The Only Winning Move

To date we have written about the Panopticon in a mostly figurative sense. Clear eyes today means seeing it in a literal sense as well. Here’s your top of the Zeitgeist piece, a Financial Times feature on the death of privacy – and more importantly, the arguments being made in favor of its demise.

Is Privacy Dead? [Financial Times]

This is rather obviously an argument for the inevitability (if not explicitly in support) of the literal Panopticon. Indeed, there are few nudges more powerful than those which compel us to believe that we are already engaged in a contest of mutually assured destruction. How does the nudge work?

It tells you that you aren’t protecting your family if you don’t participate in the ritual of collective surveillance.

If tells you that you aren’t a functioning, right-thinking member of society if you don’t do your part to aid the herd immunity of mutually assured surveillance.

We killed our web-based ads this week. We did it for a few reasons. First, in all candor, we did it because the revenues from it were good (you’re an audience advertisers desperately want to reach), but not life-changing. Second, we did it because no matter how hard we worked with our partners, ads we didn’t feel good about kept slipping through the net (and while we’re not judging you, please bear in mind that some of the example ads you sent to me and Ben were, shall we say, uh, the result of your own browsing histories). Third, we did it because the technologies required to serve up the most valuable ads put us in the position of asking you to give up control of some of your data in ways that we found it hard to justify.

I don’t want to make this some kind of big deal, because it isn’t. We still have to collect information about you to accept payments – although even there, we are in the process of exploring the integration of btcpay through a self-hosted node to reduce even that requirement for those who are so inclined. And we are not communists: if we can find ways to serve non-subscribers advertisements that don’t effectively treat your data as if it were our own, we will put up the most obnoxious banner ads you can imagine – and smile doing it.

But no, the Big Deal is when all of us choose to act with reciprocity – acting in ways that are likely to promote cooperative gameplay. And friends, mutually assured surveillance is the ultimate competitive game, a massively sized and massively failed stag hunt that is part of the transformation of all of our social engagements into games with bad equilibrial outcomes for everyone. The nudges that can be summoned to secure our compliance are many:

We will hear that what we can do with others’ data can make us (and our shareholders) wealthier.

We will hear that it will make us safer.

We will hear that it will make our neighbors and communities safer.

Every last one of those things will be 100% true. Clear eyes.

Every last one of those things will also be 100% wrong. Full hearts.

The Problem with Brussels Sprouts

I think it started in 2010.

Within six months of patient zero, they were everywhere. Every gastropub. Every upscale comfort food concept. Every ‘American Brasserie’ in a gentrifying neighborhood. Every farm-to-table that became an OK-maybe-a-little-Sysco-to-table after six months of food cost realities.

Brussels sprouts.

No, not the actual vegetable. That would be gross. No, I mean Brussels sprouts! These things that we quartered, soaked in olive oil and butter, bathed in salt and pepper and scorched until the memory of green was all that was left. These were things that, seemingly out of nowhere, an entire industry sold aggressively to a generation whose smell memory could still produce on command that acrid, metallic scent of unseasoned frozen sprouts being microwaved in water in a shallow Corningware dish – you know, the one with flowers or a cornucopia-style collection of earthy vegetables on the side?

Y’all, the only reason anyone orders this vomitous cabbage is because it is transformed into a cartoon of itself.

But hold that thought for a moment.


I had a colleague – now, sadly, passed away – who had a favorite expression: blue light, blue suit.

The idea behind the idiom was that the job of a fiduciary was not to blindly deliver what a client wanted, but what they needed. Still, one couldn’t get around the fact that clients want to be sold on what they want. If they want a blue suit, then give them a blue suit, dammit. But not an actual blue suit that would be wrong for them. Give them the gray suit they need – and shine a blue light on it if you have to.

I had a boss whose oft-used variant was the red convertible. Do your analysis, add whatever conclusions, bells and whistles you want, even take it up a notch. But the thing I get at the end of the day better at least look like a red convertible.

I met another wealth advisor once who favored a food-related analogy for the same concept. Investors need to eat their broccoli, he said, so figure out a way to make it taste good. It was, as you might imagine, a story offered in defense of investment policy statements which emphasized asset classes and strategies which (nominally, anyway) diversified home country equity risk. Heavy on foreign equities, alternatives, real assets, that kind of thing. After 10 years of S&P dominance, nobody really wanted them, but they needed them. The trick, he figured, was making the clients OK with getting the things they needed but didn’t really care about.

It occurs to me now, I suppose, that the food-related examples of this idea are overwhelmingly common. I know a CIO, for example, who characterized some of his firm’s strategies as hiding the pill in the cheese, a tactic immediately recognizable to any dog owner. It’s your job to give him what he needs, and it doesn’t matter how he gets it.

This is the heart of the meta-game of money management.

It is easy to see for those inside the industry why this meta-game playing is necessary. I hope that it is also easy for those same people to see how it might go very wrong. In practice, however, our own self-deception about why we sell investment advice in certain ways makes it far more difficult to detect. In the interest of circumventing that self-deception, let me offer another axiom:

There is no wealth management firm in the world for which investment expertise is a sustainable competitive advantage.

This is the Brussels sprouts are objectively gross statement of the story I am telling here. The only difference is that whereas some of you may have sufficiently bad food opinions to reasonably disagree with that statement, if you disagree with the above statement about investment expertise, I think you are probably just wrong.

If you think that the edge in your advice service is performance, you are probably wrong. If you think that the edge in your advice service is investment selection, you are probably wrong. If you think that the edge in your advice service is investment insight, you are probably wrong. If you think that the edge in your advice service is uncovering new investment ideas, you are probably wrong. And yet, if prospective clients don’t believe that we can do each of these things, we will almost certainly fail to build a business. What’s worse, those prospective clients will do business instead with someone less scrupulous.

