Clever Hans

This is Bali, a three-year old mustang mare we adopted in 2016 from the Bureau of Land Management, trained by daughter #3, Haven.

Vast herds of wild horses still roam out West on federal land. Officially categorized as an invasive species, many of these herds suffer terrible depradation from overpopulation and limited resources. In response, the BLM has captured more than 40,000 mustangs and moved them to long-term holding pens back East. Check out the inspiring 2011 film “Wild Horse, Wild Ride” to learn more about the controversial BLM program and efforts to encourage adoption of these magnificent creatures.

Mustangs have to be “broken” to accept a human’s touch and control, a word that conjures up images of bucking broncos and the forcible crushing of an animal’s spirit. But that’s not how it works.

The most effective way to break a horse is “negging”, a word familiar to high schoolers but not to me. Negging is negative attention. In the YA social scene, it’s small insults to supposedly pique your target’s attention and interest, like “You’d be pretty if you cut your hair.” In the horse training scene, it’s sitting in the paddock and turning your back on the mustang, ignoring her entirely. The horse gets curious and comes to check out this strange creature sitting on her turf, albeit keeping a healthy distance. The trainer continues to studiously ignore the horse. This goes on for quite a while, maybe a couple of days, but each time the mustang approaches she gets a little closer, until ultimately she makes the first physical contact and allows the human to start controlling her.

It’s really pretty amazing. This highly intelligent animal is so desperate to have a social interaction, so frustrated at being ignored, that it willingly surrenders its autonomy. Sound familiar?

This is Dick Thaler, who won the Nobel Prize in Economics a few weeks ago. He’s best known for the ideas presented with Cass Sunstein in the book Nudge, where they describe a system of “libertarian paternalism” in which a State-directed “choice architecture” improves public policy outcomes by influencing our behavior through clever framing techniques.

So if you want more organ donors, you require an opt-out choice rather than an opt-in choice on your driver’s registration. If you want more diversified 401k allocations, you make a predetermined mutual fund the default choice for your employees. If you want to preserve a law forcing citizens to buy health insurance from a government-approved list, you characterize any restoration of the freedom to say no as a “heartless cut” in the number of insured, by counting as cuts your estimate of the people you will no longer be able to force into buying insurance.

By treating citizens as manipulable objects, the Nudging State can get them to give more, save more, and insure more, all on their own volition. What possible objection could anyone have to that?

This is Adrian Veidt, aka Ozymandias, aka The World’s Smartest Man, from the classic Alan Moore comic series Watchmen. The central plot of Watchmen is that the world’s smartest man saves humanity from itelf by tricking us into choosing a peaceful set of behaviors. This is the pure expression of Nudge. This is the pure expression of smiley-face authoritarianism. By the way, Adrian Veidt is also the world’s richest man.

In the end the Party would announce that two and two made five, and you would have to believe it. … The heresy of heresies was common sense. And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

– George Orwell, 1984 (1949)

Jackbooted thugs are so passé. Unless you live in Barcelona, I suppose. Or Berkeley. It’s just so messy to stomp on someone’s face when you can cleanly accomplish the same ends with “choice architecture” and “libertarian paternalism”. If Orwell were writing today, a Ministry of Liberty would figure prominently, right alongside the Ministries of Peace, Love and Truth.

If you don’t like what’s being said, change the conversation.
― Don Draper

Ad men understand “choice architecture”.

It’s not called the Wheel.
It’s called the Carousel.

I’ll make him an offer he can’t refuse.
― Vito Corleone

Mob bosses understand “choice architecture”.

An offer you can’t refuse is what game theorists call a Hobson’s Choice, part of a more general class of games that includes ultimatums and dilemmas. 

Any customer can have a car painted any color that he wants so long as it is black.
― Henry Ford

Oligarchs understand “choice architecture”.

The secret to smiley-face authoritarianism is a choice architecture that presents a Hobson’s Choice as the most natural thing in the world.

Chief Bromden:  My pop was real big. He did like he pleased. That’s why everybody worked on him. The last time I seen my father, he was blind and diseased from drinking. And every time he put the bottle to his mouth, he didn’t suck out of it, it sucked out of him until he shrunk so wrinkled and yellow even the dogs didn’t know him.

McMurphy:  Killed him, huh?

Chief Bromden:  I’m not saying they killed him. They just worked on him. The way they’re working on you.

One Flew Over the Cuckoo’s Nest (1975)

We are being worked on, and our bottle is social media.

Nurse Ratched has two employers — the Nudging State and the Nudging Oligarchy. Tough enough to resist separately, and they’re merging today. We’re all in line for McMurphy’s final treatment.

John Keating:  We don’t read and write poetry because it’s cute. We read and write poetry because we are members of the human race. And the human race is filled with passion. And medicine, law, business, engineering, these are noble pursuits and necessary to sustain life. But poetry, beauty, romance, love, these are what we stay alive for. To quote from Whitman, “O me! O life! … of the questions of these recurring; of the endless trains of the faithless … of cities filled with the foolish; what good amid these, O me, O life?” Answer. That you are here — that life exists, and identity; that the powerful play goes on and you may contribute a verse. That the powerful play *goes on* and you may contribute a verse. What will your verse be? 
 Dead Poets Society (1989)

Oh captain, my captain! Writing your own verse — as a parent, as an investor, as a citizen — is the Resistance to smiley-face authoritarianism.

This is Clever Hans, a celebrity animal at the turn of the 20th century, a horse who could perform complex arithmetic calculations. For years, no one could figure out the trick, because there was no trick, at least not in the sense of intentional fraud.

Now of course Clever Hans had no idea how to do math. But his trainer did. And Clever Hans could absolutely recognize the subtle tells in his trainer’s expression as he approached the right answer. Clever Hans would have been a good sheep. Or a good investor here in the Hollow Market.


We homeschool our children.

I don’t talk about this very much in public, because most people assume that homeschoolers are either religious zealots or antisocial freaks, and we’re definitely not the former. Maybe a bit antisocial, but I wouldn’t call it “freakish” per se. We just don’t like seeing neighbors’ houses. Or neighbors. People, really … okay, maybe a little freakish after all. But that’s not why we homeschool.

We homeschool because we want to be more active participants in our children’s education. That’s not a knock on our local public schools, which are as good as they come. That’s not a knock on private schools in the area, many of which are world-renowned. We homeschool because most of the practices and structures of the modern school, public or private, exist for the benefit of the institution, not the child. There’s nothing evil or bad about this, it’s just inherent in the logistics and organization required for any effective institution responsible for hundreds or thousands of people. But it’s not just logistics. It’s not just the bus schedule. It’s also the curriculum. It’s also the homework and the testing. It’s also the social structures and social behaviors that are embedded in the modern school.

Modern education is a perfect example of the Industrially Necessary Egg — spotlessly clean and cool to the touch, not because that makes for a better tasting egg, but because the protein factories that supply mass society with mass quantities of eggs require chemical washes and refrigeration to turn a profit. That’s fine. I get it. We live in a big world where lots of people want eggs, and the protein factories satisfy that desire pretty effectively.

But what’s not fine is that we have all been nudged into believing that the Industrially Necessary Egg is the Best Egg, that a fresh egg, which isn’t scrubbed clean and never sees a refrigerator, is an Inferior Egg. We have all been nudged into believing that of course 13-year olds should be grouped with other 13-year olds during most waking hours, that of course there should be a clear delineation between home life and school life, that of course the school day should mirror the adult work day, that of course classroom lectures are the most effective pedagogy, that of course children can only be socialized by letting them roam free in a big flock from one semi-shepherded environment to another.

I don’t begrudge the practices and structures of modern schools. Necessary is as Necessary does.

I don’t begrudge the taxes that I pay to support these schools. Don’t tell anyone, but I’d pay even more to support public education and public safety.

What I begrudge is the question that I always get when I tell someone that we homeschool our kids: “Don’t you worry about their socialization?”

My response: “Don’t you?”

