Friends,
My professional training and experience give me tremendous respect for the “wisdom of crowds”. In a prior post, Dinosaur Markets, I defend using the “outside view” as a surrogate for your own.
Obviously you don’t want to follow this logic right off a pixelated cliff. The tension is in knowing when the consensus is wrong.
You can fail in 2 ways.
Snowflake Error: contrarian when you shouldn’t be
Lemming Error: consensus when you shouldn’t be
If the consensus is correct most of the time, you’ll make Snowflake errors more often than Lemming errors. This is counterbalanced by the fact that Lemming errors are more costly.
When I hear “first principles” thinking my mind sees snowfall. Lots of snowflakes. Since I’m a default efficient market mindset, my first instinct is Chesterton’s Fence:
Don’t ever take a fence down until you know the reason why it was put up.
If you think something that exists is wrong, you need to be able to explain why the conditions for its existence are no longer valid. This idea is often invoked when people describe the difference between rigid conservatives and eager reformers. Well, ok. I suppose there will always be some people who put ketchup on steak.
The idea is more powerful than that. It’s more broadly about epistemic humility. When someone thinks they are “thinking from first principles”, my instinct is to ask “are you the first person to think from first principles on this problem?” It’s firsts all the way down. Chesterton’s fence is more generally about who has the burden of proof. A current example: Does the urbanist need to prove that cities will continue to be humans’ preferred means to self-organize or is it the dissenter’s duty to show otherwise?
In sum, nobody’s life rule is “copy what other people do”. But the opposite binary, “always think from first principles”, which is somehow more acceptable to say, is just as ridiculous. It’s almost like the phrase “reinvent the wheel” hired a PR firm.
The subject of when you should actually think from first principles vs listen to markets is obviously complicated. If you are interested in when to diverge from consensus, then check out the free book Inadequate Equilibria: Where and How Civilizations Get Stuck by Eliezer Yudkowsky. I have plugged it before and plan to re-read it soon enough. (Link)
If I sounded harsh on snowflakes, it’s only in the sense that ramen is overrated. Ramen is objectively awesome but there’s simply no other way for it to be rated other than “over”.
So today I’ll leave you with a rec of a snowflake I really enjoyed listening to — Derek Sivers.
I published my takeaways from his interview on the Knowledge Project. (Link)
Topics include:
- Allocating time
- Delegation
- Motivating employees
- First principles
- And Derek’s satirical “Inverted Recipe For Happiness” which is I found extremely resonant (and the inspiration for some upcoming posts).
Here’s the recipe:
How To Stop Being Rich & Happy
1) Prioritize lifestyle design
Make all your dreams come true and follow your immediate gratification
2) Chase that comparison moment
Always buy that the new thing
3) Buy, not rent
Buy the house, boat, etc.
4) Internalize your new status
Celebrate your new status and relax
5) Be a connoisseur
Insist on only having the finest foods, drinks, etc.
6) Get to know your possessions
Spend more time learning about more possessions and getting them just right
7) Acclimatize to comfort
Eliminate all discomfort and blame others when life seems hard
(note: for more of a true summary of the pod you can read this version from Podcast Notes)
Finally here’s 2 short ideas from Sivers:
- How To Start A Movement (Link)
The insights he draws from this wacky little vid are tight.
1. See how “the first follower turns the lone nut into a leader”
2. Leaders should de-emphasize themselves by treating followers as equals.
- Keep Your Goals To Yourself (Link)
This short talk goes against the conventional wisdom that announcing your intentions creates motivating pressure for you to follow through.
The Money Angle
The treasury issues EE Bonds that yield 3.5% guaranteed if held for 20 years. In the interim, they are totally illiquid.
Meanwhile 20-year US treasuries yield 1.5% if held to maturity. However these are liquid, so you can sell them anytime.
Is it worth giving up 2% per year for the liquidity?
In How Much Extra Return Should You Demand For Illiquidity I explore this question and what it depends on. There are other examples of how other investments are priced based on their liquidity. I provide 2 frameworks to consider as you try to price liquidity.
Applying the logic to the current environment
Putting your money in a lockbox for 20 years to earn 3.5% per year might sound attractive if you decide liquidity isn’t worth much to you. Especially when the equivalent liquid treasury only yields 1.5%.
But as @econompic shows, there is no period in the last 75 years that if you looked back 20 years at stocks did you only earn 3.5% per year.
It’s reasonable to point out that stocks are not bonds so the comparison is made of straw. But the counter to the counter is that if you are putting the money in a box and throwing away the key for 20 years, then the comparison is not crazy. A significant benefit of bonds comes from the ability to rebalance. But with a 3.5% bond trapped in a box you lose the option to rebalance.
So we are stuck with that 1.5% bond. It’s nearly cash. Let’s not sugarcoat this. Bonds at current pricing are just an option on deflation. And the premium is all extrinsic value since they have negative real returns. Since they are now an option that you pay for in real terms, they are no longer an investment but an insurance policy. Once you see it like that, you have to wonder if their appropriate allocation size should be more commensurate with that line of thinking. Would you put 40% of your portfolio in option hedges? I didn’t think so.
Is anyone still putting 40% of their portfolio in bonds? Asking for an industry.
Last Call
- The NBA Has Settled Into An Equilibrium
GMs like Daryl Morey (he just stepped down recently) have identified and spread the dominant strategy in the NBA. A Nash (John not Steve) equilibrium is one in which you would not change your strategy even if you knew what the opponent was going to do.
Seeing the homogenization of basketball strategy in pictures is a testament to analytics and connectivity. It also depressingly reminds me of Peter Thiel’s warning that we are mired in “indefinite optimism” and the sense that everything is “solved”. So why bother?
You be the judge. Is basketball boring?
How It Started. How It’s Going (Link)
Epsilon TheoryNBA Shot Charts (tweet)
@matt_browne_Thanks to Steve for bringing my attention to these.
- Hum To Search (Google app)
“What’s that song that goes like [start humming]?”
It finally happened. Google replaced my purpose in the household. Yinh you may kill me and take the insurance money now.
- Excalidraw (Link)
A lightweight web app for creating and sharing diagrams
From my actual life
Connor’s family is trying to raise $3mm for clinical trials. We are seeing the Susquehanna family and alum contributing and boosting the message. They are building the momentum to try to make the story national. From this point, it’s a money problem.
I’ve been overwhelmed by how many including some of you have contributed when I shared the story on social. We all get it, even if we cannot truly relate. Nobody is fairly called upon to watch their child’s IQ fall before their eyes. You can see Mike, Marisa, and Connor in the news segment they did this week on their local PA TV network for a fuller explanation. (Fox29)
If you’d like to help, donate and spread the word (copy any part of what I wrote).
Here’s the link to donate and share: