Friends,

First of all, here’s the slides I shared in this vid:

I hope that video was helpful. I watched it again because I think the topic is complicated, not technically, but because it’s counterintuitive. Trades like that were bread-and-butter through my pro career (and very much why I “spotted” it despite it not sticking out in the tools other than the Trade Ideas filter which is highly validating of our algorithm! I’ll allow myself to be happy about my own work for 1 second. Ok moment’s passed, let’s continue.)

Before we head on to Money Angle stuff I’ll share 2 things I enjoyed.

Fermat’s Last Theorem Documentary (link)

This 45-minute video follows the story of Andrew Wiles’ quest to prove Fermat’s Last Theorem. I didn’t know the history of the theorem or even what it stated. It claims that for any whole number exponent other than 2 there are no values of A,B,C that would satisfy Aˣ + Bˣ = Cˣ. You can’t prove this computationally because there’s an infinite number of possibilities. The proof requires mathematical logic.

Fermat allegedly had a proof but hadn’t written it down. Turns out Wiles’ proof would have been impossible for Fermat to have known (this will make sense when you watch it). Anyway, I loved it. Yinh fell asleep. YMMV.

Holiday coziness — games!

I taught both my boys backgammon this past week. This is the younger guy playing with mom.

I used to play a lot with my colleagues during the year I was a broker on the NYSE floor. Every time I came back to the “booth” (that’s the area with the phones on the sides of the exchange floor where clerks take orders from customers), I’d make a move on the Jellyfish software. When I was at Parallax, I worked with 2 of the best backgammon players in the world (one of them was the best in the world iirc) and Parallax was actually founded by Roger Low, who was a world-class player himself. Roger had retired by the time I joined so I never got to know him.

Backgammon is especially neat if you like options because the doubling cube begs you to price volatility.

💡Fun fact

When I had my phone interview with SIG (this is the round that happens in between campus interview and the final on-site) I was asked a basic question regarding the cube. Since accepting the cube doubles the stakes of the game and rejecting it forfeits the current value of the game, what is the minimum probability of winning you need to accept it?

When looking at the board you need to evaluate how risky the position is. Like how likely is the tide to turn? When you offer the cube you are selling your opponent an option and its value depends on their chance to come back. But if you offer it to them when they have no chance they will reject it and be bailed out because you have now sacrificed your own possibility of getting a gammon (double points) or backgammon (triple points) if you beat them by a large margin.

It’s a great game for kids because they get to practice dice math. I was playing last night and knew I’d win as long as my next roll wasn’t a [1,1], [1,2], [2,1], [3,3]. So the kids would first need to figure out that’s what they are rooting for and then I ask them the probability. 4 out of 36 or 1/9. Plus the little guy figured out that the 7 is the most common roll and how to count the number of ways to get each number (he was delighted by the pyramid pattern when he realized it).

We always play more games during the cozy holiday season and I’m irrationally pleased that this season it’s backgammon. I recommend it.

[Also, if you are just learning, play a bot on your phone. You learn the game very quickly getting trounced by bots. Ultimately, I’m just a casual player, I never studied it, but would just play for $5 a game with my NYSE squad. Of course, with the doubling cube and possibility of gammons that can multiply pretty quickly. The real hitters play for four and five figures per game.]

Money Angle

On Nov 26th, Imran asked his followers would what more likely to double in the next year — gold or BTC?

I looked at the result of the poll just a few hours after it was posted and it was BTC 52% to gold 48%.

By the time the poll closed with 750 votes, BTC had garnered 2/3 of the votes.

I don’t know if me a jerk had anything to do with this but when I saw that the vote was almost a coin flip I chimed in.

Focus on the last part.

The poll should be nowhere near 50/50 because you would be able to lock in a great trade by selling gold in this proposition, buying gold call spreads financed by even more expensive BTC call spreads.

This is a classic difference between markets and democracy. It’s a perfect example of the Dinosaur Markets post in real life. The markets in the options reflect the volatility and the cost of replicating these bets. Money-weighted votes are interested in the truth where opinions are cheap as sand.

It’s very difficult to have opinions that are above replacement value about liquid assets. If you’re truly good at this, then being Scrooge McDuck rich based on consistently betting on these fantastic opinions is the only proof of such a skill. Few people are rich because of a crystal ball.

A good way to make a living in finance is to find the people that voted for gold in this poll and offer to trade with them. You need to do this in the dark because if you tried to do it on a public exchange, you’d be undercut by traders competing to sell the gold proposition to these opinionated people and it would drive the price down to a non-arbitrageable price.

Public markets protect overconfident people with arbitrageable opinions from their own ignorance and stupidity. Private or non-transparent markets are nice ways to shove a vacuum hose into their bank account.

There are many places where there’s alpha in projecting your opinion. This is the stuff you spend your time on in life. Where you have self-knowledge, private info, competitive advantage, skills, taste and so on.

But when it comes to markets, remember what we learned here just a few weeks ago:

the arbitrage reflex is more profitable than the opinion reflex

 

Money Angle For Masochists

Let’s continue on the same theme because these threads are going to become far more frequent for anyone who cares about markets. “Thinking in Bets” has a long runway, the way this country is headed, before it jumps the shark, so you might as well get used to it. From “Everything computer?” to “everything casino?”

Prediction Market Arbitrage: Using Option Chains to Find Mispriced Bets

Horse tweeted:

The moment you see a bet on a platform like Kalshi, Polymarket, or the soon-to-be Robinhood+SIG exchange, your mind should jump to the options chain.

The tweet says the Kalshi market is pricing a 9% chance of BTC hitting $250k

The options market can offer a quick sanity check. BTC is about a 55% vol. We are just being very approximate so not worrying about the term structure. I just want to show you my automatic mental response to the tweet.

Without hesitating, I pulled up the calculator on my phone and entered:

ln(250k/89k) / (.55 * sqrt(13/12))

Why?

We want to compute how many standard deviations away the $250k strike is to get a z-score which we can then convert to probability. Standard deviation depends on volatility and time. The more time or volatility you have the “closer” some percent return is. A strike that’s 100% away is extremely “far” if the asset needs to get there by tomorrow. If you have 10 years to get there, it’s not super far at all, you only need to go up 7% per year. Likewise, if an asset only varies by 5% a year, 100% is “far”, but if it moves 50% per year, 100% feels much “closer” or possible.

The formula above is simply dividing the percent return to get to the strike by the annualized volatility scaled by root(time) to find the distance.*

*Standard deviation or volatility as a quantity is proportional to the square root of time. Or you can say variance, the square of standard deviation, is proportional to time. The easiest way to remember this is to recall that when you compute the standard deviation of anything, you have an intermediate step of summing the squared deviations to get the variance, then divide by N. But to get back to the standard deviation, you take the square root of the ratio. The ratio in the intermediate step was variance/N. The final answer, the standard deviation, was the ratio of sqrt(variance) / sqrt( N). In our computations, N is replaced by time.

At the time of the tweet, BTC was 89k and there was 13 months until 2027. I assume 55% volatility.

Solving:

ln(250k/89k) / (.55 * sqrt(13/12)) = 1.80 standard deviations

We then use a standard normal table or normdist in Excel to see that 1.80 standard deviations encompasses about 96.4% of the cumulative distribution. Therefore, the probability of BTC going HIGHER than 1.8o standard deviations must be 3.6%

This is fully explained in Using Log Returns And Volatility To Normalize Strike Distances

The computation of this distance, besides being dependent on an estimate of volatility which we can borrow from the options market, assumes the asset is lognormally distributed. If you believe, as the options market certainly will if you look not at the at-the-money vol, but the far out-of-the-money call vols, that there is more positive skew than a lognormal distribution then our 3.6% estimate is too low.

But that logic is moving us in the right direction. We want to take the intel embedded in the options market when considering the price in the prediction market. We expect the liquid options market with much more volume and money behind it, to be the best guess as to the “fair price” of a proposition. If there’s an edge, it will be in the mispriced prediction market.

A prediction market bet can take a binary flavor. For example, “Probability that BTC settles above X by some date.”

It can take a “one touch” flavor. “BTC to touch but not necessarily settle above X by some date.”

Of course, “touch” is more likely than “settle” because “touch” encompasses all the times BTC settles above X, but also includes all the cases where it breaches X and falls back below X by expiry.

We can get information about the price of both binary and one-touch scenarios from the option market.

1. The Binary Bet: Price the Terminal Outcome with Vertical Spreads

Pricing: To find the true market-implied probability of the event, use the price of the spread:

Vertical spread price/Distance between the strikes ~ probability of asset expiring above he midpoint of the spread

Potential arbitrage if…the probability implied by the options chain is lower than the price offered on the prediction platform, you can buy the vertical spread and take the under in the prediction market or vice versa.

Further Reading: A Deeper Understanding of Vertical Spreads

2. The Path Bet: Account for Skew and Volatility with the One-Touch Rule

Pricing: You can estimate the path probability using the trader’s rule of thumb: take the delta of the vanilla option at that strike and multiply it by 2. This naturally takes into account the option implied skew because the delta is derived from the implied volatility at the strike.

The mechanics of an arbitrage here are complicated as it requires dynamic hedging. If that sounds interesting, perhaps you are born to be an exotic options trader. I have never tried replicating a one-touch option so while I could certainly “financially hack” a model, the main point I want to convey is that the pricing of the one-touch can be inferred from the vanilla options market.

Further Reading: one-touch

 

Stay groovy

☮️

Moontower Weekly Recap

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Friends,

I really hope to be helpful today so bear with me as this isn’t the rosiest way to begin.

This tweet halted my scroll:

For whatever reason, AOL (what year is this?) has an unpaywalled copy of the article:

A Recipe For Idiocracy

It’s short, but let me pull an excerpt anyway:

For the past several years, America has been using its young people as lab rats in a sweeping, if not exactly thought-out, education experiment. Schools across the country have been lowering standards and removing penalties for failure. The results are coming into focus.

Five years ago, about 30 incoming freshmen at UC San Diego arrived with math skills below high-school level. Now, according to a recent report from UC San Diego faculty and administrators, that number is more than 900—and most of those students don’t fully meet middle-school math standards. Many students struggle with fractions and simple algebra problems. Last year, the university, which admits fewer than 30 percent of undergraduate applicants, launched a remedial-math course that focuses entirely on concepts taught in elementary and middle school. (According to the report, more than 60 percent of students who took the previous version of the course couldn’t divide a fraction by two.) One of the course’s tutors noted that students faced more issues with “logical thinking” than with math facts per se. They didn’t know how to begin solving word problems.

The university’s problems are extreme, but they are not unique.

The article drones on. None of it uplifting.

“We call it quantitative literacy, just knowing which fraction is larger or smaller, that the slope is positive when it is going up,” Janine Wilson, the chair of the undergraduate economics program at UC Davis, told me. “Things like that are just kind of in our bones when we are college ready. We are just seeing many folks without that capability.”

Here’s Jared’s firsthand experience as a teacher while quoting that article:

This should remind you of this quiz from 2 weeks ago…

Victor Haghani referring to the quiz (emphasis mine):

It is well-known (and disturbing) that the financial literacy of this audience is, on average, quite low – as evidenced by a mean score of 56% (yes, that would be an “F” if not graded on a curve) on the below five-question quiz, known as the “Big Five” test by researchers. A survey conducted in 2021 found that less than one third of respondents answered at least four of them correctly, the threshold researchers define as “high financial literacy.” At least as concerning as the low test scores is the fact that the scores themselves have fallen dramatically between 2009 and 2021.

Are you seeing a pattern?

The useless question is “why” all this decline. Is it the phones, social media, microplastics, fluoride, the mentality that “kindergarten is the first step to Harvard” is less about upholding standards and more about suing teachers who give bad grades (just scroll thru the results)?

Probably all of them, I don’t know.

And then you have this response to Jared from our mutual friend:

The public discourse amplified by the rich and powerful is tuned to spread to the lowest common denominator. So the average person notices that rich people sound stupid and mistakes the mask for the face. The spread of information has also made corruption more obvious. That Trump’s favors are openly for sale is celebrated by his defenders as transparency. “They were all doing this, at least now we can see it”.

Fine.

I’ll let you keep that defense, but it’s hard to hear that without also hearing “we should all be allowed to crime”. Populism brings some unintentional equilibria I suppose. [I’m warming up to the idea of paying all politicians a salary of $2mm/year but making them truly public servants. All your financial affairs on full display. The fact that Congress can insider trade tells me we are so far from accountability with teeth.]

Adam’s observation is an instance of the current hypernym: honesty is for suckers.

Don’t get me wrong. This is a permissible instinct as trust in institutions disintegrates. But we risk some baby/bathwater mistakes if we malign all institutional failure as rot from within (university-industrial complex) rather than the natural difficulty of keeping up with accelerating times (securities regulation). Human affairs, the realm of politics and coordination, don’t move as fast the electrons re-shaping power and that impedance mismatch is a source of static. But that’s not nefarious. It’s just social physics.

That was a long digression to land me back where I was headed anyway — “be dumber” is an overfit to a moment we are all struggling to understand. It’s a retreat from responsibility. A cop-out. Hopium that there’s a quick way to get above this fray, shielded from the stray bullet from any of cultural ails lurking below the seemingly healthy SPX price.

I’m sorry but you can’t fake A yourself to flourishing. The flourishing is a by-product of the wax-on, wax-off. Confidence in your competence. Having some real to offer. There’s no “getting through this moment” because life is just one of these moments after another. So tie yourself to the mast of self-efficacy and it will all feel calmer.

If you tell me we’ve gained something from the loss of standards above, I’ll listen. But what hasn’t changed is you need something to offer. Society is not your parents. It doesn’t love you unconditionally. It’s hard to make beneficial choices if basic literacy and numeracy isn’t automatic. “I’ll just ask the LLM”. Well, knowing how to ask good questions itself takes intelligence and learning.

[Personal conviction…I think the quality of someone’s questions is a strong indicator of their thinking skills. This is pretty obvious if you spend too much time on X, but a universal example is to think about the last time a child asked you a question that had you go, “Damn, smart kid”. A know-it-all like the nasal boy in Polar Express comes off as obsessive, maybe smart, definitely annoying (although not a crime). But asking the right question reveals layers. For the finance heads, it’s why Jane Street uses this prompt in interviews — see thread. To just give an answer is to misunderstand the exercise.]

Ok, so the trends in reading and math say we are less and less prepared to engage in sophisticated reasoning. And we acknowledge that reasoning is important because it’s the basis of decisions and decisions are the bridge between our internal selves and our physical experiences and conditions.

How do we reverse the trends?

I don’t have an answer for society but I do have answers for you. And your family. And your friends. (“Hey, doesn’t that scale up to society?” That’s cute, did you just arrive from Mars?)

The answer has 2 facets and since we started in the context of math we will stick with it, but I don’t think it’s limited at all to math.