My god, hospital admissions for suicidal teenagers have doubled over the past 10 years. Tell me you don’t know a family touched by this tragedy. Tell me you don’t see how our children are sexualized and objectified at a younger and younger age, not by predators lurking outside some gender-neutral bathroom, but by themselves, adrift in the vast oceans of social media. Tell me you don’t see how drug and alcohol use by our children is changing in form, where instead of getting high to party they get wasted to obliterate themselves.

None of this is the fault of the Industrially Necessary School. But it’s not unconnected, either.

So yeah, we want to be active participants in our childrens’ lives, and that’s why we homeschool. Not to shield them or isolate them from reality, but to be there for them as counselors and teachers as they confront reality. And not just to be there for them when mass society allows us, when it’s our turn during the work week to take responsibility for our own kids, but to embrace that responsibility all of the time. Because it IS our responsibility all of the time, no matter how much mass society facilitates and nudges us into partially abdicating that responsibility so that we can work longer and longer hours in service to the Nudging State and the Nudging Oligarchy.

I know that homeschooling isn’t for everyone. I know that homeschooling is impossible for most. I know that when I say “we homeschool” it is entirely a royal we, where my wife shoulders 99% of the burden. But I also know that you don’t have to homeschool outright to be a truly active and engaged participant in your child’s education. Everyone can do that.

Engaging actively in our children’s education has given us two great gifts.

First, the stress level in our family evaporated the day we got off the industrially necessary schedule of the school and onto the organically beneficial schedule of the child. Imagine if you suddenly found three or four hours of new time every day. Imagine how that would reduce the stress in your life, and now think about giving that gift to your child. Even if you can’t escape entirely the scheduling clutches of the Industrially Necessary School, simply recognizing how much of your child’s schedule is institutionally nudged on you and them rather than educationally required of you and them will change everything.

Second, we were able to inject a program of critical thinking and critical speaking into our children’s curriculum, what a classical education would have called Rhetoric and modern education calls Debate. I dunno … I never did Debate in high school, and my prior was that this was impossibly nerdy and more than a little silly. I could not have been more wrong. Our girls can think on their feet. Our girls can stand their ground. Our girls can make a persuasive argument, and they can recognize how others try to persuade them. My favorite part of a critical thinking/writing/speaking education? Our girls have demolished hundreds of smarter-than-thou mansplaining-in-training boys in debate competitions around the country. What does a curriculum of critical thinking/writing/speaking look like? It looks like girls and boys of different ages and backgrounds, all practicing and competing on an equal footing in a battle of research and wits — now there’s a socialization we can all support!

And here’s the kicker. Our girls are now teaching these critical thinking and critical speaking skills to those who have a hard time raising their voice effectively in a Team Elite world, from middle schoolers in Bridgeport, Connecticut to high schoolers in Malelane, South Africa to prison inmates in California. What do I mean when I say we need a Movement to change the world? This.

What I’m describing is the difference between education and training.

Education — whether we’re talking about the education of a child, the education of an investor, or the education of a citizen ­— is always additive to the free-thinking autonomy of the child/investor/citizen. But that’s not what the Nudging State and the Nudging Oligarchy have in mind. They don’t want education. They want training. The Nudging State and and the Nudging Oligarchy want to train you like Haven trained her mustang. They want to turn you into Clever Hans, an intensely other-regarding animal who welcomes the saddle. Because once you’re trained to welcome the saddle, you’re going to take the bit.

The playbook of the Nudging State and the Nudging Oligarchy is always the same — put a compelling Narrative around some Industrially Necessary System and train humans who use that system into some version of Clever Hans.

It’s clearly the playbook for our modern markets, where we are trained by the Nudging Fed and the Nudging Street. We are Clever Hans, dutifully hanging on every word and signal from Janet or Mario or Goldman or Merrill as we stomp out our investment behavior.

It’s also the playbook for our modern politics, where we are trained by the Nudging Parties and the Nudging Media Oligarchs. We are Clever Hans, dutifully hanging on every word and signal from Donald or Bernie or Fox or WaPo as we stomp out our voting behavior.

In all of these Industrially Necessary Systems — schools, markets, and politics — recognition and critical thinking is the antidote to Clever Hans Syndrome, and active engagement is how you administer the medicine. What do we DO about our Hollow Markets and our Broken Politics?

  • Actively engage with yourself to recognize how many of your behavioral choices in the world of investing and politics aren’t a free choice at all, but are instead derived from a clever “choice architecture” imposed by others. You probably won’t change your behavior. That’s kinda the point of these pleasantly skinned Hobson’s Choices — they’re offers you can’t refuse. But the day you recognize the choice architectures that enmesh us is the day you start making true choices. It’s the day you start thinking and reading differently. It’s the day that everything starts to change for yourself, your family, and your clients.
  • Actively engage with yourself to create a critical thinking curriculum that adds to your reservoir of free-thinking autonomy. Read more history. Read more biography. Read more science fiction. Every day. Watch a lot less CNBC and CNN and Fox and all the rest. I know we can’t wean ourselves from Facebook and Twitter. It’s our bottle and we’re addicted. I am, too. But take the time to listen to someone whose political or market views you emotionally dislike and force yourself to see the world through those views, not as an adversary but as another thinking, feeling human being. Every day. Educate yourself, don’t train yourself.
  • Actively engage with others to spread the word. To educate, not to train. We treat others as free-thinking autonomous human beings, not as manipulable objects. Never as objects, even if it means losing the client or losing the election. This is how we fix things. Bird by bird. Voice by voice. From below, not from above. As wise as serpents and as harmless as doves.

What will your verse be?

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Gandalf, GZA and Granovetter

Artist: Eric Geusz

I cordially dislike allegory in all its manifestations, and always have done so since I grew old and wary enough to detect its presence. I much prefer history — true or feigned — with its varied applicability to the thought and experience of readers. I think that many confuse applicability with allegory, but the one resides in the freedom of the reader, and the other in the purposed domination of the author.

J.R.R. Tolkien

I threw down my enemy, and he fell from the high place and broke the mountainside where he smote it in his ruin. Then darkness took me, and I strayed out of thought and time, and I wandered far on roads that I will not tell. Naked I was sent back — for a brief time, until my task is done. And naked I lay upon the mountaintop…I was alone, forgotten, without escape upon the hard horn of the world. There I lay staring upward, while the stars wheeled over, and each day was as long as a life-age of the earth.

— J.R.R. Tolkien, The Lord of the Rings: The Two Towers (1954), Speech by Gandalf

Gandalf is totally not Jesus, guys. Except for the fact that literally every aspect of their story arcs is identical, they have nothing in common. But understanding applicability vs. allegory is powerful.

Anytime people read my tweets, they hear it in autotune.

T-Pain

Me too, Mr. Pain. Me too.

Criminal subliminal minded rappers find it

Hard to define it, when narrow is the gate

For fat tapes and, then, played out and out of date

Then I construct my thoughts on site to renovate

And from that point, the God made a statement

Draftin’ tracements, replacements in basements

Materials in sheet-rock, to sound proof the beatbox

— GZA, “Living in the World Today”, Liquid Swords (1995)

There’s no shortage of ways to autotune our thoughts and behavior as citizens and investors. Scripts, symbols, tribalism. Some come from our own minds and some from external sources. Some we force on others. But we always, always have a choice. Do we allow others to write our scripts? Do we allow ourselves to be someone else’s agent? Or do we stake out our roles as citizens, as principals? Narrow is the gate, friends, and if you can’t construct your thoughts on site, to renovate, and soundproof the beatbox — you’ll always be someone else’s tool.

I’ve had a string of good luck lately. Or, at least, I’ve experienced a number of things that could have been much, much worse, which works out to the same thing, I think.

When I published Before and After the Storm, I was writing it from my home in Houston. I thought we would come through completely unscathed, and for the most part we did. My car flooded, but auto insurance is a lot better at covering losses like that than home insurance, and there wasn’t anything personal about what got destroyed. The things you learn in a disaster. I feel very fortunate.

Hurricane Harvey made landfall on my 10th anniversary. My wife and I met (re-met, actually) at a beach party on Surfside Beach, not terribly far from where landfall took place, and had originally planned to rent a house there to celebrate. Not in the cards this year, obviously. So we decided to celebrate that (and a nondescript birthday of my own) with a weekend away from our lovely two-boys-two-and-under with some close friends. In Vegas. That weekend.

