Option Theory As A Pillar Of Decision-Making

  • Understanding Options and Decision-Making (Thread)

    In an old Barron’s Roundtable, Jeff Yass, the founder of SIG had strong words about how fundamental option theory is to decision making.

    Of course this sounds self-serving, from a guy who understood options as a young teen. But it reminds me of a more famous investor. Warren Buffet. I’ll rely on readers to find it but I remember Munger saying that Buffet was already thinking of options at a precocious age. While Buffet calls derivatives “weapons of mass destruction” his own investing history shows an explicit use of options (his put-selling maneuvers are well-documented…and critically path-resistant since they are not marked-to-market). I’m not a Buffet expert, but his use of “insurance float” sure looks like something that came out of the mind of a derivatives trader.

    • The Moontower Volatility Wiki is growing every week due to submissions from the online vol community. It also includes every post I’ve written on options, many of which try to use options theory to understand markets and think about probabilities.
    • Decision-making is a practice.
      • A pillar of sound decision-making is thinking in probabilities or as Annie Duke’s book is titled, Thinking In Bets. Here’s the notes I took on an interview with her which captures the essence.
      • This weekend I came across a great post by in the same vein by Jonathan Bales The Time I Sold Furbies For Money. I especially liked the bits about Belichick’s non-punt, and poker pro Phil Laak about learning what “5% feels like”. [Phil is a good friend of some friends I made in the options game so it was especially cool to see his thinking turn up in that post].

        I’ve previously commented on the neat analysis Bales himself did on the question of when you should “work for free”. You should follow @BalesFootball if you want to sharpen your “thinking like a gambler” sword.

  • A Personal Take

    I added thoughts on my days at SIG in response to the Yass thread. Here’s the text:

    When I was a Susq I heard Jeff speak a few times. It was always engaging.

    They were savage in my days there but the doubling down on tech and brains thru the years probably makes Jeff the richest dude in the world you never heard of (unless you look at pol donations, then you know). One of the talks was on the primacy of markets (Yass is an extreme libertarian, free-marketer, no fool should be allowed to keep their money type. Appealing views to many traders, esp when they are young). This post was one of his market lessons: Dinosaur Markets.

    One of my interactions with Jeff was a mystery to me:

    I remember when I was a 1st year mm on the Amex and I reported a giant trade that got crossed in AIG on the internal chat. I got a dm. “Pls call”. It was from Jeff. I was never so scared. Was I supposed to break that cross up? I called Jeff from an Amex phone and he just asked me for the trade details. Implied vols, who the broker was, what bank crossed it. I told him and he abruptly hung up. That was it. Still don’t know why of all the trades I’ve ever on reported why that warranted a call.

    Other times I’ve heard Jeff speak was on why the dot com bubble was not an example of market inefficiency and it goes back to understanding option theory and the relationship of volatility to positive skew and what drives volatility. I’ll write about that one sometime.

    He also speaks to every trading class for an hour that goes thru the 3 months of theory and mock trading in Bala Cynwyd. In my class he talked about career risk with NFL coaches affecting decisions (he defended an oft- mocked Barry Switzer decision to not punt)

    I will always be thankful for having worked and learned at SIG. I really didn’t have any business being hired there (2000 was the largest cohort bc $ was raining from the sky. They needed warm bodies to pick it up) and I think I’m proof that traders can be shaped and aren’t born. [By the way, this is very much why I try to teach what I’ve learned. Hopefully people smarter than me can build on it and let me invest in them 🙂 ]

    Incidentally, the head of HR who hired me gave important advice I always remember. When I explained I had a few higher offers she said:

    “You’ll be rich whatever you choose. Decide who you want to work with.”

    She knew SIG held the nuts.

Berkson’s Paradox

There is a positive correlation between a high school student’s grades and standardized test scores.

Yet… high standardized test scores before entering university do not predict university grades.

I’ll let you think a bit about possible reasons for that.

Some more statements:

  1. “Smart students are less athletic.”
  2. “Good books make bad movies.”
  3. “Height does not correlate with performance in the NBA”
  4. “People winning engineering contests are not that good at their job.”
  5. “In a good restaurant, the least appetizing sounding items likely taste better.”

You may have nodded with 1 and 2. Too bad they are illusions.

You may have been surprised by 3,4 and 5.

These are all examples of Berkson’s Paradox. What the heck is that?

Via Wikipedia:

The most common example of Berkson’s paradox is a false observation of a negative correlation between two positive traits, i.e., that members of a population which have some positive trait tend to lack a second. Berkson’s paradox occurs when this observation appears true when in reality the two properties are unrelated—or even positively correlated—because members of the population where both are absent are not equally observed.