1) The belief that the process of learning itself makes you smarter

We all have potential. Just like in sports. You can’t be Usain Bolt but you can always get closer to your ceiling. We choose which domains to try to move closer to our ceilings since we can’t work on everything. We prioritize based on goals. Fitness, chess, cooking.

Math and literacy touch everything, whether you want them to or not. We are all touched by deals, contracts, transactions, even if we just want to paint. Youth is the rare stage of life where there is time carved out specifically for upskilling your general-purpose machinery of abstract thought, the manipulation of symbols, and the ability to maintain a chain of ideas inside one brain. I’m not sure if the appeal of doing so is universal, but the fact that games and puzzles are not compulsory and in fact pulled, not pushed, suggests that there is something intrinsic about cognitive self-improvement. Fostering this urge requires no justification beyond “it’s fun” but it happens to have salutory effects across your mental wetware and let’s face it, your job prospects, if you insist on being purely practical.

So this gift of time that children are afforded is when the skill of skill acquisition should be taught. I emphasize this because school is treated not as a place where we acquire skills but a place to trot them out for approval. The difference is insidious. As you traverse the years, it’s not what did you master, it’s what grade did you get? There’s really no emphasis on mastery. It’s just “did you go through the motions” for most, and then for the top students, who may or may not have achieved any type of mastery (and if they did it wasn’t to the school’s credit), the school is just a sorting hat. And with grade inflation a bad one at that, making students (and their parents) feel like college admissions is plinko.

My HS diploma-only mother emphasized school because education was the path to a better life. But she specifically stressed math because she thought it literally made you smarter. Her opinion is backed by nothing but intuition and self-flattery (she was a strong math student). But Ced, whose practice and writing is maniacally obsessed with the art and science of getting good at things and separating b.s. that sounds like it works from what actually works in complex domains, sent me a link to mathematician David Bessis’ interview with Russ Roberts:

🎙️A mind-blowing way of looking at math (Econtalker)

Bessis echoes what my little immigrant mom said. In describing what we need to do differently in teaching math, he argues we must not mince words to motivate:

I think teachers should be bold. They should say, ‘It makes you smarter.’”

More:

People hate math because they view it as an IQ test that they’re failing. And, it’s not a test. It’s a technique to get smarter.

If you’re failing, it’s normal because you start. When you start any new sport, you suck at it. There’s no way you’re going to be good on Day One. Just because a two-year-old is babbling, you don’t say: Well, I guess he’ll never learn to speak, but we just won’t bother teaching him language because he’s not good at it. And yet, we do that with math. We say, ‘Well, he’s not a math person. He’s not good at math.’

You cannot teach mathematics to kids who are convinced that your mathematical ability is something that is static… A combination of confusion about the nature of mathematics, and confusion about how the brain operates, and confusion about the origin of the shocking gap of abilities that are visible on a given day in a given high school makes us believe that this thing is entrenched and you’re not going to be able to change it. But it’s not true.

The failure of teaching mathematics—and it’s something that has been going on for not just centuries, but actually millennia—is the failure to admit that we do things in our head. We play with our intuition, we play with images, and these things have traditionally not even been discussed as being part of mathematics.

At school, you enter the room with your intuition, and the teacher is telling you that your intuition is wrong; and you reach your conclusion that intuition is bad and that you’re stupid. But, the thing is, it’s wrong, but it’s not going to be wrong forever. You will gradually evolve your intuition if you confront it with this very special apparatus that is logical formalism.

Mathematics is a technique that, if you learn how to master the technique itself, you will develop your intelligence; you will utilize your brain in a way that you would not be able to otherwise.

But this is really cutting to the heart of my mother’s hunch, which she couldn’t articulate:

I knew when I was a mathematician that what was really interesting to me was not the mathematics: it’s that kind of meta-cognition that you have to learn to become a mathematician. And this is the topic of the book. What do you do inside your head when you become better at mathematics?

It’s worth mentioning that much of the interview is spent on intuition and what Bessis, playing on Kahneman, calls System 3 thinking:

Whenever you catch your intuition red-handed being wrong at something, don’t throw that away. Don’t reject the intuition… Explore it. Try to unpack it… do back and forth until they agree. It may take you five minutes, one hour, a day, a week, a year, 10 years, 50 years.

Bessis argues that this process of confronting incorrect intuition is a uniquely valuable habit because it creates a highly memorable learning stimulus. This rings so true personally. When something goes wrong, when you are snapped out of autopilot, or surprised, the lesson you learn sticks with you.

His last inversion, namely, that math is not a test of smartness but it makes you smarter is a hokey story of being intimidated when Bessis noticed legendary mathematician Jean-Pierre Serre in the audience. After the Bessis talk, Serre said he’d need to repeat the talk because he “didn’t understand a word of it”. Serre was being sincere. Bessis noticed that most people would not admit to incomprehension so easily. And while it’s much easier to do so if you are Serre, whose capabilities are beyond reproach, Bessis wondered:

“Maybe with that attitude, you can become Jean-Pierre Serre.”

Ok, so the first step to improving our abilities in math (or literacy) is believing it’s possible and worthwhile.

The next step is to know how to actually acquire the skills.

2) Skill development is not the same as education

School is time-based education. You do X in 4th grade, Y in 5th and so forth. There’s some acceleration but it doesn’t stretch as far as individual variation because the range would be too wide to contain in a single classroom. The compression hurts not only the top performers but the bottom performers who are hanging on for dear life only to be waved through to the next grade, where the deficiencies compound.

Skill development is rooted in learning science. You are far more likely to have encountered its prescriptions in sports or music than school. I encapsulate a lot of that information in The Principles of Learning Fast. But today I want to zoom in specifically on our foundations because it’s an actionable target if you are insecure about your knowledge and how to go about learning to mastery since you may have never realized that was an option. How could you have realized that…there’s a test tomorrow you need to study for even though you don’t understand the material from last week’s test, right? It’s not your fault but hopefully what you’re about to learn can serve you and your loved ones going forward.

I’m going to let Alpha School’s Joe Leimandt be the messenger. The following flow comes from an interview he did with Patrick O’Shaughnessy.

🎙️Building Alpha School, and The Future of Education (Colossus)

1) Knowledge is hierarchical

Most of knowledge is hierarchical where it’s based on foundation. Algebra is basically advanced fraction manipulation. Fractions is multiplication and division. And you can just keep going down the tree where you have to actually learn bottom-up and have mastery.

2) Well, what is mastery?

Think of a sports analogy like in basketball. If you’re the point guard and you lose the ball 30% of the time going down the court, the coach is not going to be like, hey, let’s work on the alley-oop. They’re going to be like, okay, let’s get back to the basics and master the basics so you can get down the court.

Have you mastered the basics? How good are you? We always talk about in standard school, there’s a whole set of things that 70%—you’re passing, you don’t know 30% of the material, and then they move you on to more advanced things.

This is pretty obvious stuff. You know how this feels:

3)The Swiss Cheese Problem

The problem’s not the algebra, it’s the prior knowledge… if you’re pushing people up and they’ve only learned 70 or 80% of the curriculum, you should think it’s like Swiss cheese. It’s like you’re building a foundation with all these holes. And then eventually as you get high enough, it just gets too much and it collapses and you can’t learn anymore.

4) Going Back to 3rd Grade

If you’re doing fractions and you haven’t mastered division, you’re going to sit there and say, God, this fraction problem is really hard. But the real issue is, well, just go back and learn your division and then the fraction’s going to be easier.

We have one student who was, this is sort of a unique, an extreme example and I hesitate to say it but we had a student who was 740 on the math SAT and in looking they were making careless errors. Some of the problems they were overloading working memory and for whatever reason the student didn’t have fluency of multiplication and division tables. So we literally sent her back to third grade math.