But again, I feel fortunate. We stayed further north on the Strip. None of that keeps the mind from imagining the direst scenarios, though. What if we’d made our evening plans down there on Sunday instead of Saturday, when we walked the south end? What if we hadn’t called it an early evening on Sunday and instead decided to wander around (like you do when you’re in Vegas)? What if Willie, Robert Earl Keen or Ray Wylie Hubbard had been playing the festival (in which case I definitely would have been there)? There’s a note or two to be written about how this kind of thinking affects us as investors. The psychology of narrow misses, or at least of seeing tragedy at arm’s length.

But that’s not where my mind went. Instead, in the aftermath of the mass shooting in Las Vegas, I found myself, like many others, wondering what this vicious moron could have been thinking. A seemingly normal guy with no real motive, no obvious animus. Some compulsive behaviors, it would seem, but no more than a million other men and women. No clear ideological intent. No obvious prior evidence of sociopathy, psychopathy or really any other -pathy except for maybe antipathy. Other than the senselessness that pervades all such tragedies, the most striking observation following the attack has probably been that acts of terror, crimes and murders are being committed by people who look a lot more normal. Who may, in fact, be a lot more normal.

It’s something Malcolm Gladwell has spoken about, and which he wrote about in his 2015 piece in The New Yorker, Thresholds of Violence, and in various lighter ways in The Tipping Point. Like recently minted and well-deserving Nobel laureate Dick Thaler, Gladwell’s musings sometimes dip into the sort of paternalistic pop-science/pop-policy recommendations that grate on me a bit. But he’s onto something here. His notion is that the early mass shooters and murderers were the truly insane, those willing to independently plan, pursue and carry out a vile act. In so doing, they created a script, a pattern for others. Each successive event adds to our cultural story, and makes the script more accessible, more familiar to individuals at the margin of social norms. This lowers the threshold for another to carry out a similar attack. And so the next person who carries it out seems less clearly troubled, less self-evidently motivated by ideology. More normal.

The idea builds on the work of Stanford sociologist Mark Granovetter, who was among the first to describe this phenomenon through a range of examples. Whether it is deciding to join a riot, to eat at a Chinese-food restaurant, to buy a new kind of quintuple-levered vol-selling ETF, or any number of other everyday decisions, we judge certain aspects of our social engagement based on the quantities of others who have made similar choices. The more people join the riot, and the more those people look like us, the more likely we are to join. In other words, it’s Sheep Logic. Like that most sociopathic of animals, we make decisions in our own interest that incorporate the behavior and our observations of others not out of empathy or concern for the other, but because of their information value. This is how sociopathic behavior becomes commonplace among people who are, well, normal.

Thankfully, for most of us, this sheep-like tendency toward sociopathy doesn’t manifest itself in anything quite so horrific. But if you think that threshold effect-driven symbol devotion isn’t tearing us apart, you haven’t been paying attention. It hasn’t exactly been subtle, y’all.

Some of the symbols and stylistic tropes that force heterogeneous populations into homogenous groups are pretty obvious. Like, Gandalf-as-a-humble-leader-who-dies-sacrificially-to-save-his-followers-by-battling-a-demon[1]-on-his-descent-into-hell-after-which-he-is-resurrected-in-white-for-a-time-to-teach-and-lead-before-he-ascends-into-another-plane-to-escape-Middle-Earth-for-the-realm-of-the-angels obvious. Others less so. If you can get published in a journal for identifying the subtextual racist undertones in Starbucks Pumpkin Spice Lattes, just imagine how many different symbolic interpretations there are for something like, say, Citizen Kane’s Rosebud. Symbols, and the reverence we attach to particularly tortured interpretations of them, are the reason why English departments are still producing academic papers and why Dan Brown gets to live in a house in New Hampshire with hidden doors and secret passages.

Fascinatingly, J.R.R. Tolkien actually very famously detested allegory, the most common kind of literary symbolism. He was not particularly fond of his close friend C.S. Lewis’s world of Narnia for this reason, thinking it far too allegorical, and with one too many electric streetlamps. Whether or not he always practiced what he preached, however, Tolkien’s point remains an important one for our public discourse, where symbols — semiotics — have become the center of gravity for almost every civic conflict and debate. Most symbols we encounter are powerful shorthands, and their meaning differs based on our unique and shared experiences. The song you remember from your first dance at the high school prom was the soundtrack to someone else’s personal tragedy, and the writer of the song had nothing of the sort in mind. And that’s okay. In Tolkien’s terminology, these symbols are applicable, but neither universal nor determined by any one person for another.

In Before and After the Storm and Always Go to the Funeral, Ben and I wrote about those who seek to divide us and drive us from a cooperative game into a competitive game. You won’t be surprised to see us write that this is often achieved through the construction of narratives, loaded for bear with symbols. But with these symbols, you don’t get to decide what they mean for yourself like a favorite song. No, that decision is made for you. In Tolkien’s words, these symbols represent the purposed domination of the author. They seek to strip us of sovereignty over our own intent. They force us to choose sides. This is among the most powerful forms of narrative construction.

Ben and I have also written and talked a lot about what we think it means to be a Citizen. Above all, it means always being a principal. It means treating others as principals. Those who would rule over us to serve their own ends would make us agents. They would make us nodes in a blockchain, repeating the anonymous reports of someone else’s philosophical transactions. The Citizen rejects this impulse at every pass, in his political, personal, professional and, yes, even his financial life.

Charlottesville, Continued

Both Ben and I wrote about the issue of Confederate statues, because part of this story has applicability for us, as it does for so many Americans. For me, it is applicable for two reasons. When he was 16, my third great-grandfather volunteered for what would later become the 34th Tennessee Infantry Regiment. In the first day of the Battle of Chickamauga, his gun exploded in his face at Brock’s Field. It was an injury that impacted the rest of his life, which was short. The 11th of 12 children, he was maimed in battle but continued to fight. He married, had children and died penniless in his early 40s. His wife and children were forced to leave for Texas, where they became cotton tenant farmers. They got by. Within two generations they prospered.

Don’t cry too much for grandpa Jim. There’s a Part II. His family — my family — also owned slaves. In 1860, my fourth great-grandfather, a Methodist minister, felt he had the right to say that he owned 20 human beings. The youngest was a four-month-old boy. The oldest was a 52-year-old woman. Among them was a 30-year-old man named Jim, just like my third great-grandfather. He married a woman named Clara from the next farm, and they had a son named George. The picture to the right is of George with his wife Winnie in the late 19th century.

So what do the symbols of the Confederacy mean to me? Shame, mostly. Shame in what my family did, what they were a part of. That they weren’t on the right side of justice. That they could preach a Christian Gospel and think to own a person with a soul. Some pride, too. Pride in a young boy who was brave, who volunteered and fought for his neighbors, and was maimed as a simple infantryman. Who, I hope, stood tall when the German expatriates from Indiana raised by Johann August Ernst von Willich[2] rained down artillery and rifle fire on them and the rest of General George Maney’s brigade. Sam Watkins, a soldier in another unit in the division, wrote about it in his marvelous memoir, “Company Aytch”:

We held our position for two hours and ten minutes in the midst of a deadly and galling fire, being enfiladed and almost surrounded when General Forrest galloped up and said, ‘Colonel Field, look out you are almost surrounded; you had better fall back.’ The order was given to retreat. I ran through a solid line of blue coats. As I fell back, they were upon the right of us, they were upon the left of us, they were in front of us, they were in the rear of us…the balls whistled around our ears like the escape valves of ten thousand engines. The woods seemed to be blazing…one solid sheet of leaden hail was falling around me. I heard General Preston Smith’s brigade open. It seemed to be platoons of artillery. The earth jarred and trembled like an earthquake. Deadly missiles were flying in every direction. It was the very incarnation of death itself. I could almost hear the shriek of the death angel passing over the scene.
Sam Watkins

For me, the conflicted realities of race and patriotism — shame and pride — don’t stop there. They are a running theme in my family, as they are with so many others. Almost 52 years ago to the day, on October 22, 1965, my Uncle Jimmy was walking through the jungle near Phú Cường with a small squad of men from the 173rd Airborne Brigade, when a grenade rolled into their midst. Without a moment’s thought, a young man from Chicago and Mississippi grabbed the grenade, threw it under his body and saved the lives of four men that were walking with him. My Uncle Jimmy was one of them.