It is an uncomfortable truth, but the only reason we are usually hired is because we have been transformed into a cartoon of ourselves. A cartoon of relative expertise. A plate of Brussels sprouts, charred and covered with so much fat and salt as to be almost unrecognizable.

The inevitable path of the meta-game conscious financial adviser, then, is the creation of that cartoon of expertise. What does that cartoon look like? Well, we either celebrate some expertisey-sounding thing about our firm that really has nothing to do with expertise or the odds of any investment outcome, or we hold out the notion that something we are doing may be related to producing better investment results without exactly saying it.

We tout the home office’s resources.

We talk about the depth of our teams and resources.

We talk about team credentials.

We talk about our access to unique investments.

We talk about our ESG framework.

We talk about our research, our data, our analyst team.

We talk about our process.

We turn ourselves into a talking head. An expert.

In each of these cases, we may not say that these traits are definitely or explicitly related to better investment outcomes, but the reason we cultivate them and talk about them is absolutely to satisfy the client’s desire to hire a financial adviser with the most investment expertise. It is how we create a cartoon about our expertise, knowing full well that the client will associate that with their expected investment outcomes.

So if you’re a financial adviser, here’s the question you’ve probably asked yourself more than once: is this honest? Is it fair and good and right to heavily emphasize things in marketing that aren’t false, but which don’t really matter that much to the client’s outcomes, simply because we know the prospect or client cares about them? Does the fact that we really are delivering a very credible, high quality advice product at a really competitive fee that is far better than what the charlatans and churn artists out there are pitching mean that we can feel less bad about mentioning our amazing stock guy who’s had a great run the last few years ? Or the fact that our US-tilted portfolios outperformed our peer RIA across town, even though our positioning reflected bad diversification hygiene and our results reflected simple good fortune?

There’s a lot of salt and butter on those Brussels sprouts, y’all. These are hard questions. I don’t have an answer. But I do have a process: Clear Eyes, Full Hearts.  

Clear eyes: There’s no way around it. We have got to talk about these things. Our clients are grown-ups, and don’t deserve our condescension. Yes, we’ve gotta have a page in our deck with the team’s years of experience and degrees. Yes, it’s OK to talk about our process and why we think it works. Yes, it’s OK to talk about historical client outcomes, provided we’re doing it in a seriously, honestly, humbly non-promissory (and compliant) way.

Full hearts: No, we don’t have to build our entire proposition on a cartoon of relative expertise. We don’t have to treat clients like children, but we also don’t have to treat them like marks. I think that means emphasizing, not just in marketing but in practice, the elements of financial and investment expertise that are real, important and rare. I can think of six:  

  1. Identifying and consistently reevaluating and delivering the right level of risk.
  2. Delivering a nuanced, real understanding of diversification.
  3. Really influencing household expense management.
  4. Financial, estate, tax and philanthropy management.
  5. Business consulting for entrepreneurs and business owners.
  6. Structuring investments to properly complement existing illiquid holdings.

The more important truth, of course, is that the single most important thing an adviser can deliver isn’t any of these things. It isn’t a question of investment expertise at all. It’s…well…advice. When risk appetites are high, restraining exuberant behaviors. When risk appetites are low, restraining fearful behaviors. And in all cases, working constantly to ensure that when these times arise, we have the kind of relationship and trust with our clients that will make them listen. The relationship is the thing. And while I’m not saying that you, individual FA, don’t have a couple relationships that are strong enough to withstand a pretty rough go of it, I think we all need to be pretty clear-eyed about how much of these relationships will boil down over time to the perception of the results we produce.

I am also not saying that you should not earnestly try to outperform peers. I believe that there are behaviorally-driven strategies that will (nearly) always work over sufficiently long periods, even if those periods do seem to be getting, ahem, a bit longer. I believe that there are inefficiencies driven by non-economic actors in a variety of financial markets that can create opportunities with uncorrelated sources of return. I believe that there are changes in the structure of markets that occur from time to time that can create periodic sources of return. Ben and I spend half our time on these things, for God’s sake.

But they can’t be the fundamental value proposition. Not for someone who wants to do this the right way. Control your cartoon, but don’t let it turn you into a raccoon.

Mailbag: A Modern Vocational Curriculum

Few topics seem to arouse the kind of interest, creativity and occasional rancor as our diversions into higher education. When we wrote about a vocational curriculum that we thought would do a far better job achieving the true professional preparation aims of a mixed post-secondary educational system, we received a lot of thoughtful comments – enough that it made sense to make sure all of our readers saw them:

Interesting selection. You might be interested to know that something very similar (https://lambdaschool.com/) already exists. I have no association with them, other than working with some graduates and recommending people send their kids there as opposed to University. There are a couple of changes:
1. Students pay no tuition until the graduate and get a job that pays $50K plus/year.
2. The annual amount they pay is charged as a percentage of their salary and is capped both in what’s paid in a year (I think around $17K) and in total (I think its around $30).
3. There is testing to get in.
4. It is based around software engineering.
5. The program takes 9 months to complete.
6. Lambda school is incentivized to get the students jobs, though there is more demand for graduates than there are graduates.

I can attest that their graduates are excellent.

– Andrew Meyer (ET Subscriber, via website)

We are big fans of Lambda . That said, it is a software development-focused program, whereas we think the problem it would solve is much larger. Still, both our theoretical solution and the solution Lambda is actually pursuing are both incapable of solving the credentialing problem on their own. This is a demand-side problem (w/r/t labor), not a supply side problem.

I’ll add an anecdote from my earlier years…..I knew a Burmese family that was rather wealthy – the men told me that as part of their social education, they had to spend one month as Buddhist monks , and beg for food on the streets every day . Regardless of the fact that they lived in big houses with multiple servants or that their parents drove expensive European cars.
The idea – to teach them humility ……
Of course, they cheated by asking friends and relatives to give them food every day but I thought the original concept – humility – was a good one.