We’re the only school in the world who will take a 740 math SAT student go back to third grade, send back and she got a 790, a 790. And it’s that kind of thing where when you talk about the science of learning and just I say it this way, the parent and the student in this case were not excited that their 740 math student is being given third grade problems. That can’t be the issue, but it is. It is, because you’re overloading the working memory and she’s just making careless mistakes.

My eldest is 12. I keep telling him that the form on his basketball shot is off. He finally asked me to show him a video of him shooting. After seeing it, HE decided he wanted to correct it. He understands it’s a step back to go forward. I gave him tremendous praise for the decision because it’s not easy to make choices like that. It’s an investment in the bigger picture

[He’d like be able to make the HS team and it’s gonna be competitive. His current shot won’t cut it, especially since I don’t expect he’ll be very tall.]

My wife is going to start Math Academy because she sees the kids’ work and, well, there’s lots of swiss cheese in her knowledge. She decided that didn’t sit well with her. The kids asked her what level of math she’s gonna rebuild from and while the diagnosttic will place her, she has no shame about however far it suggests. The 12-year-old would bet he’s ahead and she’s not taking the other side of that.

Everyone is anxious about time. Finish so you can get to the next thing and the next thing. I’m very sympathetic. Things just feel like a race. Business is often a race. It’s hard to backfill expertise or keep up with all the cool new stuff when you’re putting out fires. So I don’t know to what extent we as adults can choose mastery for ourselves. I don’t pretend to know your constraints. But when it comes to the kids, I urge you to think about this stuff. You know what it’s like to have swiss-cheese in your foundation. Holes are not totally avoidable. But rushing to check off “done” is training for a life of cramming. Of seeing a stimulus to grow as an obstacle to relaxation rather than an opportunity to expand your capacity to offer something to others.

That’s a real goal. Not a fake one. Getting there takes as long as it takes for you. But once you’re there you can’t be shaken because the foundation is rock solid. The title of today’s letter is hook to remind you:

Slow is smooth, and smooth is fast

There’s no shortcut to smooth.

Money Angle

A friend was asking me how to deal with a loved one who had put nearly all of his assets into a particular volatile stock and done very well. So far. The person is in their 30s with a family and my friend is concerned that if things go the other way this could be the type of thing the household might not recover from.

I asked the basic questions which of course my friend also asked. What’s your plan if the stock falls? “Probably buy more”.

Do you have a target where you’d be willing to sell any of the shares? “If it doubles again, I can retire so nothing before then.”

We can sit here and talk about risk management and yadda yadda. But I’m gonna share something personal which makes me think this has nothing to do with rational finance thought.

I’m close with people that have been taken in by pretty obvious scams. All the red flags. But the people I know are smart people. People that can compute an interest rate and all. They don’t tell me about the “great opportunity” because they know I’ll plead with them to not do it.

Predictably, they get burned. (I’m not supposed to know that because they don’t want to hear I told you so. But I know.)

They fall for this because they want to believe so badly that their better judgement doesn’t stand a chance. I’m totally nonplussed by this. It’s fascinating that we are capable of this. It explains quite a lot, good and bad, actually. But it’s not suprising if you pay attention.

But here’s the part that I found surprising and discovered on a lark.

In the aftermath of the scam, I spent 2 hours on the phone with a victim. I was standing in my kitchen of the last house. Beautiful day outside. Brutal conversation. Emotional. Just trying to make sense of it in a way where we could at least salvage some vague sense of growth out of the closure. At the tail end of our call, I asked a question that I still find peculiar but somehow felt appropriate:

“Did you need to lose that money?”

Silence.

I could hear them think.

“Maybe”.

We talked about it. There was nothing that could have been done. No warning I could have given would have talked them out of it. They admit to that.

I think about this a lot.

I told my friend whose concerned about their loved one this story. And the friend’s face dropped. They know what they’re up against.

(We actually came up with 2 proposals that he could bring to the loved one to change the shape of this death wish, we’ll see if either find reception.)

Anyway, as BTC has been dropping, this thread has been on my mind because there are a lot of cult leaders who benefit from persuasion but aren’t accountable to their followers’ families if they’re wrong.

I’ll just leave you with a tweet I sent Tuesday:

Sitting down at a table without a budget is a commitment to playing til you’re wiped out.

Stay groovy

☮️

Moontower Weekly Recap

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Friends,

The largest firms in the world’s capex doesn’t lie. They’re all-in on AGI. Since the so-called hyperscalers are also a historically disproportionate share of the SPUs, they are dragging the entire economy into that bet.

The “dog with a mouthful of bumper” outcome is they are right and actually eat the whole economy, only to be murdered by their own bunker guards. The irony of using Sama’s ChatGPT to query this:

OpenAI’s fundraising appetite and valuation requires AGI to be a thing, whereas a company like META will survive as a going concern and may even get stronger despite the capex blowing a big hole in their balance sheet temporarily if AGI is not a thing. Yann LeCun, META’s chief scientist and Turing award recipient, is leaving the company. He’s critical of the “scaling hypothesis” which claims that if you just keep throwing compute and data at the models, they will become “intelligent”. He doesn’t see how causal reasoning would ever emerge from pattern-matching even if it’s the most superior pattern-matching the world has ever seen.

This debate feels like mommy and daddy are fighting while the family’s future hangs in the balance. The naughtier kids are using the distraction to raid the cookie jar, while the market’s spirits are a thermometer on who the rest of the kids want to side with.

In a Carlota Perez framework, the prospect of AGI would suggest we are still early in the installation phase, but if the common knowledge surrenders to” AGI is never spawning from the current soil” then we are probably already in the deployment phase but not every middle-manager has taken Prompting 101 yet. In the first case, the calls aren’t hot enough, and in the second, you want your stocking stuffed with puts. Either way, we’ll take the electricity. But Santa, gas not coal, please.

Below the sci-fi (is that science fiction or science finance?) theatrics, we have the mundane business of actually using these things. Last week I shared the listicle voting app thing with some resources for those who want to make stuff with LLMs. This week Khe had a detailed post describing a CRM he built:

Vibe coding? More like “whack-a-mole” coding: The uncomfortable truth around my Pebblr CRM app (link)

Here’s another fantastic article that I think captures nuance between AGI breathlessness and very real capabilities of LLMs today.

Is Vibe Coding the Future of Skilled Work? (Scott H Young)

It’s written from a relatable perspective since I’m using these things so much, while easily admitting they are enablers rather than substitutes. And isn’t that a sweet spot? Like you can do more but still matter? Well for now I guess. We’ll see what happens. If the puts pay off maybe that’s bullish for humanity.

I’ll share some vibe-coding projects here and there.

Here’s my Car Lease Embedded Option Calculator.

Some background for the uninitiated:

• Car Straddles
• Are car leases confusing?

Money Angle

A traditional way to think of a stock price is the expected value of its future prices weighted by their probability and discounted to the present. Ignoring the cost of money, in a binary world a $100 stock could be fairly priced if it was 50/50 to be worth $200 or $0. It is also fairly priced if there’s a 20% chance of it going to $500 and an 80% chance of $0.

There’s this vocal VC named Keith Rabois who aggressively cheerleads his companies. I don’t know the guy. His online persona exudes many standard deviations of F-U confidence. Sounds par for the uber-rich these days, but he’s extra fun because he’s pugnacious. And got baited into a silly pride bet.

Here’s a tweet from investor @compound248:

We wouldn’t talk about this in the Masochists section because this is fairly basic financial reasoning. The type that really needs to obvious to everyone in a society is flirting with a simulcrum of the movie Rat Race. But it’s appropriate to spell out the opportunity here in gambling terms.