This young man, who would have no doubt endured the same racism that many black Americans knew in 1965, loved his country and his fellow man, and literally jumped on a grenade for my family. For it, he was awarded the Congressional Medal of Honor by President Johnson, and became the first black man to receive the honor during the Vietnam War. If you’re still hung up on statues and memorials, the next time you’re in Chicago, walk just north of the Navy Pier to Milton Lee Olive Park.

The picture below shows Olive’s parents receiving his posthumous medal, my Uncle Jimmy standing at attention between Olive’s father and President Johnson.

I think it’s fair to say these issues have a lot of applicability for me.

But my experience still matters a whole hell of a lot less than the experience of just about any black person in America on this topic. Do I get psychic value from knowing a relative acted bravely on the field of battle? Yes. Would I be comforted to know my country respects the tactical military brilliance of Robert E. Lee, that it was mature enough to consider that in full context of his flaws? Yes. Do I think there are strong, justifiable reasons to be extraordinarily hesitant and deliberate about anything that looks like the destruction of art, of historical records? Yes. Do any of those things measure up to how these symbols are applicable to a black man or woman in America? NO. God, it’s hard for me to fathom that they can even be represented on the same scale.

But that is the nature of civic discourse: for us to collectively weigh matters of importance, or to allow each individual the freedom to do so for himself. That is what a society which values Tolkien’s applicability does. That is what a Citizen does. It doesn’t require us to conclude that all such perspectives are equally true, or even that each person’s opinion is equally valuable. Far from it. Don’t mistake this for the postmodern view that those without personal experience don’t get a seat at the table for the discussion. Much to the contrary, the enlightenment principles of free discourse require us to allow all the arguments to be heard. On matters of social import, to be weighed. And in all cases, to be represented faithfully.

But rather than engage in true Citizenship, in the path of enlightenment, we chose another path. We chose the path of allegory, of symbols assigned to us and to others as agents and not as principals. Those bent toward purposed domination of those with conservative political leanings imposed one particular allegory: ‘statues of confederate leaders represent the spirit, culture and history of the southern United States’. An attack on the statues is therefore an attack on the spirit of culture of a huge portion of the population. The enemy are the politically correct run amok, people who wish to erase history and replace it with a sanitized version! With a lie! If you do not stand for this now, they’re going to tear down all our statues, all of our history.

The manipulating spirit of the far left in this case found a far easier target (Godwin’s Law made manifest proved too sore a temptation). Once a platoon or two of sociopathic, dunderheaded, socially awkward, spoiled white guys with an inclination toward violence rolled out the old “Blood and Soil” song and dance number, the allegory basically wrote itself: Defense of the statues IS defense of white supremacy. Defending America against Tiki-torch wielding apfelstrudelführers, as Kevin Williamson brilliantly put it, must be our aim at any cost. If we must pretend that the Occupy Wall Street trust fund kids who swapped their hipster tents for Antifa masks are our heroic vanguard, a modern form of troops storming Normandy, so be it. If we don’t, we are basically enabling the rise of Hitler!

The magic of the technique is this: for those to whom the symbol has personal applicability, the allegory that replaces it is nearly impossible to resist. If you have some affinity for the south (which is no crime at all, folks), or if you believe that history is worthy of protection with integrity, these are defensible points of view to have. If you’re especially sensitive to both active and passive forms of racism, you’re in very good (if sadly incomplete) company. But under the control of those who would make us agents, allegory uses these affinities and applicabilities as a Trojan Horse, entering as defensible, admirable points of view and pouring out into the streets of Troy as straw men to focus our rage on any who might assault them. Our defense of the south evolves into a perspective that sees attacks on monuments of the Confederacy as a broad attack on us and our culture. Our righteous anger at racists transitions into frothing rage at any who happen to share a point of view on what from our history is worthy of remembering. Those who had never stopped in contemplation — whether out of pride or shame or anger — before a monument in their lives now saw it as some existential thing that reflected the ill will of our fellow Citizens acting as principals.

But it didn’t. They — we — had already been made into agents.

Enter the Anthems

Our next test (you know, the anthem thing?) didn’t go much better.

The flag and the anthem are among the clearest examples of varying applicability, because flags are literally designed to function as symbols and representations of the state or a ruling party. To many uniformed men and women and to their families and friends, it is a binding tie, a symbol of sacrifice and service. To the patriotic, it can be (varyingly) an emblem of affinity for culture, for opportunities provided, for values shared in connection with the nation. To others, it is a reminder that they feel like second-class citizens in some way. A sharp allusion to the hypocrisy they see, that a country could emphasize freedom and equality, and yet deny both to some for so long. All these are feelings formed by experiences, some anecdotal and narrow in import, and some broad and worthy of extrapolation. They are formed by thoughtful conclusions, some rightfully constructed and some hopelessly flawed. They are not equal. But they are the views of Citizens and principals.

When Colin Kaepernick began his protest of the anthems, most of us didn’t notice, since we were sitting at home on our couches, distracted by beer, friends and smartphones. Say what you will about a young man who decries oppression wearing a t-shirt celebrating one of the 20th century’s great oppressors, who bemoans a lack of mutual respect wearing socks that stylized policemen as pigs wearing hats. But he was clearly acting as a principal, a man responding to what these symbols meant to him based on his judgments and his experiences, right or wrong.

Fueled by competitive game-driven rhetoric from the president, the right’s response took us away from the path of the Citizen. The personally applicable meaning of the symbol immediately became a monolith, an immutable national standard. To sit during the anthem wasn’t what the person doing it said it was, it was a symbol of disrespect toward the military, the police, the nation, our values, our Constitution. It was a sign of hatred of the country, and if he didn’t like living here, why doesn’t he just move? There is no intrinsic, no fundamental reason why this action in context of this symbol should have that meaning, except that we all agreed that it did. Instead of treating those protesting as principals — which doesn’t mean agreeing, but does require from a Citizen some attempt at understanding — we made them agents. We assigned them views and intents they never themselves conceived. In so doing, we made ourselves agents as well.

True to form, the American left took the bait. I don’t know if we’re really all going to laugh about this in a decade or two, but the attempts at symbol construction here are frighteningly absurd. In response to the shenanigans above, we got proclamations about acceptable forms that the protest symbol must take. Because the Dallas Cowboys knelt together before the anthem and not during it, it was bullshit. Craven and useless. Anyone who stands for the anthem stands for white supremacy! Richard Sherman informed us that if we didn’t condemn the president’s rhetoric, we were complicit. This is increasingly the shape that our debates take. Why are you angrier about this issue than that issue? Why did you tweet/post/talk more about this one issue than this other issue that I think is more important? How dare you not observe the forms that reflect the right-sounding thoughts in the manner I prefer? Did you use the proper skin tone in your emoji-laden message?

You could call all of this a more rigorous way of describing political correctness, and you’d be pretty near the truth. The left remains, I think, the most pernicious source of this scourge to an enlightened society. The Foucaltian language of privilege and oppression, while it may at times be an accurate reflection of the realities of inequality, bias and circumstance that we must assault as a society, can never be the language of the Citizen, because it inherently rejects the idea that certain people can be principals. It says that a person born in privilege is always an agent of his bias, and that he may not have the sovereignty of a principal in various arbitrarily chosen political issues. Yet for all that, under President Trump it has instead been the right that has been the proximate cause of allegory and political correctness, I think. As Ben has pointed out, this is how this political environment is trying to break us.

Agents and Markets

So what is a Citizen to do? And what of the Citizen in markets?

In markets, it should be a reminder that strong enough narratives make agents of us all. You need only to look at VIX-based instrument markets to observe just how willing we are to forgo our views as principals to join in a group-based thinking. In Part I of my recent note, The Myth of Market In-Itself, I introduced some of the ways in which behavior influences markets, but it is in Part II that I will dive more into the archetypes and languages in which principals become agents.