Here Wikipedia summarizes the same example I highlighted from Jordan Ellenberg’s book How Not To Be Wrong around the idea that attractive men are rude.

Suppose Alex will only date a man if his niceness plus his handsomeness exceeds some threshold. Then nicer men do not have to be as handsome to qualify for Alex’s dating pool. So, among the men that Alex dates, Alex may observe that the nicer ones are less handsome on average (and vice versa), even if these traits are uncorrelated in the general population. Note that this does not mean that men in the dating pool compare unfavorably with men in the population. On the contrary, Alex’s selection criterion means that Alex has high standards. The average nice man that Alex dates is actually more handsome than the average man in the population (since even among nice men, the ugliest portion of the population is skipped). Berkson’s negative correlation is an effect that arises within the dating pool: the rude men that Alex dates must have been even more handsome to qualify. 

The key to understanding all of these examples is the correlations you expect break down when the sample is narrowed. This is commonly referred to as “range restriction”.

Let’s go back to the surprising statement I opened with. This time I’ll boldface the restrictor.

High standardized test scores before entering university do not predict university grades. 

Brilliant.org created a handy visual for understanding what’s happening. Even though SATs and GPA are positively correlated at large, at any particular university you may see a negative correlation.

They explain:

The admissions committee accepts students who have either a sufficiently high GPA, a sufficiently high SAT score, or some combination of the two. However, applicants who have both high GPAs and high SAT scores will likely get into a higher-tier school and not attend, even if they are accepted. The range of students that actually attend the school is given by the blue dots in the plot in the introduction. These dots show a downward trend even though the overall population (red and blue dots) show an upward trend. This trend reversal is the “paradox,” though there is nothing truly paradoxical about it. It is the result of a trade-off between GPA and SAT scores in the people reviewed.

Why is this so important?

Because it shows up everywhere! It’s tempting to see counterintuitive correlations and try to create a story about them but they are often not surprising once we realize that the narrow pool selects between 2 dominating attributes. Consider the NBA where many players are selected by skill and height. Height does not correlate with performance in the NBA because a short player in the NBA must have abnormally high skill to have gotten to the restricted range known as the NBA. Similarly, the chance of random 7 footer in the population playing in the NBA is an order of magnitude more likely than an average height player to make it to the NBA. It’s the same reason why you shouldn’t be surprised when a small NFL player like Wes Welker or Steve Tasker is a badass (I see you 90s Bills. I also hated you, but Tasker was a maniac).

So now I’ll go back to the original statements and boldface the “range restrictors”.

  1. Smart students are less athletic.”
  2. Good books make bad movies.”
  3. “Height does not correlate with performance in the NBA
  4. “People winning engineering contests are not that good at their job.”
  5. “In a good restaurant, the least appetizing sounding items likely taste better.”

The visual versions of all of these can be found in @page_eco Twitter thread that inspired this post.

More examples

  • Grit and violinists

    David Epstein spots a “restriction of range” problem in the book Grit which cites a study of 30 violinists. When you squash the range of a variable that is correlated with the dependent variable you risk understating the correlation with the restricted variable. In this case, the sample was violinists who had already been accepted to a famous academy. We have squashed their innate talent even though it likely has a wide range.

    He also articulates the NBA example: If you studied the correlation of height to points scored in basketball for NBA players you find a jarring negative correlation but that is because you are selecting from a sample of abnormally tall players, to begin with. You’ve squashed the height variable, which would lead people to think that height has no impact on points scored.

  • Surgeons

    Nassim Taleb has warned that you should be wary of surgeons that look like stars who play surgeons on TV.

  • Hedge fund managers

    Not due diligence advice but I’m guessing you probably would have wanted to invest with a black or female hedge fund manager in say the 1980s.

Finally, one last example from Byrne Hobart who has a “range restriction” detector in his brain:

Institutional Investor highlights a study showing that CEOs get more authority relative to boards when they benefit from lucky economic conditions they had nothing to do with. There’s always some range restriction at work when analyzing the performance of CEOs. In a simple model, a CEO gets the job through some combination of a) underlying skill, and b) the ability to persuade. That persuasive skill means that we should expect the worst CEOs to be overcompensated, and the best to be underpaid. And it makes sense that one channel through which charisma works is in taking credit for good news and dodging blame for bad news, irrespective of who was really responsible for either. 

It’s not surprising Byrne spots Berkson’s Paradox everywhere. He wrote Brilliant Jerks, Crazy Hotties, and Other Artifacts of Range Restriction. (Link)

On Delta Hedging

Delta hedging is a trade-off between transaction costs (direct+slippage) and risk reduction. Some observations to help you think about it top-down:

  • Delta hedging is sampling prices with trades instead of simple observation

    When you compute realized volatility you choose a sampling period, say close-to-close. You can think of your delta hedges as samples. If you and I delta hedge at different prices we are sampling different volatilities. Close-to-close vol might not even correlate with our samples. So everyone’s lived experience of their attempted “market neutral” is different based on how their sampled vol compared with the implied. This is why delta hedging is bedeviling.