Keith is offering an even-money bet, his $100k to Compound248’s $100k on the stock multiplying by 31.5

If you think in odds:

Keith is offering even money on a 30.5-1 odds proposition

That might be more clear when you think of Keith buying the stock. If he buys $OPEN he risks losing the stock price or 1 bet and if the stock goes up 31.5x he wins 30.5 (because the 1 bet or amount of cash he spent for the stock is not part of his win or return).

It’s similar to how a stock 2x’ing is 100% return, or 10x’ing is a 900% return. A stock that 10x’s paid 9-1. You risked S, you won 9S if S is the stock price.

Normally when you buy a stock, you get paid dollar for dollar as it moves times the number of shares you have. If the stock doubles you make S in profits which is how much you risked when you bought it. You are paid in proportion to the move.

Keith needs a heroic move to simply get paid even money. His proposition is an arbitrageable violation of how return works. I don’t know anything about Compound248’s outlook on $OPEN by him taking the bet. He could be bullish or bearish. When you hear the proposition, your mind shouldn’t go to “Is $OPEN a good or bad investment?” because what you should do doesn’t depend on this assessment.

Keith’s offer is free money regardless of your outlook.

He’s laying 30.5-1 odds where the max loss is $100k.

So you solve for “How much OPEN do I need to buy to make a $100k profit if it pays 30.5-1?”

It’s simply:

1/odds * bet size

1/30.5 * $100k = $3,280.21

I need to buy $3,280.21 worth of shares. Since the stock was $8.48 that’s just about 387 shares.

If the stock goes to 0, you lose the $3,280.21, but Keith hopefully pays $100k. If the stock does go up 31.5x, you break even.

You could also structure the hedge so that at a stock price of 0, you break even. You buy $100,000/$8.48 or about 11,792 shares. If the stock hits Keith’s bogey you get paid 30.5 on your $100k and you happily peel off 1 bet size to him as a tip. Any share quantity you buy between 387 and 11,792 is a guaranteed win.

An amusing post-script to this story is HF manager Benn Eifert requesting $10mm of action on this proposition. Of course, Keith said no — he’s confident not stupid. Keith said he did the bet with Compound248 just to shut the “troll” up or something.

I don’t understand how rewarding a troll with the easiest money I’ve ever seen is anything but encouraging future trolls, but maybe this is why Keith is rich and I’m writing on the weekend.

Money Angle For Masochists

Tomorrow, we are going to launch the annual Black Friday/Cyber Monday discount for moontower.ai. It’s the only sale we offer during the year (current subscribers will be able to extend at the discounted price as well).

The app’s selling point, what makes it different, is its “point of view” on vol. It really starts from “what’s normal in the options market now” vs what sticks out. The analytics are geared towards answering that question because that’s how you find contradiction.

If sunscreen and umbrellas are simultaneously expensive, it might be because there’s a sunshower expected — but do the odds make sense? Before you could even reason about that you needed to know that sunscreen and umbrellas were both expensive in the first place, otherwise you wouldn’t even consider the question. Questions are where opportunities live.

The price of options is summarized by properties of vol surfaces, which in turn, can be compared to each other. We do the measuring and comparing to point out where the questions are. Options are not as simple as point spreads. Strikes themselves are fixed but the stock price changes, time passes. That same contract’s properties morph like natural landscape seen through a time-lapse camera. We are your guide in this wilderness.

We surface what types of trades look relatively attractive from the vol trader’s vantage point. You can think of that as a solid hypothesis based on the data, but from there, you can adjust based on your knowledge or opinion of what is going on in the name.

We don’t make guesses about the future. We don’t say do X and you will make money. It’s obvious to anyone who has ever taken risk that handicapping the future is not enough to make money. Think about it. How confident are you that the current price of SPY is not the all-time high? Probably 100% and rightfully so. The “SPY to be up 1 cent” one-touch option would be priced at 99.99999% percent. The knowledge is replacement-level not value-add.

You don’t sign up for Bloomberg because it tells you how to make money. You sign up because it helps you see*. And seeing in the correct terms is a prerequisite to profitable decisions. It’s the base of the pyramid upon which you layer the rest of your process.

That’s what we’re solving for in the options niche. The vol trader’s lens.

I made these vids this past week to offer a concise description of some of the key tools for seeing like an option trader:

*When you sign up for analytics, you usually do so knowing what you want to see. But also, there’s a built-in education. You learn what matters to others as well. Digital real estate is not scarce but deciding how to fill it is still constrained by taste and demand. The option pricing software that I used in market-making was also full of clues about best practices because professional users drove the features. What’s interesting when you have an analytics product that serves both retail and enterprise is the features can be a weaker signal about what matters. B-to-B vs B-to-C.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• Automation
• Moontower Binomial Tree Explainer

   

Friends,

I really liked this listicle by Sasha Chapin:

50 things I know

I was gonna do my usual thing of sharing which items from the 50 resonate most for me.

I’ll give you one.

11. I know that talent doesn’t feel like you’re amazing. It feels like the difficulties that trouble others are mysteriously absent in your case. Don’t ask yourself where your true gifts lie. Ask what other people seem weirdly bad at.

But what I want to know is which of these land for YOU.

This was an excuse to do a project.

Here it is…go vote:

https://sasha.moontowermeta.com/

I have been doing a lot more vibe-coding recently. This project was an excuse to make something that required a database backend to record the likes and user sessions.

I used AI to then document the process which you can read about here:

General environment and stack:

👨🏽💻Setting up Git + Vercel + Terragon

Specific for the sasha voting page:

☕1-page guide

🔍Detailed tutorial

You can find a new portal here and in my signature down below:

🤖Resources to Get More Out of AI

Related and timely — this week Khe documented making a CRM which is the next-level up because it uses authentication (ie username/password to login):

I coded an entire CRM from scratch

If there are any resources you love as you explore, feel free to share!

---

Money Angle

Essential Wisdom from Twenty Personal Investing Classics (6 min read)

Elm Wealth distills investing lessons from 20 classics, cross-referencing them with James J. Choi’s paper Popular Personal Financial Advice versus the Professors (Journal of Economic Perspectives, Vol. 36 No. 4) that analyzed advice across 50 best-selling personal-finance books, revealing where popular wisdom aligns (or clashes!) with financial theory.

This stood out to me:

Bear in mind that the first twelve books listed above are written for the broad audience of all investors in developed market economies, with particular focus on US investors. It is well-known (and disturbing) that the financial literacy of this audience is, on average, quite low – as evidenced by a mean score of 56% (yes, that would be an “F” if not graded on a curve) on the below five-question quiz, known as the “Big Five” test by researchers. A survey conducted in 2021 found that less than one third of respondents answered at least four of them correctly, the threshold researchers define as “high financial literacy.” At least as concerning as the low test scores is the fact that the scores themselves have fallen dramatically between 2009 and 2021. If you decide to read some of these books, don’t be surprised to find a good deal of the advice proffered seems blindingly obvious if you come to them with above-average financial sophistication.

Umm, the quiz:

With the growing zoo of money distractions (crypto, gambling, prediction markets) and the results on that quiz, I’m guessing a large swath of society is gonna feel like there’s a financial tapeworm in their wallets.