It should also be a reminder to those of us with clients that it is important to listen to what they are telling us. About their desires, their intents, their motivations. The robo-adviser, style-box generation is happy to slot us into a category and tell us who we are. Even outside of this, the investment industry has constructed entire business models out of gaming characteristics to suit investor archetypes and the superficial things that are likely to attract them to buy. As an industry, we don’t treat our clients like principals, and it’s a problem.

But whether or not we are in markets, the refrain you will hear from us is to resist being drawn into the competitive game. Resist being drawn to allegory. Resist being made into an agent, and reject doing so to others.

[1] OK, a Balrog of Morgoth, which is technically among the Maiar kin to Sauron that aligned themselves with Melkor when he rebelled against the Valar that Eru had sent to shepherd their collective vision for the world. So not really a demon, but “wings of shadow, wreathed in flame?” Imma call it a demon. Don’t @ me, Stephen Colbert.
[2] This is a really fascinating man. A Prussian noble who renounced his titles and became confidante and eventual competitor to Karl Marx, Willich counted Friedrich Engels as his aide-de-camp during the socialist revolutions of 1848-1849. He ultimately found Marx to be too conservative, and challenged him to a duel that Marx rejected. Willich then left for America, where he recruited and led a division of men from Indiana and Ohio, mostly German expatriates. They were among the most decorated units in the Union Army.

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Failure to Inflate

On episode 25 of the Epsilon Theory podcast, we’re joined by Peter Cecchini, Chief Market Strategist, Head of Equity Derivatives and Cross-Asset Strategy at Cantor Fitzgerald, to discuss one of his recent notes, “Failure to Inflate.” As Peter writes, “The theories that guide monetary policy fail to explain why growth and inflation remain so low in developed economies.” Tune in to hear why this is and what might bring about higher inflation.


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Massively Fast Compute, AI Algorithms and Blockchain Development (by Silly Rabbit)

I’m limiting this week’s Rabbit Hole to three links which represent the rapid tick-tock of the trifecta of massively fast compute, AI algorithms and blockchain development as I believe that these are the top three technology mega-trends of the 2015 – 2025 period (ex-Life Sciences innovation). Personally, I still believe that within these three mega-trends massively fast compute (Big Compute) will be the most world-changing, but clearly big compute hardware and algorithm development are deeply intertwined, and I believe we will start to see blockchain intertwine in a meaningful, although as-yet somewhat unclear, way with these other two technologies too.

That’s a fast chip you got there, bud

Very accessible CB Insights write up here and denser original paper here of a test of a Photonic computer chip which “mimics the way the human brain operates, but at 1000x faster speeds” with much lower energy requirements than today’s chips. To state the obvious, the exciting/terrifying potential of chips like this becoming reality is that machines will be able to rapidly cumulatively learn while we humans are still limited by learning, passing on some fraction of that learning, and then dying, which is clearly a pretty inefficient process.

The future of AI learning: nature or nurture?

IEEE Spectrum provide an overview on a recent debate a between Yann LeCun and Gary Marcus at NYU’s Center for Mind, Brain and Consciousness on whether or not AI needs more built-in cognitive machinery similar to that of humans and animals to achieve similar intelligence.

Blockchain for Wall Street

Bloomberg reports on a major breakthrough in cryptography which may have solved one of the biggest obstacles to using blockchain technology on Wall Street: keeping transaction data private. Known as a “zero-knowledge proof,” the new code will be included in an Oct. 17 upgrade to the Ethereum blockchain, adding a level of encryption that lets trades remain private.

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/15828/

Sheep Logic

These are baby-doll Southdowns, and yes, they’re exactly as cute as they look in this picture. We only have four today on our “farm”, as sheep have a knack for killing themselves in what would almost be comical fashion if it weren’t so sad. We keep them for their so-so wool, which we clean and card and spin and knit. It’s so-so wool because the Southdowns were bred for their meat, not their fleece, and I can’t bring myself to raise an animal for its meat. Well, I could definitely raise birds for meat. Or fish. But not a charismatic mammal like a baby-doll Southdown.

Here’s the thing I’ve learned about sheep over the years. They are never out of sight of each other, and their decision making is entirely driven by what they see happening to others, not to themselves. They are extremely intelligent in this other-regarding way. My sheep roam freely on the farm, and I never worry about them so long as they stay together, which they always do. But if I only count three in the flock, then I immediately go see what’s wrong. Because something is definitely wrong.

That’s the difference between a flock and a pack. A flock is a social structure designed to promote other-awareness. It has no goals, no coordinating purpose other than communication. A flock simply IS. A pack, on the other hand, is a social structure designed to harness self-aware animals in service to some goal requiring joint action — the raising of cubs, the hunting of meat, etc. Both the flock and the pack are extremely effective social structures, but they operate by entirely different logics.

We think we are wolves, living by the logic of the pack.

In truth we are sheep, living by the logic of the flock.

Jealousy, turning saints into the sea
Swimming through sick lullabies
Choking on your alibis
But it’s just the price I pay
Destiny is calling me
Open up my eager eyes
Cause I’m Mr. Brightside
 The Killers, “Mr. Brightside”

It was only a kiss. Leave it to a Las Vegas band to write the best song ever about the most powerful other-regarding emotion — jealousy. That’s Laurence Fishburne as Othello on the left and Kenneth Branagh as Iago on the right, actors’ actors both.

Gary Coleman:Right now you are down and out and feeling really crappy
Nicky:I’ll say.
Gary Coleman:And when I see how sad you are
It sort of makes me…
Happy!
Nicky:Happy?!
Gary Coleman:Sorry, Nicky, human nature-
Nothing I can do!
It’s…
Schadenfreude!
Making me feel glad that I’m not you.
― Avenue Q (2003)

There’s no way that a grown-up musical with Sesame Street puppets should work, but Avenue Q does. “Schadenfreude” is my favorite tune from the show, as well as the second-most powerful other-regarding emotion that drives our world.

Jukeboxes made a nice comeback when the user interface started showing you what other people had chosen to play, both in the past and coming up.

Once you start looking for the Jukebox Effect — the intentional effort to force you into other-regarding flock behavior — you see it everywhere.

All the world will be your enemy, Prince with a Thousand Enemies, and whenever they catch you, they will kill you. But first they must catch you, digger, listener, runner, prince with the swift warning. Be cunning and full of tricks and your people shall never be destroyed.

Richard Adams, Watership Down (1972)

I’ve got an unexpurgated print of this card sitting on my desk. A prey animal like a rabbit would find Watership Down unrecognizable. Not because reality is any less dominated by fang and claw, but because the protagonists are protagonists, driven by independent will and self-regarding decision making. It’s a Hero’s Journey, which makes it a great read but poor rabbit socio-biology.

Roy:I’ve seen things you people wouldn’t believe. Attack ships on fire off the shoulder of Orion. I watched C-beams glitter in the dark near the Tannhäuser gate. All those moments will be lost in time… like tears in rain… Time to die.
― Bladerunner (1982)

The movie Bladerunner was based on the Philip K. Dick novella, Do Androids Dream of Electric Sheep?, and inherent in the question is the reason we root for the androids over the humans. It’s the same reason we root for Hazel and the other intrepid rabbits of Watership Down. They’re dreaming and striving for a better life. They’re fighters. They have gumption.

In reality, neither sheep nor rabbits nor androids have gumption.

Deckard:She’s a replicant, isn’t she?
Tyrell:I’m impressed. How many questions does it usually take to spot them?
Deckard:I don’t get it, Tyrell.
Tyrell:How many questions?
Deckard:Twenty, thirty, cross-referenced.
Tyrell:It took more than a hundred for Rachael, didn’t it?
Deckard:[realizing Rachael believes she’s human] She doesn’t know.
Tyrell:She’s beginning to suspect, I think.
Deckard:Suspect? How can it not know what it is?
― Bladerunner (1982)

That’s the Big Question. How can we not know what we are? it not know what it is?

Better to live a day as a lion than 100 years as a sheep.