– Cartoox (ET Subscriber, via website)

One of the primary challenges of the American public school setting, I think, is its inability to cultivate humility. The entire experience teaches most students that strident confidence is the path to success. In fairness, that is ONE path to a form of financial success in some professions, but the kind of self-introspection and honesty necessary to achieve more meaningful forms of success don’t come easily to those who (like me) were educated in environments where maximizing relative comparisons was the most immediately profitable path.

I could quibble in detail and pick nits around the edges, but my first reaction is that I wish that had been there for me. This would change the world, and it got me wanting to start a school.

– Howard Wetsmann (ET Subscriber, via website)

Thanks, Howard. Me too.

This is stellar. I’d add a module on design/aesthetics and probably pull the calculus. Just a tiny bit of design training makes a world of difference in almost every aspect of business.

– Brent Beshore (Via Twitter)

I struggled over this exact thing. I don’t know that I’d swap out calculus (it’s a hill I’ve chosen to die on, for better or worse), but Brent is right – design is huge. The ability to frame an idea in words is powerful. The ability to frame it in visuals is no less powerful, and in some circumstances even more indispensable.

If this was your reaction, too, I probably agree with you.

You inspired me to take a stab at this myself, @EpsilonTheory: (link: https://blog.dthomason.com/a-better-vocational-curriculum-for-university/) blog.dthomason.com/a-better-vocat…. Quite similar to @WRGuinn‘s answer, but with a bit more focus on meta-skills. Interested in your thoughts!

– Daniel Thomason (Via Twitter)

Please take a look at Daniel’s link.

There are some things here with which I’m in violent agreement, and a few which I’m not sure about. Most notably, Daniel’s list is high on meta-skills, as he points out, which I think is spot on in terms of what leads to professional, financial and personal success. These are things like ‘discipline’, ‘decision-making’ and the like.

When we consider education, however, I personally think that we must separate what is important from what a formal direct educational platform is the best venue to convey. I agree with Daniel, for example, that personal discipline, self-control and decision-making processes are going to be far greater indicators of success than whether you remember the derivation of Black-Scholes. Where I differ, perhaps, is that I think that these are skills that are best developed in live workplace situations. Entry-level professional projects have a comparative advantage vs. formal education in developing them, and I would not focus on them in a vocational program. Your mileage may vary, however – just my take.

I’d add a course in ethics. I took an ethics course in biz school that was revealing. The class was mostly mock situations wherein collaboration produced a satisfactory result, but individual promise breakers came out better. Everyone needs to know how it feels to be cheated.

– George Hill (Via Twitter)

Unfortunately, everyone will learn how it feels to be cheated pretty quickly in their career.

This is a similar point to the one I would make to Daniel: much of what we teach is based on what we believe is important, even if the setting isn’t one that will most effectively convey the lesson. Unlike Daniel’s point, however, I think that ethical behavior is a thing which – if it isn’t clear by the time someone has graduated high school – is probably either unlikely to be grasped at all or which has been very consciously ignored by the student. In either case, post-secondary instruction doesn’t seem as useful to me.

If reinforcement is useful, it will be in assuring young professionals that there is a path to financial success and opportunity that permits reciprocity and full heart behavior. Again, however, I think that is a thing that can only be learned in practical settings.

Raking it in

Nike rakes in $3 billion after Colin Kaepernick calls foul on shoe [Denver Post]

We have written about the Colin Kaepernick / Nike saga before. It was the headliner for our inaugural piece that discussed how winning in a widening gyre requires politicians, companies and people to control their own cartoon – before someone else does it for them. Nike did it, and they won.

Some few months later, they’re back in the Zeitgeist, with coverage language powerfully connected to all other social and financial news. I think you can make a meta-game argument that their tactic this go around was a bit transparent. Maybe even long-term counterproductive, given some internal inconsistencies in the cartoon they’re created. What you can’t do, I think, is argue that it wasn’t effective in promoting and controlling that same, highly effective, polarizing cartoon today.

One of the easiest ways to spot a well-controlled cartoon is how it auto-tunes others’ perceptions to that narrative. The Denver Post gives us exactly that:

Remember, this is at the top of our Zeitgeist query. This language is making its way across financial media. Whatever we think about the reality or fairness of Nike’s decision or Kaepernick’s belief here, the narrative about Nike is that its wokeapitalism strategy is working. Outlets are attributing market price changes over a couple days to a specific event. Outlets are calling day-to-day volatility in total market cap ‘raking it in’, which says about as much as it does for financial literacy as it does the strength of the cartoon. Articles are even intimating that Nike is winning from the popularity of protest actions (and they may not be wrong):

The simplest takeaway from our first brief on this topic was that controlling your cartoon is an indispensable corporate tool in the widening gyre. The takeaway from this one is probably more important: there is now a strong narrative that controlling your cartoon works. A cartoon about cartoons now sits at the top of the Zeitgeist.

Don’t be surprised, friends. The world we live in is now the kind of world in which Jar Jar Binks is trending on social media because…well, because everyone wanted to know why Jar Jar Binks was trending on social media.

Alas, I fear it’s Jar Jars all the way down. Brace yourself for more of this.

ET Pack Gathering #1 – Northeast US

Image result for smoke rising

At the urging of some pack members – and because we thought it was a great idea – we will be hosting the first official Pack Gathering in our headquarters town of Fairfield, Connecticut. The idea is, well, ideas. Genuine connection. But if you’re part of the Pack already, we think you probably already know what you’d want to get out of a time like this.

We want an intimate affair, so we are keeping the event to thirty pack-members, solo and sans family for this first event. Because of the limited number of spots, please only sign up if you’re sure you can and will attend.

Spots will be held open for ET Professional subscribers through Friday, July 12th, after which we will open up remaining spots to ET Premium subs. To sign up, simply email Harper at harper.hunt@epsilontheory.com.