I tweeted this a few days ago:

Let’s focus on evergreen financial hygeine. These were common themes I saw in the books Elm Wealth selected:

• Diversify. It’s the rare free lunch: combine two assets with equal expected return and volatility, and your portfolio’s risk-reward improves.
• Minimize frictions. Avoid fees, taxes, and excessive trading.
• Reduce touchpoints. The fewer chances to act on emotion, the better your long-term results

Just to piggyback on the diversification bit. It sounds trite, but you’ll hear some people push back against it with the buzzword “deworsification”. When you’re as smart as Warren Buffett maybe you can use this word. But Buffet himself recognized Ed Thorp was a genius despite Thorp’s strong conviction in diversification. [And vice versa, by the way. Thorp’s recollection of hanging out with Buffet when they met in their 30s is pretty heart-warming. Game recognizing game. Apparently, after dinner Buffet showed Thorp a toy he really liked — non-transitive dice. Think of them like roshambo. A beats B which beats C which beats A.]

Here’s the cold-ass truth. Not diversifying is incinerating money. Looking back at your concentrated outcome and saying “see” is not proof of anything but survivorship. In fact, you can prove mathematically that diversifying is a free lunch.

What would you rather own?

Portfolio A: a single stock with an expected return of 10% and 30% vol

OR

Portfolio B: an equal-weight portfolio of 2 stocks where each has 10% expected return and 30% vol but are 70% correlated

💡Stuff you can read if this is not clear:

• You Don’t See The Whole Picture
• Your Portfolio Intuition Is Poor
• Why You Don’t Get Paid For Diversifiable Risks
• Is There Actually An Equity Premium Puzzle?
• DCF As A Lower Bound

The proof is sitting there in market prices too. A diversified portfolio of inferior credits will have a higher rating than the bonds in the basket. A higher rating means a higher price (lower yield).

The nuances of that are better understood today than they were in the heyday of CDO-squared.

🔗See the GFC through a quant’s eyes

Of course, diversification always means you left something on the table in hindsight. You sign up for FOMO. But this is the nature of every decision. If you get crushed, you wished you traded zero and if you win, you wish you traded more. Results alone tell you nothing about the quality of your shot.

To complete the point:

“If you invest and don’t diversify, you’re literally throwing out money,” stated Jeff Yass. “People don’t realize that diversification is beneficial even if it reduces your return.”

Why is this the case? “Because it reduces your risk even more,” added Yass. “Therefore, if you diversify and then use margin to increase your leverage to a risk level equivalent to that of a nondiversified position, your return will probably be greater.”

The modern pod shops are another triumph of diversification, which takes us to the next section…

---

Money Angle For Masochists

I am impressed by the multi-managers on the whole. They continue to generate positive returns with outstanding Sharpe ratios and thus far don’t capture the same downside as conventional 60/40 portfolios.

I think of them as the holy grail marriage of deep security research that you would have associated with a long/short fundamental manager plus the quantitative risk management and attribution metis that prop trading firms trading their own money have accumulated through the decades.

Many investors, usually from the cheap seats, want to hate on them because they don’t match the SP500 plus their pass-through fees are multiples of typical fees. Not to mention, hedge fund managers are just natural villains to normal people who maintain a Richard Scarry worldview about which jobs are valuable (eh, like any competitive profession, some of them are decent and some of them are vampires).

Regardless, this quote from Byrne Hobart conveyed something I never found the words for, so as soon as I read it, I had to clip it.

From Why Does Volatility Matter?:

If the portfolio you’re looking at is 100% net long conventional asset classes, and if you think it’s absurd to pay high fees in order to match the S&P with less liquidity—lucky you! You’re part of society’s financial shock absorber, a middle class or above saver in a rich country with functioning capital markets. But if you’re in that position, there’s a very real sense in which joking about how the S&P has outperformed complicated multi-manager setups year-to-date is a form of financial punching-down. They have a different benchmark, and a harder job. And they’re doing you the very generous service of ensuring that the next time you buy the S&P 500, the price of every single component reflects the collective attempt by thousands of professionals with massive data and analytics budgets who are all trying to push the price 1% closer to optimal.

---

I want to share another post from Andrew who I introduced last week.

So-Called “Bonds” in Prediction Markets

Great subtitle:

Rare events teach slowly

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• why poker is used to train traders
• American options are not vanilla

Friends,

The phrase “studies show…” is almost always followed by bs. To understand why, I’ll point you to a post by David Epstein.

David is the author of Range, The Sports Gene, and the new book Range Adapted for Young Readers which I bought for my 12-year-old son and nephew.

I’ve been a long-time reader of David’s letter and this post is both useful and timeless.

Everything in Your Fridge Causes and Prevents Cancer

It’s a reminder that outlier studies and results in general make headlines, but are statistically inevitable if you do enough studies.

Excerpt:

It wasn’t every sauna enthusiast who reaped the supposed protective effect against dementia; it was specifically those who used a sauna 9-12 times a month. Sauna bathers who hit the wooden bench 5-8 times a month — sorry, no effect. And those who went more than 12 times a month — again, no luck.

That should raise a caution flag in your head.

When only a very specific subpopulation in a study experiences a benefit, it may indeed be that there is some extremely nuanced sweet spot. But it is more likely that the researchers collected a lot of data, which in turn allowed them to analyze many different correlations between sauna use and dementia; the more different analyses they can do, the more likely some of those analyses will generate false positives, just by statistical chance. And then, of course, those titillating positive results are the ones that end up at the top of the paper, and in the press release.

Here’s the point I want to hammer home: when you see a tantalizing health headline — like that saunas prevent dementia — keep an eye out for indications that the effect only applies to specific subgroups of the study population. Even if the headline is very authoritative, revealing nuggets are often buried lower in the story.

I want to stress that you shouldn’t assume the sauna results can’t possibly be true. But when you see Bears-undefeated-in-alternate-jerseys type conclusions — and someone is claiming one thing causes the other — you should hold out for more evidence.

This doesn’t just happen in health news. Investing/trading is another area where making a mountain out of a statistical molehill is rampant. Unless you are specifically studying a phenomenon that you’d expect to be discontinuous (binary, “phase change”, threshold cutoff) you should be wary of any signal from a specific range of an otherwise continuous function.

I’ll take a simple example from Kris Longmore’s article explaining how month-end rebalance trades work. The post is titled How Wealth Managers Pay You To Trade. He writes (emphasis mine):

How I’d Test This

So here’s the hypothesis: if we can identify which asset outperformed during the first part of the month, the underperformer should outperform as we approach month-end, when rebalancing pressure is likely to be greatest.

The first step is simple. Pull daily data for SPY and TLT going back as far as you can get it (I used data from 2007). You can get this from Yahoo Finance – nothing fancy.

Then ask a straightforward question: If I know which asset outperformed during the first 15 trading days of the month, can I predict which will outperform during the last ~7 trading days?

Why 15 days? Because it’s roughly two-thirds of a trading month, and it gives us a reasonable window to identify the outperformer before month-end rebalancing kicks in.

Could you use 10 days? 20 days? Sure. But 15 seemed reasonable and shouldn’t really matter much. If it did, then that would be a big red flag. We want stuff that’s fairly robust to the actual implementation details.

Back in my floor days my biz partner was incubating a futures trend strategy and he’d have me look at the backtest results. I’m no scientist, but I knew enough to realize that if the signal depended on a particular value of the parameter (ie the exact amount of what defined a “breakout”, the number of lookback days, etc), then the result was overfit.

It’s the same idea as David’s sauna therapy study.

When you are in a competitive domain where many people are constantly mining, “too good to be true” discoveries should be met with extra skepticism.