Benito Mussolini (1883 – 1945)

Donald Trump retweet (Feb. 28, 2016)

Really? I’ll take the 100 years, thank you very much. Life is too precious, and this, too, shall pass.

Such a vainglorious statement by such a preening man. Mussolini, that is. Find a film clip and watch how he uses his hands.

Our compliance departments require us to say that retweets are not endorsements. But of course they are.

The copycat phenomenon is real. As more and more notable and tragic events occur, we think we’re seeing more compromised, marginalized individuals who are seeking inspiration from those past attacks.

Andre Simon, head of FBI Behavioral Analysis Unit 2 (Threat Assessment)

Mass shooters are not Lone Wolves. They are Lone Sheep.

Tom Junod at Esquire featured FBI agent Andre Simon in his must-read 2014 article, “A Radical New Look at Mass Shooters.” Three years later and we’re still having the wrong debate, focusing on gun control rather than mental health and intervention. Why? Because the gun control debate has enormous political efficacy for both the Left and the Right, where the mental health debate has none. Steve Bannon’s fondest dream is for Democrats to make Federal gun control a key issue in the 2020 electoral cycle. We are, YET AGAIN, being intentionally shepherded by political entrepreneurs into a pernicious Competitive Game of domestic identity politics.

Behold, I send you forth as sheep in the midst of wolves; be ye therefore wise as serpents, and harmless as doves.

Matthew 10:16

There’s no domesticated animal species that has had more of a reputational fall from grace than the sheep. To call someone a sheep today is just about the worst insult there is. To call someone a sheep is to call them stupid and — more pointedly — stupidly obedient and in thrall to some bad shepherd.

It wasn’t always this way. Jesus isn’t insulting you when He calls you a sheep. The point of all those Biblical allegories isn’t that sheep are stupidly obedient or easily led, but that the healthy life of a willful sheep requires a good shepherd.

Ask anyone who actually keeps sheep. Sheep are weird. Sheep are evolved to have a very different intelligence than humans. But sheep are not stupid. Sheep are not obedient. And sheep are definitely not easily led.

Of course, no one except a dilettante farmer like me keeps sheep today, so all of the Old Stories about sheep and shepherds have lost their punch. They’ve all been diminished through the modern lens of sheep-as-idiot-followers.

Today most people dismiss the notion that good shepherds — i.e., individuals with expertise and wise counsel in some difficult to navigate field like … I dunno … investing — exist at all. And they utterly reject the idea that it’s actually okay not to have a fully formed and forcefully held opinion on anything and everything, that it’s not a sign of personal failure to say “I don’t know” and follow another’s lead.

It’s not just the media careers and media business models that are built on the notion of the Constant Hot Take — an unending stream of contrarian opinions expressed in the most incendiary way possible, solely for the entertainment value of contrarian opinions expressed in the most incendiary way possible — it’s the millions of hours that so many non-media civilians will spend engaged on Twitter or Facebook or whatever to construct their own steady stream of Hot Takes and bon mot responses. All tossed out there like bottles into the vast social media ocean, never to wash up on any inhabited shore, lost in some great Sargasso Sea of impotent and forgotten texts.

Why? Why does @RandoBlueStateLawyer with 45 followers spend the better part of every afternoon thinking about his next brilliant riposte to the latest Republican Hot Take on Obamacare reform? Why does @RandoRedStateRetiree spend every evening working himself into a MAGA apoplexy that can only be sated by retweeting his 19,001st Hannity blurb?

To answer that question, I want to go back to the Old Stories. I want to share with you what sheep are really like.

Sheep are evolved to have a specific type of intelligence which has the following hallmarks.

  • Enormous capacity for other-regarding behaviors. Sheep are unbelievably sensitive to what other sheep are doing and their emotional states. If another sheep is happy — i.e., it’s found a good source of food, which is the only thing that makes a sheep happy — then every other sheep in the flock is filled with jealousy (there’s really no other word for it) and will move in on that good thing. If another sheep is alarmed — which can be from almost anything, as bravery is not exactly a trait that tends to be naturally selected in a prey species — then every other sheep in the flock is immediately aware of what’s going on. Sometimes that means that they get alarmed, too. As often, though, it’s just an opportunity to keep going with your own grazing without worrying about the alarmed sheep bumping into your happy place.
  • Zero altruism and overwhelming selfishness. The most popular misconception about sheep is that they are obedient followers. It’s true that they’re not leaders. It’s true that they are incredibly sensitive to other sheep. But it’s also true that they are the most selfish mammal I’ve ever encountered. They don’t lead other sheep or form leadership structures like a pack because they don’t care about other sheep. Every sheep lives in a universe of One, which makes them just about the most non-obedient creature around.
  • The determination to pursue any behavior that meets Hallmark #1 and #2 to absurd ends, even unto death. My worst sheep suicide story? The first year we kept sheep, we thought it would make sense to set up a hay net in their pen, which keeps the hay off the ground and lets the sheep feed themselves by pulling hay through the very loose loops of the net. Turned out, though, that the loops were so loose that a determined sheep could put her entire head inside the net, and if one sheep could do that, then two sheep could do that. And given how the hay net was hung and how these sheep were sensing each other, they started to move clockwise in unison, each trying to get an advantage over the other, still with their heads stuck in the net. At which point the net starts to tighten. And tighten. And tighten. My daughter found them the next morning, having strangled each other to death, unable to stop gorging themselves or seeking an advantage from the behavior of others. The other sheep were crowded around, stepping around the dead bodies, pulling hay for themselves out of the net. That was a bad day.

In both markets and in politics, our human intelligences are being trained to be sheep intelligences.

That doesn’t make us sheep in the modern vernacular. We are not becoming docile, stupid, and blindly obedient. On the contrary, we are becoming sheep as the Old Stories understood sheep … intensely selfish, intensely intelligent (but only in an other-regarding way) and intensely dogmatic, willing to pursue a myopic behavior even unto death.

Why are we being trained to think like sheep? Because sheep are wonderful prey animals. They pay the rent with their fleece, and when push comes to shove you can eat them, too. Plus they’re not helpless prey animals. Sheep are quite competent and rather self-sufficient prey animals, which from a smart owner’s perspective is really what you want. If sheep were truly docile and stupid, then they’d be way too much trouble to keep. Nope, with sheep you can let them wander around all day and do their thing. Just keep them from killing themselves in some really stupid accident and you can harvest them for years and years and years.

How are we trained to think like sheep? By the rewards we receive from our modern social institutions for other-regarding flock behaviors like jealousy (feeling sad when others are glad) and schadenfreude (feeling glad when others are sad), and by the penalties we receive for self-regarding pack behaviors like honor and shame. If you’ve ever kept a pack animal like a dog, you know how clearly they can experience a sense of shame, that feeling when you believe you’ve let the pack down through your personal failure. Sheep have no shame. Not a bit. Shame requires self-evaluation and self-judgment against some standard of obligation to the pack, concepts which would make sheep laugh if they could. Sheep are enormously other-aware, but never other-obliged. They’re high-functioning sociopaths, shameless creatures of jealousy and schadenfreude, which is exactly the type of human most purely designed to succeed in the modern age.

The mechanism for all this sheep training, particularly in our investment lives, is what game theory calls the Common Knowledge Game. Once you start noticing it, you will see it everywhere.

I’ve written about the Common Knowledge Game a lot in Epsilon Theory, starting in the original “Manifesto” and continuing with notes like “A Game of Sentiment” and “When Does the Story Break”. But let’s review this core game of sheep logic one more time, with feeling. So here’s the classic thought experiment of the Common Knowledge Game — The Island of the Green-Eyed Tribe.

On the Island of the Green-Eyed Tribe, blue eyes are taboo. If you have blue eyes you must get in your canoe and leave the island the next morning. But there are no mirrors or reflective surfaces on the island, so you don’t know the color of your own eyes. It is also taboo to talk with each other about eye color, so when you see a fellow tribesman with blue eyes, you say nothing. As a result, even though everyone knows there are blue-eyed tribesmen, no one has ever left the island for this taboo. A Missionary comes to the island and announces to everyone, “At least one of you has blue eyes.”

What happens?

