Moontower #54

Friends,

There used to be this concept known as dine-in. You would go to a restaurant, park your car, then go inside and meet somebody known as a host. This host was in charge of finding you a table. With chairs. And you could stay there to eat an entire dinner. And other people that did not live in your house were able to go and sit on their own chairs at the same table. You would prearrange a meeting time with these people just as you do with an AmazonZoom date now — by texting them ahead of time to see if you had a mutual opening in your calendar. There were many more appointments in those days that needed tracking so you would not just presume they were free.

Back to the host. It’s amazing to think how they could coordinate all of this. Tables needed to turn over. There were only so many people that could be served every hour. Dead space was lost time, but the rent was still being charged. Not only that. Think of how much property the restaurant used to need. Space for dining room obviously, but that’s not even the half of it. They needed land for a whole parking lot. You can google image “parking structures” to see just how businesses would economize on that need. Ugly, but I guess they were effective.

Anyway, one of my last dine-in experiences was with a navy pilot who was shipping off to the South China Sea. He was explaining how China had been basically adding rocks to tiny islands to grow them. After 30 years, these man-made bodies were large enough for the Chinese to build bases on. I can’t help thinking this maneuver is both completely unimaginative and genius at the same time. But whatever your opinion, they were playing a long game. Many Asian nations stake claims to the various islands. Land disputes are common. A military base is a handier way to end a dispute than posting a flag.

(Quick aside on why my friend deployed there: Since WWII, the US has been chaperone to the dance of the high seas. Making sure the trade routes to the punch bowl were always clear. De-escalating tensions between the horny boys with their emerging economies and testosterones. Only the metalheads, playing the role of North Korea in this overreach of a metaphor, want a mosh pit to break out but nobody asks them to dance anyway. So the chaperone is there to hinder encroachment by the jocks who are most capable of inciting a ruckus.)

It’s hard to deny the sovereignty of a military base. So every time a cartographer sits down to update borders, the Google Earth satellite view is going to be a better guide to labels than any deed filed at [insert Asian country] town hall. Even natural borders like rivers are arbitrary. Like the spot of a football. They are subject to influence and judgment.

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This brings me to one of my favorite reads. The powerfully provocative (and amusing) The Categories Are Made For Man, Not Man For the Categories.

Some teasers:

• “…I have a special place in my heart for the people who occasionally try to prove Biblical fallibility by pointing out whales are not a type of fish.”
• “Your job is not to draw “the correct border”. There is no one correct border between Israel and Palestine…Instead you’d be making a series of trade-offs…[and] there are also much stupider decisions you could make…But, crucially, they would not be false. They would not be factually incorrect. They would just be failing to achieve pretty much any of the goals that we would expect a person solving land disputes in the Middle East to have.”

The conversation extends beyond physical borders:
“Statements like “the Zambezi River is full of angry hippos” are brute facts. Statements like “the Zambezi River is the territory of Namibia” are negotiable.

In the same way, statements like “whales have little hairs” are brute facts. Statements like “whales are not a kind of fish” are negotiable.

So it’s important to keep these two sorts of statements separate, and remember that in no case can an agreed-upon set of borders or a category boundary be factually incorrect.”

Slatestar summarizes the primacy of facts and definitions that characterize so-called rationalists (a tribe he is undoubtedly a key member) with this:
Abraham Lincoln’s famous riddle: “If you call a tail a leg, how many legs does a dog have?” And the answer: “Four – because a tail isn’t a leg regardless of what you call it.”

(if John Wilkes Booth had to suffer through that riddle, then I don’t blame him)

Now it’s going to start getting weird for people who pride themselves on being very left-brained (a false binary I’m not sure why anyone would proudly subscribe to):

I take this argument seriously because sticking to the truth really is important. But having taken it seriously, I think it’s seriously wrong.

Pause. Here’s an inventory of the practical upshots as I see them:

1. Categories are defined by people.
2. The usefulness of a category depends on the context.
3. Therefore applying a category requires discretion.
4. Discretion is inherently negotiable

Ok, now I urge you to read the whole post. (Link with my highlights)

He’s a psychiatrist. It’s interesting to see how this has influenced his thinking on issues of mental health, trangenderism, trans-Napoleonism, and therapies. The “hairdryer incident” shows just how wide the divide can be even amongst intelligent, reasonable people.

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I’ve written here before about my own recognition of how categories made up. It’s not necessarily inconsistent to treat a group versus an individual from a group differently. The context of relationships is scale-dependant. When I deal with an individual I do my best to abide by the zeroth commandment. (Link)

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The Money Angle

A finance version of “categories are made for man”.

What is the definition of “risk”? If you ask a quant, they will say volatility. If you ask Warren Buffet he will tell you that’s stupid and that risk is the chance of permanent loss as opposed to price variation. I don’t want to get into a taxonomy of risk definitions. And I definitely don’t want to get into semantics. Or near-semantics like “risk” versus “uncertainty”.

Just like the border drawn on a map. It has nothing to do with some objective sense of right or wrong. The criteria for evaluating the definition of a border is simply how useful it is. The concept of risk is useful insofar as it helps you judge the merit of an investment. No single measure of risk is sufficient. Think of risk as a multi-faceted prism. The same investment projects different qualities depending on which angle you view it.

Check out this Twitter poll by @Econompic:

This poll targets differing views of risk. It’s trying to find a weakness in the “risk is volatility” definition. It does this by showing that asset B which has very low volatility is an inferior investment. It is, therefore, riskier according to any non-volatility based definition. It is riskier in a common-sense definition of risk. It’s possible however to find a context where the volatility-based definition matters. Let’s say you are a bank and mandated to hold all excess reserves in one of these investments overnight (I know it’s a stretch). Well, the volatility-based definition is useful if losing 2% in one day is an unacceptable outcome.

This exercise a reminder that any definition of risk should be evaluated by its usefulness. Any single definition is incomplete and insufficient for making an investment decision.

Picking on the quants’ definition of “volatility as risk” as popularized by Buffett is not new. Cliff Asness defends the quants in the first item of his cranky list My Top 10 Pet Peeves. (Link)

I also like #10 on poor justifications for individual bonds to bond funds.

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I published my notes this week for an old interview between Ted Seides and Basil Qunibi of Novus. Novus is a fund consultant that is best described as “Moneyball for allocators”. Novus does performance attribution. Which means they figure out if a manager’s edge is what they say it is. If a manager’s performance has been due to good timing but they say their edge is security selection you should care. Especially if you attribute timing to luck as opposed to a persistent skill. You will also learn about the 4 Cs that they track and how they predict performance. (Link)

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Climb Higher