A current example of this is the so-called Mississippi Miracle in which both the left and right appear to have an axe regarding the childhood literacy improvement in Mississippi schools. It checks the box of “domain where many people are constantly mining” so interventions that show huge returns deserve a lot of skepticism. You can count on Freddie deBoer to deliver that, but I think the pushback in the comments section of his post show the complexity:

There Are No Miracles in Education

 

Would be interesting if there was a prediction market on how much literacy scores would improve in places that decide to adopt the Mississippi approach?

Which brings us to this week’s Money Angle, which should get a rise out of you…

Money Angle

Prediction markets are all the rage. They even played a main character role in an episode of South Park just a few weeks ago with Kalshi being specifically shouted:

 

On Friday I shared a rare interview with SIG founder Jeff Yass that came out this week about prediction markets:

 

On the subject of prediction markets, long-time Moontower sub Andrew Courtney has launched a substack with many of his recent topics being analysis of prediction markets. His thought processes look familiar because…well, Andrew retired quite young being an extremely successful SIG trader himself.

You can get started with these posts:

🔗from the Kalshinomics Lab: conditional election probabilities

🔗are you good or just up?

🔗Relearning Math at 38 — Andrew was at the top of the Math Academy leaderboard for a bit which iirc corresponds to learning math with the same time commitment as a full-time job. My kids and I have looked at the top of the list thinking “who the heck are these people?!”. I was envisioning autistic homeschooled kid not retired SIG trader.

Finally, this is also Andrew’s site:

Kalshinomics

If you are in the Philly area, he’s done meetups for prediction market enthusiasts.

Fun fact: I told Andrew I was going to boost his awesome letter this week and I asked him to make me a market on how many subs it would lead to.

He gave me a 90% confidence interval which I thought was a good market although too wide to trade on. I showed him a 175 bid if he wants to hedge his happiness. We’ll see what happens.

Good handicapping practice would be to try to list the info you’d like to have in making such a market!

Money Angle For Masochists

The “Masochists” header word this week is a pointer to “aspiring traders”.

I’m going to reprint Joel Rubano’s tweet in full. Joel is a friend, energy trader, author and entrepreneur running a corporate trading education company with a focus on commodity trading and hedging.

His book: Trader Construction Kit

The tweet pairs well with the post from last week’s so you’re interested in trading.

Joel:

I had the opportunity to guest lecture to a university class yesterday and got some questions about resources for students interested in working toward a trading seat.

The good news is that there are massively more and better resources available now than ever before. The bad news is that for every useful book, class, or podcast, there are 999 more that are worthless at best and massive value destructors at worst.

A few hints to help sort the wheat from the chaff:

Anything that tells you trading is easy is lying to you. Trading is a brutally hard game played against literally the smartest, most disciplined, most aggressive people in the world. The people who survive and thrive tend to welcome that specific challenge, even though most would not describe their time on the desk as “fun.”

Anything that claims a risk-free or can’t-lose strategy is garbage. Most professional traders are hoping to be right 50–55% of the time and relying on extremely strict discipline and risk management to be profitable with that hit rate. They also have to manage capital so they can survive stretches of worse-than-normal performance, which invariably happen.

Anything that tries to sell you trading as a lifestyle — the cars, the watches, the vacations — is almost certainly a scam. Real traders are not sitting there thinking about what the money buys in real time; that’s distracting and leads to bad decisions. There’s even a famous passage in Reminiscences of a Stock Operator about a group of traders who all try to make enough money to buy a fur coat, and they all fail because they were focused on the coat instead of on playing the game well.

Anything that says “anyone can do it” ignores how markets actually work. Most markets are zero-sum: people have to lose for other people to win. The softer version — that anyone can become a trader if they just grind — is also not really true. The job demands unusually high levels of discipline, curiosity, intellectual honesty, and competitiveness. Some people have those traits and can develop into professional traders; most people don’t, and that’s fine. The good news is that there are lots of trading-adjacent roles (risk, research, sales, tech, execution, ops, product) that let you work on markets, think about markets, and have a productive, interesting career without being the person taking risk.

Anyone promising something “just like what the pros use” or “better than the professionals” does not understand what professionals actually have. Elite hedge funds, banks, and merchant trading firms spend huge amounts of money on proprietary tools, data, infrastructure, and staffing to compete in an intellectual arms race. A single trader can easily consume hundreds of thousands to millions of dollars’ worth of technology and information resources per year, which is one reason their profit targets are so high. You are not getting that for $29.99 a month.

Anything that claims “the edge is AI” with no further detail is almost certainly not going to outperform anything. Yes, serious trading firms are racing to integrate AI, and yes, AI will be useful for specific tasks. But AI is very good at some things and still not very good at others. If someone is just putting a thin interface on top of a generic stock-picking model and calling that “AI-driven alpha,” it’s not only unlikely to be useful — even if it does work for a bit, it will almost certainly get out-competed by more specialized, internally developed tooling at a bank or hedge fund.

Ultimately, if you’re serious and you’re early, your main job is not to find a shortcut; it’s to build the traits that compound: discipline, honesty with yourself, curiosity, and competitiveness under stress.

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• roundups
• deducing the market-maker’s fair value
• Spooky? Jeff Yass on Prediction Markets

   

Friends,

My 12-year-old is a compulsive reader. To the point of me telling him, put the book down, go do stuff.

My 9-year-old has no interest in reading.

No bowl of porridge in this house is “just right” apparently.

I’m more alarmed by the 9-year-old of course. Our environment conspires against reading so it’s more important than ever to establish the habit early.

Warning: Old man yells at cloud moment

My niece goes to the local public school that is consistently in the top .50% of public high schools in the US. She had no summer reading assignment. She will be asked to read 3 books all school year.

Going into my freshman year of Christian Brothers Academy in NJ back in 1992, I was assigned 7 books to read over the summer. Every summer after that, we were assigned at least 4 books just for the summer. CBA is a good high school, but I live next to one here in CA and our local public school has a better reputation on academics. What if you don’t go to a top school? Or is this lack of reading some perverted thing that top schools do?

(My niece is taking AP Physics as a sophomore which used to be unheard of, so times have changed in good ways too. My niece’s favorite subjects are math and science and I’d like to think I had something to do with the math, given all the nerdom I’ve embarrassed my family with. What is not encouraging is discovering that there are only 4 girls out 40 students in AP Physics.)

Is standardized testing reflecting a reduction in standards or just the reality of dilution that you’d expect if a large majority of HS kids expect to go to college, as opposed to a few generations ago?

Some time back, I was in a conversation on Twitter about the SATs. Someone mentioned that the scores are inflated these days and you can’t compare across time. I didn’t realize that but sure enough one of my Twitter mutual follows chimed in. No other than Princeton Review founder Adam Robinson. He left a brief reply saying that while it’s complicated, it’s true.

Poking around online (a good place to start is the wiki for History of the SAT) you will find many calculators that allow you to compare SAT scores or at least percentiles between years. There have been many adjustments over the years, but the largest was the 1995 recentering. While my math score would be basically flat after adjustment my verbal was an 800 by today’s system. I haven’t delved into the decomposition of why verbal scores needed to be so inflated, but since the recentering occurred as early as 1995, it doesn’t make me think this is related to the decline of reading that has garnered more recent attention.

[To further muddy the waters, I’m not sure to what extent SAT verbal evaluation maps to any real-world acumen. I got a 790 on my SAT II – Writing, one of these subtests you needed to take back then, despite being a B student in English and literally walking out of a play at BAM in my late 20s because I was too stupid to understand it. My wife and I still think about how high-schoolers were laughing at Shakespeare’s jokes as we sat puzzled, trying to get cultured, only to give up by intermission. Yes, I write on the internet today, but it’s more like talking than the writing I saw in the classics I was forced to struggle through.]