Let’s take the trivial case of only one tribesman having blue eyes. He has seen everyone else’s eyes, and he knows that everyone else has green eyes. Immediately after the Missionary’s statement, this poor fellow realizes, “Oh, no! I must be the one with blue eyes.” So the next morning he gets in his canoe and leaves the island.

But now let’s take the case of two tribesmen having blue eyes. The two blue-eyed tribesmen have seen each other, so each thinks, “Whew! That guy has blue eyes, so he must be the one that the Missionary is talking about.” But because neither blue-eyed tribesman believes that he has blue eyes himself, neither gets in his canoe the next morning and leaves the island. The next day, then, each is very surprised to see the other fellow still on the island, at which point each thinks, “Wait a second … if he didn’t leave the island, it must mean that he saw someone else with blue eyes. And since I know that everyone else has green eyes, that means … oh, no! I must have blue eyes, too.” So on the morning of the second day, both blue-eyed tribesmen get in their canoes and leave the island.

The generalized answer to the question of “what happens?” is that for any n tribesmen with blue eyes, they all leave simultaneously on the nth morning after the Missionary’s statement. Note that no one forces the blue-eyed tribesmen to leave the island. They leave voluntarily once public knowledge is inserted into the informational structure of the tribal taboo system, which is the hallmark of an equilibrium shift in any game. Given the tribal taboo system (the rules of the game) and its pre-Missionary informational structure, new information from the Missionary causes the players to update their assessments of where they stand within the informational structure and choose to move to a new equilibrium outcome.

Before the Missionary arrives, the island is a pristine example of perfect private information. Everyone knows the eye color of everyone else, but that knowledge is locked up inside each tribesman’s own head, never to be made public. The Missionary does NOT turn private information into public information. He does not say, for example, that Tribesman Jones and Tribesman Smith have blue eyes. But he nonetheless transforms everyone’s private information into common knowledge. Common knowledge is not the same thing as public information. Common knowledge is information, public or private, that everyone believes is shared by everyone else. It’s the crowd of tribesmen looking around and seeing that the entire crowd heard the Missionary that unlocks the private information in their heads and turns it into common knowledge.

The important thing is not that everyone hears the Missionary’s words. The important thing is that everyone believes that everyone else heard the Missionary’s words, because that’s how you update your estimation of everyone else’s estimations (why didn’t that blue-eyed guy leave the island? I know he heard the news, too … hmm … but that must mean that he, too, saw a blue-eyed guy … hmm … oh, snap.). The power source of the Common Knowledge Game is the crowd seeing the crowd, and the dynamic structure of the Common Knowledge Game is the dynamic structure of the flock. There’s no purposeful objective that animates a flock the way it does a pack, which is why you famously have people describing the “madness of crowds.” But it’s not madness, and it’s not chaos, either. A crowd is the communication mechanism for the Common Knowledge Game, with clear rules and strategies for playing and winning.

Understanding the Common Knowledge Game has been the secret of successful shepherds since time immemorial, in business, politics, religion … any aspect of our lives as social animals. The only difference today is that technological innovation provides a media toolkit for modern shepherds that the shepherds of the Old Stories could only dream of.

This is why sitcom laugh tracks exist. This is why performances, whether it’s an NFL game or Dancing with the Stars, are filmed in front of a live audience. This is why the Chinese government still bans any internet pictures of the Tiananmen Square protests, with their massive crowds, more than 20 years after they occurred. This is what John Maynard Keynes called the Newspaper Beauty Contest, which he believed (and demonstrated) was the secret to successful investing through the 1930s. This is how Dick Clark built a massive fortune with American Bandstand. He didn’t tell Middle America what music to like; he got a crowd of attractive young people to announce what music they liked (“it’s got a good beat and you can dance to it, I give it a 94, Dick!”), and Middle America took its cues from that. Not only is that all you need to motivate sheep, it’s far more effective than any efforts at direct influence.

This is why executions used to be held in public and why inaugurations still are. This is why Donald Trump cared so much about the size of his inauguration crowd. This is why he’s always talking about the viewership and ratings of his televised appearances. Trump gets it. He understands what makes the Common Knowledge Game work. It’s not what the crowd believes. It’s what the crowd believes that the crowd believes. The power of a crowd seeing a crowd is one of the most awesome forces in human society. It topples governments. It launches Crusades. It builds cathedrals. And it darn sure moves markets.

How do we “see” a crowd in financial markets? Through the financial media outlets that are ubiquitous throughout every professional investment operation in the world — the Wall Street Journal, the Financial Times, CNBC, and Bloomberg. That’s it. These are the only four signal transmission and mediation channels that matter from a financial market Common Knowledge Game perspective because “everyone knows” that we all subscribe to these four channels. If a signal appears prominently in any one of these media outlets (and if it appears prominently in one, it becomes “news” and will appear in all), then every professional investor in the world automatically assumes that every other professional investor in the world heard the signal. So if Famous Investor X appears on CNBC and says that the latest Fed announcement is a great and wonderful thing for equity markets, then the market will go up. It won’t go up because investors agree with Famous Investor X’s assessment of the merits of the Fed announcement. The market will go up because every investor will believe that every other investor heard what Famous Investor X said, and every investor will be forced to update his or her estimation of what every other investor estimates the market will do. It doesn’t matter what the Truth with a capital T is about the Fed. It doesn’t matter what you think about the Fed. It doesn’t matter what everyone thinks about the Fed. What matters is what everyone thinks that everyone thinks about the Fed. That’s how sheep logic, aka the Common Knowledge Game, works in markets.

So who owns us market sheep? The controllers of any Common Knowledge Game are the Missionaries, and the eternal Missionaries are the political executive and the market sell-side. Politicians and brokers have understood the power of this game for thousands of years, which makes the Street and the White House the constants as you examine the history of American sheepification. But they’re not the most powerful Missionaries of the modern age. No, that honor goes to our central bankers, relative newcomers to the Game, but quick studies all the same.

In his last Jackson Hole address, Ben Bernanke extols the virtues of their “communication tools”, carefully constructed media messages designed to alter investor behavior, messages that he says have been their most effective policy tools to date. Interest rates may hit a lower bound of zero, and asset purchases may lose their punch, but investors can ALWAYS be “guided”. The architect of this new and powerful toolkit? Vice Chair Janet Yellen, natch. Forward guidance and what the Fed calls communication policy are the very definition of Missionary statements, and our utter absorption in what everyone believes that everyone believes about the Fed’s impact on markets IS sheep logic.

Think that the Fed will go back to their old taciturn ways, content to let their actions speak louder than their words? Think again. Here’s Ben Bernanke again, this time in his final speech as Fed Chair:

The crisis has passed, but I think the Fed’s need to educate and explain will only grow. When Paul Volcker first sat in the Chairman’s office in 1979, there were no financial news channel on cable TV, no Bloomberg screens, no blogs, no Twitter. Today, news, ideas, and rumors circulate almost instantaneously. The Fed must continue to find ways to navigate this changing environment while providing clear, objective, and reliable information to the public.

Active central bank Narrative construction in the service of their policy goals is a permanent change in our market dynamics. The introduction of such a powerful new weapon in the Fed’s policy arsenal can no more be removed than mustard gas or tanks could be removed from national arsenals after World War I. Market prices may be mean-reverting, but “innovation” in the service of social control never is.

What do the Missionaries get out of this? What’s our equivalent of wool and mutton? It’s low volatility. It’s the transformation of capital markets into a political utility, which is just about the greatest gift that status quo political interests can imagine. When Donald Trump and Steve Mnuchin talk about the stock market being their “report card”, they’re just saying out loud what every other Administration has known for years. Forget about markets, our entire political system relies on stocks going up. If stocks don’t go up, our public pension funds and social insurance programs are busted, driving our current levels of wealth inequality from ridiculously unbalanced to Louis XVI unbalanced. If stocks don’t go up, we don’t have new collateral for our new debt, and if we can’t keep borrowing and borrowing to fuel today’s consumption with tomorrow’s growth … well, that’s no fun, now is it?