  • Delta hedging links implied vols to subsequent carry p/l

    Delta hedging is the link between the implied vols you trade at and the subsequent p/l you realize regardless of what some objective measure of realized spits out. If you hedge a 1 month option 2x over its life you aren’t really trading vol since hedging that infrequently is going to generate a pretty random vol compared to the vol that’s realized by conventional measures. If you are trading implied vs realized strat you are mismatched.

  • Transaction cost vs risk trade-off

    If you hedge hourly your sampled vol will land somewhere close to traditional measures of realized (assume no flash crashes or quick resolving discontinuities). But it costs you a few bps in slippage each time. Expensive. So you need to tolerate some delta, which means you don’t hedge “continuously” as the pricing models assume. How much you let your deltas run will depend on so many factors. Non-exhaustive list:

    1. Tolerable p/l variance
    2. How much gamma you have
    3. Opinion of how returns are distributed.

    Another thought. You could hedge more frequently but with a more liquid instrument like ES. So you are sampling vol more often, and saving on slippage, but increasing basis risk. (Be careful about taxes!…Futures are designated “1256” contracts and have specialized tax treatment which means you need to track p/l in different buckets for tax purposes.)

  • The reason to systematize your hedging rules

    Once you tally all the considerations you just want to systematize the hedging. Fixed time intervals, time intervals divided in proportion to volume traded, just trade on the close, every time you go to the bathroom. Whatever. Just reduce the temptation to trade emotionally.  Why?

    Cutting long gamma short and letting short gamma ride is the vol traders equivalent of being a loser in delta one trading.  Be consistent about your rules whether you are short or long gamma.

  • Be realistic about what delta is capable of hedging.

    Market making 101 — the only way to actually hedge an option is with another option.  This is especially true with low delta or tail options.

Finally…my ongoing joke is delta is the only Greek. Be short options where she expires and long where she doesn’t.

This thread was a cleaned up version of a popular Twitter thread.

Cultural Flashback

One night, while browsing Netflix, I came across a show called Valentino. I gave it a chance.

Oh man. I wasn’t ready for wave of feelings it conjured. I was instantly transported back to childhood.

A vivid cultural flashback.

Valentino is an Egyptian show with English subtitles. The mannerisms, expressions, body language, intonation, dynamics between old and young, male and female. I have not viscerally felt that way since perhaps 2005 when I visited Egypt. To be totally immersed, in a culture that is both deeply familiar, and philosophically foreign.

The show is quite ridiculous and has that Arrested Development energy (RIP Jessica Walter this week). I’ve urged my family to watch it. My mom finds it hard to watch because the male lead actor, now 80, plays a hapless, pathetic character. But he’s a famous, celebrated actor in Egypt who my mom loves and has even seen on stage. To see him in this role is too much for her to bear. My sis however enjoyed the same nostalgia feeling I got. Even her husband, who our clan affectionately refer to as “The White” , recognized our family in the show’s dynamics.

A crazy aside: we thought “The White”  was a just a European mutt, but 23andMe sent him a revision 2 weeks ago that stirred intrigue. He’s got Egyptian in him! So many questions. First one — they send revisions out of the blue?! And not to be gross, but can chromosomes cross…oh nevermind. Here’s the proof:

Anyway, the ship stuck in the Suez Canal has brought Egypt into focus for 2 American seconds. Nick who lived and worked there wrote a resonant thread about its culture. It’s short and worth a read. Between the show and the thread I reflected a bit on my own experience.

I’ll leave you with my response:

Anecdote…a friend of mine here in the states (but born in Egypt) went back to Egypt and started a trading shop. He is a good dude and really wanted to teach a group of Egyptians to trade. The “fatalism” work ethic eventually caused him to abandon ship after 2 years. He described constant no-shows, excuses, and frankly people had a hard time connecting the dots to why making money was worthwhile. No sense of urgency. Nick’s use of “fatalism” captured the essence of what my friend reported to me. I don’t see this quality in Egyptians here [in the US].

I’m not on top of Egyptian politics and I’ve only been there once. Arabic was my first language though i lost it by the time I started school. I can understand what I call “household Arabic” and I Spanglish it when I speak. I was surrounded by Egyptians in Brooklyn and NJ growing up. I actually rejected much of its culture growing up. My mom is a very independent thinker and a bit brash and let’s just say she doesn’t stay in her place. It had a big impact on me and my sis.