This post by James Marriott suggests the decline is real. And why wouldn’t it be? Everyone sold 4 hours of their day to the biggest companies.

(Hey, at least your absentee ownership of cap-weighted indices investments benefit.)

The Dawn of the Post-Literate Society (James Marriott)

Select excerpts:

• “To engage with the written word”, the media theorist Neil Postman wrote, “means to follow a line of thought, which requires considerable powers of classifying, inference-making and reasoning.”
• In America, reading for pleasure has fallen by forty per cent in the last twenty years. In the UK, more than a third of adults say they have given up reading. The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
• The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
• Our universities are at the front line of this crisis. They are now teaching their first truly “post-literate” cohorts of students
• “Most of our students”, according to another despairing assessment, “are functionally illiterate”. This chimes with everything I’ve heard in my own conversations with teachers and academics. One Oxbridge lecturer I spoke to described a “collapse in literacy” among his students.
• The transmission of knowledge — the most ancient function of the university — is breaking down in front of our eyes. Writers like Shakespeare, Milton and Jane Austen whose works have been handed on for centuries can no longer reach the next generation of readers. They are losing the ability to understand them.
• Laid out on the page their arguments would seem absurd. On the screen, they arepersuasive to many people.
• Postman cites the Lincoln-Douglas debates of 1858 in which both presidential candidates spoke at incredible length and in remarkable detail as one of the summits of print culture: Their arrangement provided that Douglas would speak first, for one hour; Lincoln would take an hour and a half to reply; Douglas, a half hour to rebut Lincoln’s reply. This debate was considerably shorter than those to which the two men were accustomed . . . on October 16, 1854, in Peoria, Illinois, Douglas delivered a three-hour address to which Lincoln, by agreement, was to respond…When Postman was writing in the late 1980s, such debates were already impossible to imagine.

Marriott’s post is dramatic. Its strength is more in diagnosis than in bridging the decline of traditional literacy to its ramifications.

A librarian writes a terrific criticism of the post which articulates the concern I feel but didn’t put my finger on.

The real crisis isn’t that people can’t focus. It’s that we’ve built information environments actively hostile to contemplation while simultaneously lamenting the loss of contemplative practices. We’ve created attention casinos and then diagnosed the players with moral weakness. This is a design problem masquerading as a cultural catastrophe.

Consider what actually happens in a modern library. We don’t just house books anymore. We create what I think of as “containers for attention”: spaces and practices that enable different kinds of engagement with ideas. The silent reading room remains sacred, but it’s joined by maker spaces where people think with their hands, recording studios where oral traditions find new life, collaborative zones where knowledge emerges through conversation. We’re not abandoning literacy. We’re expanding what literacy means.

Marriott is right that we’re living through a profound transformation. Where he sees collapse, though, I see metamorphosis. The challenge isn’t to preserve the aristocracy of print but to democratise the conditions for deep thought across all modes of engagement. This means designing information environments that support sustained attention, teaching people to navigate multiple modes of meaning fluently, and recognising that human understanding has always been richer than any single medium could contain.

The future Marriott fears, where we’re all reduced to emotional, reactive creatures of the feed, is certainly one possibility. But it’s not inevitable. The teenagers I see who code while listening to philosophy podcasts, who annotate videos with critical commentary, who create elaborate multimedia presentations synthesising dozens of sources: they’re not the degraded shadows of their literate ancestors. They’re developing new forms of intellectual engagement that we’re only beginning to understand.

The question isn’t whether civilisation will survive the death of traditional literacy. It’s whether we’ll have the wisdom and imagination to build institutions, practices, and spaces that support human flourishing in an age where meaning moves through light and sound as readily as through ink. That’s the real work ahead, and it’s far more interesting than mourning a monopoly that was always going to end.

There’s a compromise between Marriott and the librarian. A minority of people will have the “wisdom and imagination” to be empowered by new mediums and not be “reduced to creatures of the feed”.

Maybe it’s not your fault or “moral failing” if you can’t focus when We have decided to outsource our principles to “what’s good for the market is Good”.*

* I’m not sure when this happened but here’s how I see it:

When I was a teen, the Jeff Lebowski played by David Huddleston’s character was the villain. Jeff Bridges’ Lebowski was the hero.

Your revolution is over, Mr. Lebowski. Condolences. The bums lost.

The dude extracts a mini-revenge when he tricks Brandt into giving him an expensive rug.

The spirit of today would be to lock the Dude up for pulling one over on a guy who turned out later to be an empty suit:

We did let him run one of the companies briefly, but he didn’t do very well at it…I give him a reasonable allowance. He has no money of his own. I know how he likes to present himself. Father’s weakness is vanity.

You don’t need to mainline kumbaya to notice how much rebellion-coded acceleration optimism is corporate-cuck fluffery.

Here’s a fun one:

There are only 2 possible reactions.

1. You hate this interview
2. You love this interview and hate yourself

I’m still stuck in the 90s, so you can guess where I live on this.

In honor of Jane Goodall, I’ll share a letter I saved in my notes years ago sharing her exhortation to make kids read:

Dear Children,

I want to share something with you — and that is how much I loved books when I was your age. Of course, back then there was no Internet, no television — we learned everything from printed books. We didn’t have much money when I was a child and I couldn’t afford new books, so most of what I read came from our library. But I also used to spend hours in a very small second hand book shop. The owner was an old man who never had time to arrange his books properly. They were piled everywhere and I would sit there, surrounded by all that information about everything imaginable. I would save up any money I got for my birthday or doing odd jobs so that I could buy one of those books. Of course, you can look up everything on the Internet now. But there is something very special about a book — the feel of it in your hands and the way it looks on the table by your bed, or nestled in with others in the bookcase.I loved to read in bed, and after I had to put the lights out I would read under the bedclothes with a torch, always hoping my mother would not come in and find out! I used to read curled up in front of the fire on a cold winter evening. And in the summer I would take my special books up my favorite tree in the garden. My Beech Tree. Up there I read stories of faraway places and I imagined I was there. I especially loved reading about Doctor Doolittle and how he learned to talk to animals. And I read about Tarzan of the Apes. And the more I read, the more I wanted to read.I was ten years old when I decided I would go to Africa when I grew up to live with animals and write books about them. And that is what I did, eventually. I lived with chimpanzees in Africa and I am still writing books about them and other animals. In fact, I love writing books as much as reading them — I hope you will enjoy reading some of the ones that I have written for you.

Money Angle

Below is an excerpt from the presentation I did at McCombs Business School at UT Austin.

It’s more hands-on to watch it after you take this quiz:

Confidence Test

(Respondents tend to score about 4 out of 10 on it.)

There’s a fun experiment in the video as well.

You’ll see just overconfidence and confirmation bias feed off each other in an escalating, reinforcing loop — and the key to stopping it.

Money Angle For Masochists

I was reviewing the posts I’ve written that have gotten the most views over the years. These 5 posts have had the longest tail, presumably because they are evergreen. They get readers every year.

1. Straddles, Volatility, and Win Rates
2. Lessons From The .50 Delta Option
3. Moontower on Gamma
4. If You Make Money Every Day, You’re Not Maximizing
5. Understanding Edge

This is the most widely read and shared post I’ve ever written:

Why Investing Feels Like Astrology

As an fyi, all my finance articles are cross-posted on the moontower.ai blog so these URLs are the cross-posted ones. The originals are on the blog. Since a lot of my writing is educational, it doesn’t make sense to be in chronological blog format so while the blog is useful as a host, it’s better organized in this index.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• my read on the market from the option lens
• Presentation to McCombs MBA Students at UT