Details:

Date and Time: 5PM on Saturday, August 31, 2019
Location: Fairfield, CT. Address to be provided to those signing up.
Format: It’s a BBQ. Think beef, chicken and a pig roast. We will have a couple vegetarian options, but I’ll be honest – they’re going to be lame. Dress like you would for a backyard BBQ.
Cost: None. Bring a wine, beer or spirit you’d like to share with the group. If you don’t drink, then feel free to bring something else you think people would enjoy.

Life in the Gyre

I been watchin’ you watchin’ her watchin’ herself in the mirror.

High Tone Woman, from Somewhere Down in Texas by George Strait (2005)

I wanted to write something about Andy Ngo.

Andy is an independent journalist who was badly beaten by members of Antifa last weekend. He writes for Quillette, a provocative, liberal centrist publication that you will probably see (oddly) described as conservative. His public actions haven’t made him a saint in the eyes of everyone, but he didn’t deserve to be physically assaulted.

I wanted to write about how most media outlets weren’t talking about the attack in the way they would if Ngo’s politics were different. Because that’s how it felt to me. So I looked at our database of media coverage of other attacks on journalists that have taken place in the last year or so.

What I felt to be true, well, wasn’t.

Clear eyes. The attack on Andy – in no small part because of the graphic video capturing it – has gotten more coverage in the first three days of its aftermath than almost any attack on a journalist in the United States in 2019. More than coverage of journalists in D.C. being knocked down by Capitol Police, or a longtime Sacramento Bee cameraman receiving similar treatment. More than a journalist who took similar injuries from objects flying out of a car (hurled with epithets) when covering dueling pro-choice / pro-life rallies. More than the recent injuries to journalists covering the Memphis police protests. In fact, the only event in 2019 with comparable coverage was the attack on the press pool – and a BBC cameraman in particular – at a Trump rally in February.

We will be the first to say that quantity of coverage isn’t necessarily what is most important. Is there a cohesive narrative indicative of a collaborative desire of missionaries to tell readers how to think about this event? Can we spot the affected language we call Fiat News – opinions parading as fact – in news stories about it? Is there a detectable bias embedded in the qualities of the language used to discuss this event relative to similar ones? Yes. Yes. And yes.

And while demonstrating each of those things is what drew me to the topic, when I saw the narrative structure, it wasn’t what struck me. What jumped out at me was just how much of the coverage of this issue was about others’ response to coverage of the issue. In other words, more than just about any topic we have researched, somebody looking for news about these events was just as likely to instead find ‘news’ that would tell them how the curious case of Andy Ngo was really a symbol of virulent right-wing whataboutism equating childish antics to Nazism, or how it was really an example of mainstream left-wing hypocrisy and indifference to violence and bad behavior if perpetrated against the ‘right kind’ of people. And then it was media outlets trumpeting the content of media outlets making the opposite claim. In other words, if you felt what I felt and wanted to have a mirror engagement with the confirmatory story, or a rage engagement with the people getting it wrong, you had a host of articles to choose from.

How many?

By our estimate, roughly 40% of the 273 articles in our data set written about Andy Ngo between June 29th and July 1st have principally been about the coverage of the event and responses to that coverage by other outlets and people.

Source: Quid, Epsilon Theory

Missionaries have been shaking their fingers at us to tell us how to think about issues for a long time now. That is not new. But increasingly, what we are being told isn’t just how to think about issues. We are being told what other people think, how others are covering the events and how everyone else is all wrong. We aren’t even allowed to figure how we’re going to start fighting about some dumb thing. By the time we’ve read a single fact about a story, the ring is built, our gloves on, Michael Buffer already halfway to his car, and the bell still ringing.

It isn’t that there isn’t truth in these claims. I still believe personally that most large outlets were aggressively dismissive of Ngo’s victimhood for political reasons, and I think there’s substantial evidence in language of their coverage to indicate it. I think a lot of people of a different political persuasion would still think – in good faith – that it is ridiculous that we are even talking about this when psychotic, racist white nationalists are out there running people over.

The problem is that when the information we consume ceases to be information about things that happened, and is transformed into information about how important people perceived those things or how the other side is being hypocritical about their coverage or opinions of those things, we descend another layer into the Panopticon – watching the crowd, watching the crowd watch itself. The more of this kind of information we unwittingly consume, the more we unwittingly live our lives in a world in which our reality is defined by the second and third levels of the Common Knowledge Game. Even when we think – even when we know that we are right.

We can’t avoid being in the Widening Gyre. But we can avoid being of it.


It’s not all political theatre.

Let me give you an example. When I was preparing this essay, the New York Times was so sure that I needed to see this article that they paid for the pleasure of putting it on my screen:

What is it?

Well, it’s a promoted tweet from last year, which probably means that the New York Times has a marketing and social media department that has determined that paying for 30-something dads who search for “real metal Tonka trucks” and “foam airplanes with long wings” on Amazon and post dad jokes on Twitter to see this article has a positive ROI.

The article itself, of course, includes zero descriptions of how parenting is any different from what it used to be. The descriptions are of how specific parents have said that they feel they have to do different things for one reason or another. This isn’t the kind of Fiat News we’d usually see in your classic feature piece, trying to guide in a newsesque way in how you think about some Big Social Issue. Instead, it’s news that provides you with reminders that this is how other people are thinking correctly about this.

It sounds melodramatic, but under any reasonable interpretation, the New York Times is literally trying to sell subscriptions to parents by preying on their fear that they will miss an article that will tell them how other parents are defining what parents are supposed to do. It’s a less obtrusive version of Black Mirror’s Fifteen Million Merits, with more nudges and less Big Brother. Click-bait, sure, but more subtle and far more powerful. Don’t mute your audio, or else you’ll be subject to a penalty.

Image result for fifteen million merits don't look away

But no, it also isn’t always gentle nudges. The media-as-principal has determined that vanilla Fiat News isn’t enough, that guiding how you think will be most effective by telling you how other people are thinking about things, how they are getting it wrong, etc. The pattern is everywhere.