I have a lot of issues with the culture and yet I find the people to have a beauty that I am drawn to. There is def something that I deeply enjoy in their mannerisms, expression, and warmness that I think is cultural and that I have affinity or at least nostalgia for.

Yinh and I contrast my family quite a bit from hers. My family wears emotions on sleeves. Perhaps hot blooded, stubborn, but very expressive and openly loving. Big fat Greek wedding kinda crowd. Very extraverted. Whereas my wife’s (Vietnamese)fam is more even keeled and reserved but every bit as tight. They are also so much easier to deal with (shhh, don’t tell).

Anyway, it occurred to me that Nick’s comments about Egypt are the type of comments read by the wrong person would get him egged. There are eggshells everywhere around topics like these but I find the “feeling” of being around different cultures to be real and a gift. It’s a treat to know that immersing yourself in another culture can transport you. It’s one of the most interesting things about being the animals we are.

There’s probably cultural features that are absolutely good or bad. My mom could never live in Egypt but likes visiting. Debating these differences sounds like a very bad block of Twitter city that I avoid and I’m not especially educated on topics like that. I just enjoy feeling the differences in how people talk, touch and communicate in general.

I just started watching Valentino on Netflix which is like an Egyptian Arrested Development. It is totally transporting me to a different cultural time in my life. Overbearing matriarch (grandma “teta”), men useless in a particular way, polite insincerity mixed with love.

(Now I have the urge to call my cuz to have him rap Biggie in Arabic which always had me dyin as we rode around in his car in NJ) 

A Closing Suggestion

If you grew up around a different language or culture but feel a bit distant form it today, I urge you to take a chance on a foreign show that might recapture that. It has never been easier. I can’t emphasize how trippy and amusing watching Valentino has been for me. If you had access to a totally different world that has since disappeared from your daily consciousness, this is a reminder that it’s both fun and easy to rediscover.

And if you specifically have an interest in Egypt, Kamil recommended this book that I immediately ordered. Will I read it anytime soon? Insha’allah.

Seeing Sociopaths

A common criticism of people who vote straight down the party line is that they are not thinking. They are brainwashed.

This criticism fails for 2 reasons:

1. The greedy outsourcing algorithm

A voter may be lazy or just self-aware that they aren’t going to be informed on every topic. A party-line vote is a greedy algorithm for solving their decision by relying on the judgement of the like-minded. I’m sympathetic to this strategy especially if you build your own cabinet. Its failure mode is the voter forgets that their stance was a surrogate’s, not their own, then defends it like it’s blood.

2. Stances are signals.

Criticizing the person’s judgement misses the point. The actual stance and its reasons are irrelevant. This person is just putting on their team’s jersey. It’s very much like sports. When the star player defects to another team it may as well be treason. Allegiance is to the colors not the players. Republicans used to be about fiscal sobriety. Democrats valued free speech.

To call deeply partisan thinking “brainwashed” does not give people enough credit. I’ll walk you through a thought that has been lingering lately.

Many lament the feeling that facts appear as negotiable as a watch on Canal Street. This is especially true at the extremes of the political spectrum. Many mock extreme views as stupid. I disagree. That view only makes sense if you think extreme positions are about logic. Logic is not something used to build up these stances. I’m sorry, but it is post-fit. Not even as a sincere rationalization. It’s just playing along with the delusion that logic ever mattered.

How do I know?

Imagine regurgitating the NRA’s logic as if it wasn’t propaganda.

Imagine watching an anti-vaxxer explain how injecting a small dose of a virus into their body is unnatural while they smoke cigarettes and put pasteurized milk into their bowl of Lucky Charms.

Imagine taking ‘slippery slope’ arguments seriously.

The extremes give reasons for their behavior but only because we still pretend reasons matter. So they feel compelled to speak in those terms. But they know the reasons don’t matter. Politics are an expression of their chaotic alignments. Politics’ function is to advance their abject desires. Not for good reasons but simply because their desires exist. So when you argue with an extreme point of view, you’re wasting your time. Sociopaths are cosplaying a debate, but understand it’s a charade. Meanwhile useful idiots try to recycle the sociopaths’ logic in earnest debates.

The sociopath is honest to themselves and purposely dishonest to others. The useful idiots are dishonest to themselves and don’t even know it. They are not so much brainwashed as willing to play along if that will get them what they want. Self-deception only makes them more effective. Neither their urges or reasons are brainwashed. They are simply convenient.

David Hume wrote “reason is slave to the passions”. We fancy ourselves civil by requiring justifications, not might. But the object of might in the first place is self-interest. The self-interest still rules but we require the theater of reasons. The sociopaths supply the script, the sheep supply the numbers.

The grand delusion is that Hume is wrong.