The flip side to all this, of course, is that so long as stocks DO go up, nothing big is ever going to change, You say you want a revolution? You’re a MAGA guy and you want someone to drain the Swamp? You’re a Bernie Bro and you want the rich to “pay their fair share”? Well, good luck with any of that so long as stocks go up. It’s a very stable political equilibrium we have today, full of Sturm und Drang to provide a bit of amusement and distraction, but very stable for the Haves.

And that brings us back to @RandoBlueStateLawyer and @RandoRedStateRetiree, fighting the good fight on Twitter or Facebook or wherever, speaking their Truth to their audience of dozens. They’re smart guys. Politically engaged guys. They’re angry about the mendacity of the Other Side. In another day and age they’d slam the newspaper down on the table and tell the dog what a fool that darn Truman was. Maybe write a strongly worded letter to the editor. But today they are consumed by this modern equivalent of writing a letter to the editor. They are immersed in the world of the Constant Hot Take, morning, noon and night. Why? Because Common Knowledge Game. Because they see a crowd responding to a crowd, and they are hard-wired to join in. Because it makes them feel good about themselves. Because they’ve been turned into other-regarding sheep even as they think they’re being self-regarding wolves.

In the same way that the modern story of what it means to be a sheep — docile, obedient, stupid — is totally wrong, so is the modern story of what it means to be a wolf. We think of a wolf as the epitome of rapacious independence, but wolves, like all pack animals, are far less independent (and far less greedy) than your average sheep. Unlike sheep, wolves can act outside of their group because they’re not consumed by other-regarding behavior, but those actions are ultimately in service to the pack. A sheep always acts within its group, but it’s never in service to the flock, only to its own needs.

Look, I’ll admit that I’m talking to myself as I write these words. I spend WAY too much time on Twitter, justifying it to myself in any number of ways, when in truth it’s the functional equivalent of a meth habit. At least it’s not as tough on the teeth. My wife is hooked on Facebook, my kids on god knows what social media platforms …. I’m not so naïve as to think that the answer to our collective sheepification is just to put the devices down. No, we’ve got to shift the way we use this stuff, not quit it cold turkey.

So what do we do? We stop pretending to be fake wolves and we start acting like real ones. We stop acting like animals of the flock and we start acting like animals of the pack. We reject the other-regarding emotions of jealousy and schadenfreude. Yes, even in our tweets (gulp!). We embrace self-regarding emotions like honor and — here’s where I’m going to lose everyone — shame.

Yes, we need a lot more shame in the world. The loss of our sense of shame is, I think, the greatest loss of our modern world, where — to retweet myself scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where communication policy and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery. Or to put it in sheep logic terms: the tragedy of the flock is that everything is instrumental, including our relationship to others. Including our relationship to ourselves.

Why do we need shame? Because with no sense of shame there is no sense of honor. There is no mercy. There is no charity. There is no forgiveness. There is no loyalty. There is no courage. There is no service. There is no Code. There are no ties that bind us as citizens, as fellow pack members seeking to achieve something bigger and more important than our ability to graze on as much grass as we can. Something like, you know, liberty and justice for all.

Any coin worth having has two sides. A shameless politics has no honor. A riskless market has no reward. Oh, the Missionaries will tell you that there’s honor in the shameless politics and reward in the riskless markets, and for all the high-functioning sociopaths out there I’m sure that’s true, But if you’re not totally sheepified yet, if your goal is still honorable service to your clients or your partners or your family or your nation or your species — whatever your pack may be — then you know that this is NOT true. You know that shame and risk can be deferred or displaced but never wiped clean, no matter how many Supreme Court Justices you appoint and no matter how many all-time highs the stock market hits. You know that a reputation is like a tea cup; once broken you can glue it back together, but it will always be a broken tea cup. You know that the only game worth playing is the long game.

This is the Age of the High-Functioning Sociopath. This is the Age of Sheep Logic. We have to survive it, but we don’t have to succumb to it. How do we Resist? Not by switching out blue Missionaries for red Missionaries or red Missionaries for blue Missionaries. Not by switching out one bad shepherd for another bad shepherd. We don’t have to play that game! We resist by changing the System from below, by carving out local spheres of action where we are relentlessly honorable and charitable, relentlessly un-sheeplike. We resist by Making America Good Again, one pack at a time, which is a hell of a lot harder than making America great ever was. We resist by doing right by our clients, even if that means getting slapped around by supposedly riskless markets and shameless politics. Even if that means losing clients. Even if that means losing our jobs.

A good shepherd once said that whoever shall smite thee on thy right cheek, turn to him the other also. Of course, I also knew a good Dungeonmaster who said that being lawful good didn’t mean being lawful stupid, and turning the other cheek always seemed to be kinda stupid to me. Kinda sheeplike. But then I started keeping sheep, and my perspective changed. Sheep would never turn the other cheek. But a wolf would. A wolf would take a hit for the pack. It’s the smart play for the long game. As wise as serpents, you might say.

It’s time to be wolves. Not as devourers, but as animals that know honor and shame. It’s time to be wise as serpents and harmless as doves. It’s time to remember the Old Stories. It’s time to find your pack.

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Information Bottlenecks, Fake News and Boredom (by Silly Rabbit)

Information bottleneck

A new idea called the “information bottleneck” is helping to explain the puzzling success of today’s artificial-intelligence algorithms — and might also explain how human brains learn:

“Claude Shannon, the founder of information theory, in a sense liberated the study of information starting in the 1940s by allowing it to be considered in the abstract — as 1s and 0s with purely mathematical meaning. Shannon took the view that, as Tishby put it, “information is not about semantics.” But, Tishby argued, this isn’t true. Using information theory, he realized, “you can define ‘relevant’ in a precise sense.”

Quantum computers need smart software

Nature reports “The world is about to have its first (useful) quantum computers … The problem is how best to program these devices. The stakes are high — get this wrong and we will have experiments that nobody can use instead of technology that can change the world.” Related to this, I’m excited to spend some time in a couple of weeks with Scott Aaronson of QCWare who “develop hardware-agnostic enterprise software solutions running on quantum computers”.

In other “the quantum age is nigh” news:

A pair of researchers from the University of Tokyo have developed what they’re calling the “ultimate” quantum computing method. Unlike today’s systems, which can currently only handle dozens of qubits, the pair believes their model will be able to process more than a million.

Australian researchers have designed a new type of qubit — the building block of quantum computers – that they say will finally make it possible to manufacture a true, large-scale quantum computer.

Microsoft now has 8,000 AI researchers

Apparently, Microsoft now has 8,000 AI researchers. That’s a veritable army. Presumably a big chunk of the 8,000 are datamungers, infrastructure engineers etc., just as on aircraft carrier like the USS Nimitz (pictured below) where there are, order of magnitude, the same number of personnel but most are cooks, logistics managers, medics etc. rather than fighter pilots. But still: Eight thousand!!!

And in other “that’s a lot of engineers” news: Amazon now has 5,000 people working on the Echo / Alexa.

As I’ve noted before, in my view it is utter conceit that it is possible to do something ‘AI’ which is truly and sustainably novel, scaled and production-ready in a high stakes environment (such as trading) without a decent sized team focused on a narrowly defined problem.

Fake news and botnets

Fascinating interview with Researcher Emilio Ferrara on fake news and botnets:

“We found that bots can be used to run interventions on social media that trigger or foster good behaviors,” said Ferrara. “This milestone shatters a long-held belief that ideas spread like an infectious disease, or contagion, with each exposure resulting in the same probability of infection. Now we have seen empirically that when you are exposed to a given piece of information multiple times, your chances of adopting this information increase every time.”

Representational universality

It has been at least a month since we have had a Hofstadter quote, and this week’s Rabbit Hole column feels light on existential theory, so here’s a classic:

“In the world of living things, the magic threshold of representational universality is crossed whenever a system’s repertoire of symbols becomes extensible without any obvious limit.”

Boredom

And finally, in general I have quite a bit of reticence about sharing TED Talk links as, to quote the low-agreeability Benjamin Bratton, they can be kinda “Middlebrow Megachurch Infotainment.” Having said that, here’s a link to a terrific TED Talk on why boredom is important.

Best quote:

“As one UX designer told me, the only people who refer to their customers as “users” are drug dealers and technologists.”

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