It is evident in the editorial selection of news articles and how they are written. Here, for 2015-2018, are the percentages of articles in the New York Times, Washington Post, CNN and Huffington Post – the most socially important left-leaning news publications in the US – which specifically reference Fox News.

Source: Quid, Epsilon Theory

Fox itself, probably as influential and powerful in right-leaning circles as each of those outlets combined in their own milieu, is selling the same thing. The growth is not so dramatic, but part of that is – I think – because the narrative of a general left-wing bias in media was already well-established as the network’s raison d’etre.

Source: Quid, Epsilon Theory

What does this mean? It means that, relative to only four years ago, you are twice (or more) as likely to encounter a ‘news’ article telling you what tragedy the opposing political side isn’t treating the same as they did a different one, a response ‘news article’ which snidely references the first with as many scare quotes as possible, and then a set of third articles which just cover all of the most virulent social media posts the dueling articles spawned.

Oh, think that last one was a throwaway joke?

Yeah, that’s happening, too.

If your response to this is, “Yeah, but that’s just reflective of growth in Twitter and social media in general – it’s just an indication that it is being embraced more broadly by public figures,” well, yeah, no kidding. Y’all, the point isn’t necessarily to convince you that people are doing something wrong here. It’s to show that this is happening. To argue that we can stop predicting and start observing. Some statement or dispute on social media is now newsworthy. A public figure condemning X on Twitter but not condemning Y is now a news event. A random jackass replying to AOC with a racist remark is now a fully fleshed-out feature piece about the New Right Wing, and a search that yields a community college professor who liked a post about punching Nazis is now a wholesale indictment in print of the Lunatic Left.

The peril of this new Panopticon? Fewer of the facts we are provided are divorced from opinions, sure. But fewer still are untarnished by the light shining back on all of us, telling us what the crowd thinks and what it ought to think. Missionaries are taking our Common Knowledge into their own hands.


And it’s working.

Think for a moment about the coverage of the events on America’s southern border. When is the last time you read such a story that was not at least partly meta-commentary about contrasting media treatment of the events? OK, give yourself a little test. How many asylum-seekers have been detained so far in 2018? Just an estimate. Roughly what percentage have come from Guatemala? What about other countries? What are most of them fleeing? How do the conditions and US border policies as currently enforced compare to those of other developed countries?

Cool, cool. OK, now who tweeted out a border photo-shoot in a white outfit? What did some political leaders compare the detention camps to? Who took issue with those characterizations? What biased newspapers and networks have been ignoring and downplaying the current situation in the detention centers? Which biased outlets ignored it during the Obama Administration?

I think I know which set of questions the average news-following American would be able to answer and which they wouldn’t. There’s a reason: because the latter, increasingly, is what is produced and consumed. And whether that tendency plays the role of the chicken or the egg in all this, this is happening because it’s increasingly the content that gets shared. In our query of detention facility-related news this year, here are 5 articles from the top one-half of 1% in shares across social media:

Bank of America will no longer do business with companies that run detention centers [CNN]

Wayfair employees plan walkout to oppose furniture sales to migrant detention facilities [Boston Globe]

Alyssa Milano Promotes Fundraiser for Illegal Alien After Mocking Veteran’s Border Wall Crowdfund [Breitbart]

Ocasio-Cortez presses case that U.S. is running ‘concentration camps’ at border amid Republican outcry [Washington Post]

Many in media changing their tune on border ‘crisis’ after claiming it was ‘manufactured’ [Fox News]

I’m not saying that these topics aren’t newsworthy.

But the fact that the ‘what everyone else is thinking/saying/doing’ articles spread like viruses – when reporting of simple facts does not – matters. It is changing the kind of information we get through incentives alone. There is nothing – nothing – a media outlet can do to better position its franchise than to frame every story as being about the hypocrisy or bad behavior of some opposing group. It is squelching the already short supply of pure, unadulterated, fact-based news we have available to us.


Second- and third-degree Common Knowledge posing as news is doing something else, too:

It is killing good faith. It is killing our collective willingness to believe the benevolent / benign intentions of our fellow-citizens.

Some of that is happening through the subtler – if we can even call it that – Fiat News-like stories above. Some of it is happening through much more transparent means. Consider, for example, the below image, which began to make the rounds yesterday (collected by Heather Heying) about the Andy Ngo affair.

It would be an extremely, er, powerful assertion from the American Spectator – except it was never made. The American Spectator never published this article. You could say it was fake news of the type meant to mislead some number of people on simple facts, but I don’t think so. This image exists to break down any lingering belief that the information being circulated outside of our curated on-narrative sources comes from a place of good faith. Here’s the real one below.


I am not ignorant to the fact that much of what we do on this website is the identification of what we see as common knowledge and active narratives. But the danger isn’t in thinking about the second- or third-degrees of the Common Knowledge Game. We should do that. We must do that. The danger lies in treating the second- and third-degree information that we receive as first-degree fact, rather than how we or someone else would like us to interpret the import of those facts.

And the more we allow others to do that interpretation for us, even when it seems sensible – no, especially when it seems sensible – the less sovereignty we retain over our own thoughts, and the further the gyre of our divided politics widens.

The Solution To The Fintech IPO Shortage

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Scott: Hey, how’s your girl, man? 
Luis: Ah, she left me. 
Scott: Oh. 
Luis: Yeah, my … mom died, too. 
[Beat; Scott gapes in awkward silence]
Luis: And my dad got deported. 
[More silence]
Luis: But I got the van! 
Scott:[quickly] … It’s nice!
Luis: Yeah, right?!