My feeling that the invisible hand of sociopaths is heavier than we might think is inspired by Venkatesh Rao’s Gervais Principle which has haunted me for a few years. My feeling that dumb arguments are a distraction or a form of talk traces its roots back to Rao.

The Gervais Principle recently re-surfaced in Alex Danco’s post The Michael Scott Theory Of Social Class where he juxtaposes Rao’s model on another piece I keep saved…Michael Church’s Ladders of Social Class.

Highlights from Danco’s juxtaposition:

The Office Model

So, twelve years ago, Venkatesh Rao wrote a lengthy and fascinating series of essays called “The Gervais Principle”, which walked through the NBC show The Office, an American adaptation to Ricky Gervais’ original British series. The essays go after a particular aspect of organizational behavior, around how organizations that survive tend to self-stratify into three predictable layers.

  • In the bottom layer, you have around 80% of the office, who occupy the rank-and-file roles. They are the losers. Rao carefully notes that “losers” does not mean uncool, or unworthy; he specifically means “economic losers.” Losers are the people who are set in roles or stations in life where the output of their effort is wholly realized by someone else. As they learn throughout their careers, their skill or engagement might lead to incremental career progress, but no real leverage of any kind. Hence, they are “economic losers”, and they know it. They see the world through clear eyes, and cope. 
  • At the top you have Corporate. These are the sociopaths; the economic winners. They are smart, they care about getting power, and little else.
  • The losers and the sociopaths are actually pretty alike. They are alike in that they both see the world through clear eyes, as it actually is. The losers basically understand how the world works, and how their role fits within it. So do the sociopaths. 
  • In the middle, in between the losers and the sociopaths, is a very different group. That group is the middle managers: the clueless. In The Office this group is an iconic trio: in ascending order of cluelessness, Andy, Dwight, and of course – Michael. When it really comes down to it, The Office is a show about these three people.

The Language Focus

There are many fascinating parts of Rao’s multi-chapter series. I recommend reading through them all. But the most interesting topic he dives into, by far, is language. If you look at the way everyone talks to each other, you’ll find five distinct ways that the characters speak both within and between the three groups.

  • Posturetalk

    Posturetalk is everything said by Michael, Dwight and Andy, to anyone: the staff, the execs, or each other. Everything they say is some form or another of meaningless, performative babbling. This is the language of living inside a construct; where your entire world lives within arbitrarily drawn boxes, and you have nothing concrete to attach to. It’s the only language that Michael knows how to speak. 

  • Babytalk.

    Babytalk is the language spoken from the literal, to the clueless. It’s placating, soothing, or often misdirection: “There, there. You have no idea what you’re saying. Why don’t I distract you with something over here.” 

  • Powertalk, Gametalk, and Straight Talk

    The three other languages spoken, which don’t involve the Clueless, are Powertalk (the Sociopaths’ internal language, which is entirely about competitive information-gathering and retroactive deniability), Gametalk (The Losers’ internal language: recurring games or coded rituals to get through the day), and the rare instance where Corporate actually speaks directly with the losers: Straight Talk. It’s the one and only time where people actually speak directly, with zero encoding. 

Michael Church’s 3 Ladder Class System

Michael Church wrote a neat summary of the American social class system, and how the traditional metaphor of “climbing the ladder of social class” is wrong in an important way. There isn’t one single ladder; there are three – each with different values, norms and goals. You have the first, and largest ladder, Labour. Next, you have the “Educated Gentry” ladder that corresponds to what we typically call the Upper Middle Class. And finally, you have the elite ladder. And the remarkable thing about these ladders is how perfectly they correspond to the three-tiered pyramid in The Office, of the losers, clueless, and sociopaths. 

  • The Labour Ladder

    Climbing the labour ladder means making more money. At the bottom are really tough jobs, typically paid hourly, informally, or with tips. Above that there are stable, but modest blue collar jobs; then high-skilled or good Union-protected careers. Finally at the top you find “Labour leadership”, which doesn’t mean being a union boss, but means, “You’ve made it. You own stuff. You drive a new F-150, you have income properties, you enjoy nice things.”

    But you have not actually escaped the category of “economic losers”, because the Labour ladder does not create paths to leverage. That is the fundamental difference between how the labour ladder works versus how the elite ladder works. The people on the labour ladder fully understand this. 

  • The Elite Ladder

    The Elite ladder has a lot in common with the Labour ladder: it’s straightforward. You move up by getting more money and more power. The only fundamental difference is that you climb the Labour ladder by working hard, whereas you climb the Elite ladder by acquiring leverage.

  • Middle Ladder

    The middle ladder works completely differently from the other two. This ladder isn’t about money or power; it’s about being interesting. You climb this ladder by being more educated, and towards the top, by having costly habits and virtues.

