500 index correlations have realized (although option folks know how spikey that number can be, especially on short measures).

Summing Up

ERP doesn’t exist if you look at stock; only stock indexes!

  • Researchers commonly mistake equivalency between a single asset and a portfolio:
    • Treasury bills (and bonds) are a single investment item. An equity market index (SP500 for the original study and many others) is a portfolio of many investments, who’s composition changes all the time. They are not the same thing and shouldn’t be compared as if they are!

A Final Note

I chat with BreakingtheMarket on Twitter and follow his discussions with quants. So much of the merit of Twitter, and the internet in general, is the beauty of being able to learn and engage in conversations with talented, curious people whom you may not have found otherwise. Breaking the Market is not in finance. He’s an engineer with a strong math background who approached markets with a “beginner’s mind”. I don’t think it’s an accident that two of my favorite finance writers on the internet are from scientifically minded people from a different field. I think the best finance blog is which is penned by another finance outsider, the pseudonymous Jesse Livermore. Jesse did his first interview this year and it’s worth checking out, along with his widely influential writing. (Link to interview with my notes)

Best of Moontower 2019

The Top 11

Spinal Tap style here’s the Moontower posts you seemed to like the most based on my proprietary state-of-the-art analytics which I will only tell you about if you get me drunk.


Is Loneliness A Downside of Connectedness?
Don’t Ignore the Tambourine

Finance and Economics

The Volatility Drain
The Income Inequality Myth
The Disagreeable Investor

The Scooped Midrange
The Homeownership Fetish
How Expensive Human Poop Saved Us All And How High Prices Are Self Correcting

Mind and Productivity

More Shower Thoughts Please
Memories As A Unit Of Time


Number Neighbors

References To Bookmark

Here are writeups you may find useful once they are practically relevant for you:

How To Approach Twitter (Link)
Tips to Optimize Your Reading (Link)
The Investment Experts Bookshelf (Link)
Car Lease Math is Not Obvious (Link)
Correlation Is The Key to Investment Portfolios (Link)

Littlewood’s Law in Media

Check this out.

What’s your gut reaction?

If Moontower Musings are doing their job then many of you will have smelled a trap and wondered “well how many cardiologists are there?”

The excerpt was taken from a Slatestar’s post Cardiologists and Chinese Robbers (Link). He discusses parallels in “Chinese robbers”, police brutality, and basically any anomaly that can be summed without context to indicate a trend.

Littlewood’s Law

“In the course of any normal person’s life, miracles happen at a rate of roughly one per month”

Applying Littlewood to the news, Gwern writes:

There will be enough ‘miracles’ that all media coverage of events can potentially be composed of nothing but extreme chance chances, even though it would seem like an ‘extraordinary’ claim to say that all media-reported events may be flukes. Given this, it is important to maintain extreme skepticism of any individual anecdotes or stories which are selectively reported but still claimed (often implicitly) to be representative of a general trend or fact about the world.

Inoculate Yourself

He maintains that your best defense remains standard techniques like critical thinking, emphasizing trends & averages, and demanding original sources can help fight the biasing effect of news.

Here’s an easy trick you can use every day. When you encounter cases where anecdotes are used to paint a picture, instead of jumping to horror, retrain your mind to ask “what is the denominator?”

Unfortunately, connectivity combined with the existence of billions of humans will lead to news which distorts reality. I don’t see any supply-side solution to this. Extremes sell. The human love of narrative is a biological backdoor that media holds a key to. It takes mental effort to be constantly critical. To constantly question how stories are framed. For a mild taxonomy of narrative fallacies and how to spot them Art of Manliness gets you started. (Link)

Gwern has some satirical recommendations for the journos. His intentionally naive belief that news is about signal and not clicks is cute. Some of my favorites:

  • Perhaps in one format, discussion could be weighted similar to a meta-analytic weighting of effect sizes: you are allowed to discuss both anecdotes and studies, but the number of words about an anecdote or study must be weighted by sample size. So if you write 1 page about someone who claims X cured their dandruff, you must then write 100 pages about the study of n=100 showing that X doesn’t cure dandruff. That’s only fair, since that study is made of 100 anecdotes, so to speak, and they are as deserving of 1 page as the first anecdote.
  • A “proportional newspaper” might allocate space by geographic region populations, so there’s a giant void with a tiny little 2-line wire item for Africa, while the (much smaller) USA section requires a microscope.
  • Weight by age: If someone is rereading a 50-year-old essay, that should be given more proportionally more emphasis on a social media stream than a 5-minute old Tumblr post.


The Cost of Taking The Bait

The news’ incentives plus our susceptibility to stories strand us in a suboptimal equilibrium. The distortions are insidious and distributed.

How do they darken our world?

1) Healthy skepticism is your best-case scenario

Back to Slatestar’s cardiologist’s example:

If you read Part I of this post and found yourself nodding along, thinking “Wow, cardiologists are real creeps, there must be serious structural problems in the cardiology profession, something must be done about them,” consider it evidence that a sufficiently motivated individual – especially a journalist! – can make you feel that way about any group.

So what are your options?

  • Put no effort into learning how to reason and be an easy mark for charlatans, pseudoscience, ads, politicians.
  • Go to a Penn & Teller show to start a life-long journey into skepticism

Nobody actively chooses to be a sucker, so this is a classic Hobson’s choice. You might not check out P&T but you do try to be critical. So you must find a way to be skeptical without becoming cynical. If my own experience is any indication I’d expect many of you to agree that this is a difficult line to walk.

2) We glorify extremes 

Dr. Oz and the media will highlight whenever a patient appears to benefit from one of his quack remedies. But no story will be written about the patients who did not get better using his tips. Sure that’s frustrating, but by now you are immune to that trick even if the masses are not (given how rich Dr. Oz is I’m pretty sure I’m not underestimating the public here).

But here’s a more speculative cost of glorifying extremes. School shootings. The gun control issue is important, but I’m a seller of it being the entire issue. The social mirroring aspect feels like it is not given enough weight. The question of whether they are contagious, and if so, why and to what extent feels underexplored. Malcolm Gladwell is only a scientist by airport bookstore standards so we know to take him with a heap of salt, but his riot threshold model is worth a peek.

My own feeling about the rise in shootings is strongly tied to a vague sense of how social media and traditional media feedback on each other which is highly coincident with how modern the epidemic really is. Gladwell’s theory happened to tie it together in a way that made me feel that I wasn’t alone in thinking social dynamics are the biggest driver.

  • I first caught wind of his take from a 10-minute talk at the New Yorker Festival. (Link)
  • If you prefer a 3rd party take on his theory, Derek Thompson gives it his characteristically balanced treatment. (Link)

If you are new to Moontower, you can find my own views about consuming the news here.