Ant-Man (2015)

The Solution To The Fintech IPO Shortage [Forbes]

The headline is bullish. The tone is positive. But the article is dour as hell. Why haven’t we seen Fintech IPOs, it asks, then provides the answer: because they don’t have sustainable business models, the companies don’t have clear value propositions, they can’t get to scale, IPOs did terribly last year and they haven’t done anything to change the actual economic proposition of financial services products to end users.

Other than that, Mrs. Lincoln...

Still, the piece manages to end with the kind of relentless optimism that you have to admire on some level. If they can figure those fourteen things out, expect more IPOs! Still, it’s an interesting question, given how powerfully non-financial tech and VC has managed to cultivate a supportive narrative. The problem is pretty simple, and it’s a narrative problem:

Everyone knows that everyone knows that financial services switching costs are extremely high.

It’s the source of the fundamental economic malaise affecting these companies – their stratospheric customer acquisition costs. It’s the source of the scale problem. It’s the reason the business models aren’t sustainable. Having a product that disrupts something customers hate isn’t enough if they still can’t fathom the pain in the ass that is figuring out, learning and actually pulling the trigger to do something different.

The successful Fintech plays have (as the article points out) either served other financial services businesses directly or have figured out how to make the complicated process of switching or simply starting to use a financial product people haven’t used before, well, easy. Any such company that isn’t actively owning its cartoon on this dimension – continuing to obsess over addressable markets and consumer frustration with incumbents – will continue to miss the boat.

Narrative Means Never Having to Say You’re Sorry

Being a full-time missionary – someone who leans on the power of memes and narrative to nudge others into some particular way of looking at the world – often requires a certain amount of sociopathy. Not always, of course. We’ve written several times about when and how we think narrative can be marshaled to serve worthier causes than the interests of a nudging oligarchy. To wit:

Still, it is no coincidence that when we run down our list of professions we collectively associate with corrupt, dishonest people, nearly every one is intrinsically dependent on selling you a story. And every one that isn’t is perceived as being corrupt because they are either seen as the source of that corruption in others (e.g. Lobbyists) or as the agent of structures seemingly designed to fail to live up to promised service standards (e.g. HMO Managers, Nursing Home Operators).

Source: Composite of 2016-2018 responses to Gallup’s Americans’ Ratings of the Honesty and Ethical Standards of Professions Survey

Not all storytellers are missionaries, of course. When we refer to missionaries, we are referring to a game theoretic concept. We mean the people who seek to steer and influence common knowledge – the things that we all know that everyone knows. That, or they’re people who are in a position where they can’t help but influence common knowledge, because their pronouncements are the kind that everyone knows that everyone else has heard. Presidents. Congressmen and women. CEOs. Celebrities. Tech visionaries. Major media personalities and outlets. Within just the investment community, there are similarly prominent voices. Fed Chairs. Activists. Celebrity PMs.

The sort of elective sociopathy that it takes to succeed as a self-interested missionary almost always rests on two malignant abilities: the willingness to stretch the truth, and the fortitude to stick with a story no matter how it goes wrong (or who it hurts). We’ve written a lot about the former.

We have written less about the latter, although it is a crucially important human tendency to monitor in ourselves and others all the same. The unwillingness to admit error is part of an equilibrium-maintaining strategy in a narrative-driven competitive game, and our susceptibility to it is a testament to the human animal as a living embodiment of Gell-Mann Amnesia. In short, we are built to empower unrepentant liars. More disconcertingly, in a widening gyre, those who cultivate the skill are more likely to rise to power of all varieties (yes, even more than normal).

When a missionary permits common knowledge about himself or his ideas to break – the veils of abstraction around their identity or the narrative they’ve promoted nearly always break, too. All of the once-removed models for how we saw and thought about the person and what they meant, the justifications we conjured for their behavior or actions, the cultural significance of believing the reports about them – all disappear almost immediately. Even when the same evidence or factual knowledge exists, absent an admission of error, we still find it brutally difficult to shed the abstractions which color our interpretations of whatever they are purported to be guilty of, especially if we have powerfully positive or negative opinions about the person.

Don’t believe me?

Here’s a fascinating little study on this topic from Richard Hanania at Columbia University’s Arnold A. Saltzman Institute of War and Peace Studies (h/t to Rob Henderson). The gist is this: if your standard is the public perception and credibility of the offender, apologies don’t work. They hurt.

Admission of error is the enemy of narrative.

Yes, there are consultants and others who counsel these people to admit error, but that isn’t because the apology will aid their public perception or any narrative that they are promoting. It is almost always because our taboos require the act of penance to permit others to do business / interact with that person again in an economic sense, which – since we’re talking about influential and famous people here – will almost always happen.

If we want to see more clearly through narrative abstractions, well, we can’t eliminate our sensitivity to those stubborn memes, but there are more lessons here for us as citizens and investors. There are things I think we CAN do:

  • We can seek to be wise enough to be more skeptical in general of those not given to admitting error.
  • We can seek to be wise enough to be more merciful in general to those who do.

It isn’t easy. It will make us vulnerable. We will get burned. But it IS one of those rare places where the often-conflicting philosophies of Clear Eyes and Full Hearts align.

We Didn’t Say it WASN’T a Press Release

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Discretionary Consumption Becomes Law In The Land Of Lincoln [Benzinga via Morningstar]

There are a couple reasons I’m intrigued by this story ranking so high on the Zeitgeist today. The first one is that weed stocks have been remarkably resilient as a part of the financial media Zeitgeist. My suspicion is that this is simply being driven by clicks, and if you write about weed and weed stocks, you’re going to get those clicks in ways that writing about, say, Clorox wouldn’t get you. Doesn’t hurt that Motley Fool’s business model, whatever it was originally, is now basically pitching investments cannabis ideas to your boomer relatives on Facebook, either.

But I’m also fascinated by how often these Benzinga articles keep ranking as highly as they do. Every one we see is syndicated through Morningstar, reads like a news article, transitions to an obvious pitch, and never really discloses that it was really just a press release disguised as news. Is there any chance that the average person researching mutual funds on Morningstar.com, would know that? It’s really misleading, and really disappointing.