    Generally speaking, the farther you go up this ladder, the more detached from reality you get. Importantly, this isn’t seen as a problem: it’s actually a virtue, so long as you portray it correctly. Sixty years ago, this group sought refuge and status in the suburbs, explicitly detaching themselves from the reality of dirty, dangerous cities. Now, it’s fashionable to move back downtown, detaching ourselves from the reality of gas-guzzling, chain restaurant normie suburbs. The farther you go into expensive, performative habits (Doing triathlons, eating farm-to-table) and coastal echo chambers (“I don’t know a single person who voted for Trump”; “We should ban cars”), the farther you progress up this ladder. 

The Office Model Applied To Class Structure In The US

Once you get familiar with [Rao’s Office model], you start to see it in other places. One of the biggest stages on which you could argue it plays out pretty faithfully is social class structure in North America.

I want to highlight something Church never covers, but you can see clear as day by superimposing The Gervais Principle on top. And that’s how clearly this three-ladder structure reveals itself through language. 

  • The great irony of the Educated Gentry [the middle ladder] is that the more time you spend in it, and the more people talk to you with that language, the more you turn into Michael Scott. It’s a funny juxtaposition, because Michael Scott in the show is absolutely not in this economic class (he never went to college; his job falls solidly in the labour ladder), but his character is a bang-on portrayal of what’s like to aspire to Petite Bourgeoisie values.
  • Language is the fundamental reinforcement mechanism of why arbitrarily constructed environments eventually turn you into Michael Scott. The more you have committed to being seen as interesting within your particular area, the more you detach from reality and move into a construct of your own creation. As this evolution takes place, more of your and your peers’ language will become Posturetalk, and more of the language that gets spoken to you by outsiders will become Babytalk. 

Conclusion: The Michael Scott Theory of Social Class

The higher you ascend the Educated Gentry ladder, the more you become Michael Scott.


Serious Triathletes? Michael Scott. 

PhD Students? Michael Scott. 

Have an opinion on the right amount of hops? Michael Scott. 

More than 10,000 followers on Twitter? Michael Scott. 

Really into urbanism? Michael Scott. 

NYT Op-ed? Definitely Michael Scott.

Reading these essays in their entirety is fun. I recommend starting with Danco and Church because they are relatively quick. The Gervais Principle is as long as a book but its detail offers the highest reward. If you want a digital copy with my highlights ping me.

Here’s the links to the original essays:

Alex Danco’s The Michael Scott Theory of Social Class (Link)

Michael Church’s 3-Ladder System Of Social Class In The US (Link)

Venkatesh Rao’s The Gervais Principle (Link)

My Simple Rules For Social Media

My good friends’ son recently turned 13. He was allowed to get an IG account for his birthday. My friend shared my guidelines for social media with him.

1. Be kind
2. Be useful
3. Give people the benefit of the doubt

These rules are Twitter-centric especially #3 which makes allowances for the 280-character limit in Tweets. It’s tempting to get sucked into “someone being wrong on the internet” so having a code can save you from yourself.

Dropping your phone in the toilet also works.

What Does “Rich” Mean To You?

My Twitter following grew hand-in-hand with the newsletter. On Twitter I really just wanted 1,000 followers figuring that might be enough to crowdsource. That was a goal because Yinh and I would randomly text friends with a question to settle our own debates. I remember sitting in a cab as she blasted a group “Do you know what a solstice is?” because I claimed this was “common knowledge”.

Well I used Twitter this week for a survey.

“What number do you consider “rich”?

There are over 400 respondents by now but the poll is still open. You can see the thread and take the brief, anonymous survey here.

You can see the results here.

There’s 2 centimillionaires. 5% of respondents have a net worth greater than $10mm. And the relationship between wealth and age is fairly strong until about age 30 but then the correlation becomes much weaker. Lots of very rich 30 and 40 somethings. And there’s a 22-year-old worth $3mm. Smells like someone who has been mining ETH since high school.

The 400 respondents have a combined wealth of over $1.2b. Several people have joked that I have a valuable email list. But I did not collect email addresses. It will be interesting to see how the numbers change now that this mailing list is getting the survey. Then I’ll know just how valuable your email addresses are, muahaha!!!

Let me explain the context of this survey in the first place. It was a piggyback to my wealth tax email last weekend. A friend told me that he once read that people consider net worths 4x larger than their own to be “rich”. The reason this is interesting is you would expect that people in favor of a wealth tax would try to draw the line in relative terms since “rich” is relative. So someone worth $1mm might think $4mm should be the line, while the top respondent on our survey would draw the line at $1b.