You rarely see a They Live meme-worthy transformation of newsy-looking content to pure pay-to-distribute opinion journalism in the course of a single piece, but well, here we are:

I suppose it goes without saying, but “Why am I reading this NOW?” should be your go-to on just about any site that syndicates content like this as news, sight-unseen. Add Morningstar to that list.

The ANDs of Asylum

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 


Bringing the Border to the Front Range [Boulder Weekly]

Increasingly rare, but powerful even so, are pieces which demonstrate high connectivity in narrative structure not because of their adherence to a particular common narrative, but because they connect otherwise disparate language with their own familiar language. It is the power of AND, a thing that most on-narrative journalism and writing misses, so caught up in hewing to some particular interpretation of facts.

This is one. It does not shy away from discussing conditions of detention facilities at the border.

AND it does not shy away from discussing an influx of asylum-seekers that is not a fantasy.

AND it tells both the stories of those who fear the current administration’s policy’s effects, and those who admit that, under some definitions, it is working.

The piece is feature journalism. There are opinions, affected language and structural decisions that convey a view in this piece. But broadly? This is gyre-closing, not gyre-widening work. No, it’s not about always naively presenting ‘both sides’. It’s about remembering that most of our complicated issues warrant far more ANDs.

Zeitgeist Narrative Map – Week of June 16 in Review

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

This is the map that links them all together for the week gone by.


Source: Quid, Epsilon Theory
  • The week’s macro focused news (NE quadrant) emphasized the Fed above all – for obvious reasons
    • We note, however, that China and trade were never far from the language used to discuss Fed policy
  • Language relating to Iran and oil prices was more connected than we would have expected. A little drilling down demonstrates that there is some active linking of ‘geopolitical risk’ and ‘wag the dog’ narratives around China, Iran and easy Fed policy
  • Beyond Meat’s adopted taxonomy is not even part of the go-go growth language cluster (NW quadrant). It’s in pure pitch-to-retail land (SW quadrant), through and through, a la Tesla. Proceed with caution.
  • As with almost every other network we observe, education and health care / health care cost-related language remains central to almost every graph
  • We were surprised to see Slack as disconnected from the rest of the language we would otherwise have expected to be related – whether growth or in retail-friendly momentum language – but that’s exactly where it was. Alone and on its own with only limited connection to any market narrative.
    • We are not sure what this says about the IPO frenzy or Slack as a business, but it isn’t being connected to bigger ‘thematic’ market commentary in the way other IPOs in the last year have

The Half-Happy Horror


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The Judgment of Solomon, Gaspar de Crayer (c.1620)

Optimization is a scourge.

I say this as someone who is as addicted to efficiency as anyone I know. I have a chart – not a mental chart, but an actual on-paper chart – of which of the three specific routes I should take to my office by day and time. I almost never schedule same-day meetings because I find it disruptive to planned periods of work on certain projects. I set up a mise en place for making Kraft Mac & Cheese for my kids, for God’s sake. My biggest average allocation to public markets in non-taxable accounts for several years has been to risk parity. Much of the rest has sat in systematic trend-following and behavioral premia strategies. I am an optimizer, y’all.

Yet I have also spent my career as an allocator to investment strategies observing what both explicit and implicit goal-seeking does to investors and their processes.

I’m not really talking about the robustness of objective-function optimized portfolios to changes in key variables or estimation methodologies, although just a shred of epistemic humility in portfolio construction would go a long way with some quants. I’m also not really talking about the mean-variance frontier-plotting and JP Morgan GTTM-driven Monte Carlo slides I see being put in front of clients (and which I have, from time to time, put in front of them myself). Feel seen? Throw a rock in the air and you’ll hit someone guilty.

But what I really mean is this:

Our need to manage common knowledge about multiple competing objectives in an optimization-centric framework makes us into professional cartoonists.

The Lip-Service Cartoon

I’m not saying anything outlandish here. If you’re a professional investor, you’ll be familiar with this – especially the lip-service cartoon. This is the one where we pretend – and ask everyone else to pretend – that our secondary and tertiary objectives or constraints are conveniently totally achievable without impacting our primary pursuit, even when they’re not.

I have written about this recently in context of post-secondary education, where optimization’s effects are obvious. The stories we tell about college are that it ought to serve three objectives, usually all at once:

  • College should broaden horizons, providing a foundation of historical, philosophical, aesthetic and scientific knowledge and the critical thinking needed to process problems raised by or answerable using that knowledge;
  • College should prepare students to enter and be successful in a profession; and
  • College should provide an environment for the socialization, personal growth and independence of young adults.

In practice, by any realistic measure of revealed preferences American universities don’t really optimize for any of these things. As we have argued, we think they mostly target maximizing the signal sent about the underlying intellectual, temperamental and socioeconomic and demographic traits of their degree-holders, because, well, that’s what our culture has permitted and what alumni donors demand.

Is it true that critical study of history, philosophy and language can improve the quality of thinking? Of course it is! If you’ve been reading Epsilon Theory very long, you will know that we believe the same Big Ideas tend to permeate almost every area of human activity, and that identifying those variants and their memetic attachments in the wild can be a meaningful advantage to our thinking. You’ll also know that we are passionate about the human importance of art and creation. The cartoon isn’t in recognizing the importance of these things. It isn’t even in recognizing that they may have some value for multiple objectives. The cartoon is in our pretense that coursework in music theory and the emergence of proto-Celtic language and cultures from other Beaker societies will be just as important to professional pursuits or personal growth of young adults as it is to living an enriched life. By corollary, however many hours you spend studying Kant, it won’t make you as good at your job as spending the same amount of time doing that job or preparing more directly for it.

To maintain the cartoon, we must pretend that it will.