In this case, I was trying to see if there was a relationship between a person’s net worth and what they considered rich. This sample produced a median multiple of 5. So someone with $1mm thought $5mm made you rich. Also, the median amount the entire sample considered to be rich was $5mm. That’s comforting. On average people who were worth at least $5mm considered themselves to be rich. So if you hit that mark, there’s a fair chance your neighbor’s yacht won’t actually make you feel as poor as those headlines of NYers making $750k/yr barely making ends meet will have you believe.

Many people sent me their definitions of being rich incorporating age, expenses, what makes them happy, where they live and so on. I wasn’t looking for thoughtful responses. I was looking for a gut impression. I used the word “rich” specifically for that reason. “Rich” is a child’s world. When I was a kid if another boy had that GI Joe aircraft carrier, they were automatically “rich”. It’s ironically a low-brow word. People were telling me the difference between rich and wealthy (which Chris Rock once quipped is the difference between Shaquille O’Neal and the person who signs his checks). I wasn’t interested in such nuance. Rich…first number that comes to your head. Go.

Back to the results. Of course fintwitters visualized the data. Of course fintwitters had comments. That’s the fun in this. Here’s a thread of reactions.

And as Kamil said, the best take points out that almost everyone thinks that $5mm is the bar for being rich. I’m only off by a factor of 2 when I said that $10mm was the new millionaire. In fact as of 2020, to be a 1%-er in the US a household needs $11mm!

And if you want to see net worth in the US by age as of 2020, you can find that table here.

Lessons From 100 Moontowers

Welcome to Moontower episode 100. I also picked up 80 new subs this week pushing the total over 1500. I started this weekly letter with the Dazed and Confused namesake March 2019.

I’m going to share a few bits about this little experiment in the hope that there might be a bit of inspiration or even lessons from my experience.


2 years ago I was always blowing up friends and family chats with links and commentary on random stuff. Yinh had been a few months into her podcast so she had already “put herself out there” and suggested I collect my ideas and send them to friends once a week. Since I was already feeling bad for RIP-ing friends’ WhatsApp notifications, I figured what the hell.

So I emailed 100 friends and asked if they would be cool receiving a weekly musing. About 45 people signed up.

The writing started mostly as me drawing connections between related links. The readership grew steadily but slowly but it was never my goal to reach a bunch of people. It was really to spark conversations. And it did. One of my favorite things about the letter is how it has put me in touch with the friends I miss out on because life gets in the way.

The letter was and remains a big time commitment. I harvest links and take notes as a life habit. I would do that even if there was no letter. But the letter specific time suck is about 6-8 hours per week with a long tail for letters that have taken 15 hours. I love and hate writing the way one hates and loves working out. It’s painful and hard but there’s some reps and PRs which make it all feel worth it. When you’re done you feel good but it’s less of an endorphin and more of relief. You earned a beer and music with lyrics.

I remember my buddy Khe telling me that 95% of letters fizzle out by the 20th issue and I remember being proud when I crossed that checkpoint. I promoted the letter on Twitter where I had basically no followers but every now and then someone with a following would get a hold of the letter an take a liking, and boost it. Both my Twitter and letter following started growing together.

This was where this Moontower experiment was starting to point me in a direction.

Writing As A Catalyst

When I would write about investing or options I would get more readers. And this is despite the fact that I don’t give tips or trade ideas. It was more the  meta or theoretical aspects of trading. So within 6 months, the letter that started as links evolved into “write what you know”. I always enjoyed the teaching aspects of my day job over the years so finding many eager learners online offered a fun challenge. Can I make technical finance ideas approachable?

Within a year of starting Moontower, I had the confidence to write about technical ideas. I added Money Angle to the format as a safe space to talk about wonkier finance topics. They were well received and spread through #fintwit and even amongst investors in both Yinh and my networks. It led to so much inbound encouragement and thank you’s that it fed on itself. I’ve joked before that my love language is compliments (“words of affirmation” is the scientific term). From one angle that makes me sound insecure. That’s not without a nugget of truth. I even keep an “encouragement” label in Gmail for all the feedback I get. It’s important and meaningful to me. I respond to every email I get. But being powered by compliments means the cost of my human capital is quite low. I write because it’s useful to others and I get a better understanding of things that I spend time thinking about anyway. Win-win. Compliments are a renewable energy. In fact, I think encouragement and gratitude are some of the most underutilized sources of fuel out there. Many people would work for less money if they believed what they were doing was special to others.

So if what I’m doing is useful it’s all of you that I have to thank for pulling it out of me. You were all helping me and one another without even knowing it.


I was warned that writing in public was risky. The internet is permanent. Cancel culture. Trolls. I take these warnings respectfully. But it’s not me to worry too much about that. I give “people the benefit of the doubt” to a fault. (Except brokers — we used to have a joke on the floor…”how do you know a broker’s lying? Their lips are moving.” If you are a broker reading this we’re cool don’t worry.) I live pretty outwardly. I think the benefits of living that way outweigh the times I get burned.

I expect my outwardness is a defining aspect of this letter. I still write it like I’m writing to 40 close friends. I talk about my family, deeply personal experiences (like when Max was in the hospital or when Zak was born), and personal views (like why you can’t say ‘deserve’ around me). I do this because I like hearing others think aloud. We are all a bit voyeuristic. I subscribe to others’ letters because I want to hear them think. And if I like how they break things down then I want to hear how they break down the things that happen in their lives. I’m probably not alone in feeling that way. So I write personally because I expect you’ll appreciate it too.

Plus if it falls flat, my kids will have their old man’s writing to look back on one day.

For Other’s Interested In Getting Started

If you were on the fence about writing a newsletter, I can offer these encouragements:

  • Finding topics is easy because writing generates more ideas.

    I started with a list of about 20 topics. Well, I’ve now written 100 letters with multiple topics in each one and my outstanding queue grows faster than I can write them. Also, you start to see the world from the lens of “other people might want to know about this” so experience just drops tons of ideas into your inbox.

  • Having no audience is actually good

    Small audience means low pressure. A small audience is also going to be supportive since they will be friends and family. You don’t want to feel like you are writing to an empty auditorium forever, but you should expect it to be like that for awhile. Expectations are everything. If you have low expectations than every bit of growth will be dopamine. And you don’t want to desensitize your receptivity to it because of high expectations. Writing is hard and those drips of dopamine might just be the bits that help you push through.

  • Writing is hard

    It just is. Don’t be discouraged. It’s hard for everyone. Even Seinfeld considers it torture. It’s also more time consuming than you expect.

  • It’s never been easier to start

    Substack. Twitter has partnered with Revue. I’m using Mailchimp. Don’t waste time overthinking the tech, the title, the logo, or anything else. You don’t need to buy the perfect sneakers before you go running. Just go outside and run. Action creates information. You can blindly trust me on that. Just start.

  • Ignore me

    Finally, most of you should ignore me. The opportunity cost of a minimum of 1 hour a day is high. You could have taken a course online, started a business, gotten in killer shape or just put more time in at the office. There’s so many uses of time that will all yield amazing benefits if done for 100 consecutive weeks. But if you are not especially happy with how you are using your time, maybe too much video games or Netflix, remember writing is a form of expression that recruits so much of the self without requiring you to leave the couch.

Thank you all for giving me the privilege of sharing to an actual audience.

One last thing. This past week I was reminded of a fun story that embodied our guiding principle of outwardness. It will be especially amusing to food fans or SF’ers. Mom, you’ll want to click on this too –> thread

My Lost Xtranormal Video

I was trading nat gas options on the NYMEX in late 2010. Those Xtranormal videos had just gotten popular so I decided to try my hand at making a humorous take of being a market maker. Well, over 10 years have gone by and the original URLs are just dead links. The video was lost forever.

Or so I thought.

On Friday, a mutual on Twitter dm’d me a file in reference to a thread about market-making of course not knowing I was the creator of the video.

This is the closest I’ll ever be to finding buried treasure. It’s a bit esoteric because of trading jargon, but it’s a time capsule for NYMEX folk. It’s also the best work I’ve ever done. I watched it probably 10x since I got it.

I uploaded it to YouTube for the 50 people or so in the world that will appreciate it as much as me. Conveniently, they probably all read this letter.


Shannon Hoon “All I Can Say”

I was chatting with my guitar instructor about songwriting and we got on the topic of melody and he was sharing some artists who were especially creative in how they would compose a melody over a given harmony. One of those artists was Blind Melon’s Shannon Hoon.

This prompted me to watch the 2019 documentary All I Can Say ($3 on Amazon Prime).

I really enjoyed this film. A few bits about it:

  • It’s all just edited clips from Hoon’s camcorder. Hoon videologged his life from 1990 to 1995 which captured their rise from Midwest obscurity to the cover of Rolling Stone and playing Woodstock ’94.
  • Hoon died from complication of a cocaine overdose at age 28. The documentary opens with his final day. He sets the camcorder on the hotel dresser, calls his wife while laying in bed, and goes to sleep for the last time. It’s a surreal thing to watch before the tape rewinds 5 years to the start of the videologging.
  • The documentary is very raw as you might expect. It’s an intimate tag-along on his life. There’s also some amazing cameos. I’ll spoil one…he sang back up on several songs on the Use Your Illusions records, being from the same town as Axl Rose. He’s also in the video for Don’t Cry.

Anyway, I’ve been listening to lots of Blind Melon the past couple weeks but the video I watch every day now is their performance of the song Soup at Woodstock. I just love how he sings this, and the transition into the heavier part of the song is [chef’s kiss]. (YouTube)