Our pressure to create these cartoons can be traced to our sensitivity to common knowledge about those secondary and tertiary objectives that we are ‘balancing’. It is untenable – unacceptable – to be seen as not seeking out those objectives, and it is desirable under almost every governing narrative of the Zeitgeist to be seen as pursuing them. The inevitable result is that they get only as much of our energy and attention as is necessary to maintain the cartoon.

If you want to see this in financial markets, look no further than the methods your value managers provide for avoiding value traps (which will, I assure you, be disregarded as not being relevant in this particular case when it suits them), most ESG overlays, and almost every risk report provided by a non-integrated risk team to the portfolio management team. Pro-tip: the more a PM you are interviewing goes on about how much having daily access to these risk statistics has really changed their thinking, the more full of shit they are.

In fairness, it isn’t that they’re lying – it’s that the cartoon permits them to act as if the balancing of multiple objectives is serendipitously bereft of any tradeoffs. Their process is just that good.

The Measurement Cartoon

Sometimes our cartoon isn’t that we wave our hands at potential tradeoffs between our objectives, pretending that some magical alignment of our ideas permits the kind of synergy never found in nature. Instead, the cartoon is the pretense that we have the capacity to measure what those trade-offs are, even when we don’t.

The most inevitable cartoons of this variety, I think, are those built around liquidity. Our industry gets the occasional reminder that liquidity matters, such as with the recent Woodford business in the UK, or the Third Ave blow-up a few years back. After those events, there’s usually a 12-18 month cycle in which people Really Care about it. They add a few more questions to their DD questionnaires, and once the answers from fund managers congeal around some standardized answer, the questions largely stop, other than in the most perfunctory way. That is, until the SEC passed 22e-4, a rule establishing the requirement for a liquidity risk management program for open-end investment companies. It requires the mapping and publishing of position liquidity in four different categories.

In this case, we have a rule requiring the creation of a cartoon, and lest anyone is laboring under any delusions here, that’s exactly what investors will get. I’ve provided below a helpful example of the rule, its standards, the cartoon responses investors will receive and the real response investors would get if the industry were concerned about telling them the truth:

The point, of course, is not that liquidity isn’t important. When it matters, it matters a lot. And when it matters a lot, things are happening that are often not quantifiable in ways that will make sense under any objective quantification scheme in a normal environment. Asset class flows, manager-specific flows, market direction and available position-level liquidity are all pro-cyclical. As has almost always been the case, these cartoons will tell a happy story about liquidity to investors…until it’s too late. In other words, the value ascribed to a liquidity bucket is an ephemeral, practically useless figure that gives false comfort and context to manager and investor alike.

There are other examples of how we optimize for multiple objectives by turning a complicated secondary objective that deserves our respect into a cartoon we hand over to ALPS, BNY or our internal risk management team. Highly leveraged funds whose managers have ever uttered the words ‘Cornish-Fisher expansion’ to a client, you are correctly detecting side-eye. In all such cases, there’s nothing disqualifying or wrong about using guideposts or systematic measures, but when we optimize for some key objective (return or volatility-adjusted return) and explain away others (maintaining adequate liquidity) by constructing a cartoon to ‘measure’ them away, we’re gonna have a bad time.

The Mitigant Cartoon

In still other circumstances, we know that we can’t measure a secondary thing we care about, so the hand-waving takes a different form. We don’t have measurements. We have mitigants.

To be fair, mitigants are real things. AND they are often the basis of cartoonish abstractions that allow us to dismiss important things we ought to honestly, fully consider. We know that excessive leverage and concentration in this strategy creates potentially outsized risks to the portfolio, but worry not: in portfolio transparency we have a powerful mitigant. We know that there’s an unusual capital structure which could permit the intentional impairment of our class of interest, but the principal is a public personality with long-term clients in the same class. These are strong mitigants, you see.

The problem with mitigant cartoons – and what distinguishes them from actual mitigants, is that they are among the most basic tools of confirmation bias. They provide ready answers to our concerns which, like our other cartoons, miraculously seem to support the unbridled pursuit of whatever our primary objective was in the first place.

When we build too much of our thinking around optimization instead of good-faith, knowingly messy, honest evaluation of conflicting facts and circumstances, we will inevitably find that all of our problems become just-so stories. They will perfectly explain, measure or mitigate away the things we have to be seen to care about but don’t. They will perfectly support our single-minded pursuit of the things we do care about.

The Half-Happy Horror

Look, the idea here isn’t that we can’t walk and chew gum at the same time. An incredible share of life is obviously about finding balance between conflicting things, priorities and ideas – whenever it’s possible to do that, that is. The idea also isn’t that we shouldn’t adopt systematic methodologies -quite the opposite, as I frankly think these tendencies to optimize are stronger for those who don’t constrain their processes to rules (yes, it is clearly quite possible to systematize predispositions in such rules, too).

The idea is simply that optimization of decisions involving multiple objectives and constraints – whether fully systematic, rules-based or discretionary – is the kind of thing that should always cause the responsible investor and citizen to step back. Especially when the alternative is often a solution that will make everyone half-happy, which in a zero-sum game is no solution at all.

What can that person do?

  • We can (try to) be honest with ourselves. If we have a constraint, a risk, or a secondary objective in our strategy we’re trying to balance with another, are we giving them lip service? Are we draping them in unwarranted quantification so that we can consider them ‘solved’? Are we clothing them in ‘mitigants’ so that we can check the box and move on?
  • We can focus on ANDs. The language we use to talk about multiple objectives often betrays our attention and the considerations we would just as soon wave our hands at. In my experience, it is critically important to start from a place that considers all facts as ANDs, rather than presuming their relationship to one another.
  • We can try to simplify our decisions. Where possible, simplifying decisions and our responses to them so that we truly can focus on a narrower set of objectives – not through abstraction, but in truth – can help a great deal. With portfolios, maintaining a lens to conceptualizing pools of capital as serving discrete objectives can be an effective management tool.

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