The soul of Epsilon Theory is our long-form content, a library of hundreds of pieces written by Ben, Rusty and others over the course of the last 5+ years. These are the print-and-take-home-for the weekend notes that made Epsilon Theory what it is today.
In a two-body market, the interactions of fundamental data and prices are generally predictable. In a three-body market, the epsilon — investor behaviors in response to narratives — exerts a powerful gravitational force which must be considered when building a portfolio.
What if I told you that the dominant strategies for human investing are, without exception, algorithms and derivatives? I don’t mean computer-driven investing, I mean good old-fashioned human investing … stock-picking and the like. And what if I told you that these algorithms and derivatives might all be broken today? You might want to sit down for Part 9 of the Notes from the Field series.
The libertarian paternalism of a nudge culture in finance has created an industry of investors who care about fees but have forgotten about taxes, trading costs, slippage and behavioral costs of actively trading passive instruments.
The pecking order is a social system designed to preserve economic inequality: inequality of food for chickens, inequality of wealth for humans. We are trained and told by Team Elite that the pecking order is not a real and brutal thing in the human species, but this is a lie. It is an intentional lie, formed by two powerful Narratives: trickle-down monetary policy and massive student debt financing. Part 8 of the Notes from the Field series.
If you can manage to find a truly independent voice in your personal, political and financial life, pursue it with reckless abandon. Don’t set it to the side so that you can build a brand or make an impact. Get your ass out of the boat, grab your bow, strap on your broadsword and sound the pipes. All that’s left is to decide what song you’re going to play.
It was no great secret that Weinstein was and is a serial rapist. Apparently everyone in Hollywood was familiar with the stories. It was ubiquitous private knowledge, and pretty darn ubiquitous public knowledge. I mean, if you’re making jokes about it on 30 Rock, it’s not exactly a state secret.
But there was never a Missionary.
The behaviors that influence markets must be considered in context of archetypes, the languages and identities which group investors every bit as much as identity politics groups voters.
Part 7 of Ben’s Notes from the Field series reminds us that you don’t break a wild horse by crushing its spirit. You nudge it into willingly surrendering its autonomy. Because once you’re trained to welcome the saddle, you’re going to take the bit. We are Clever Hans, dutifully hanging on every word or signal from the Nudging Fed and the Nudging Street as we stomp out our investment behavior.
When we try to define others’ cartoon, we take away their agency, and strip away their humanity. And we do it with our clients, every time we guess what behavioral box they fit it.
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).
In Part 6 of the Notes from the Field Series, Ben observes that we think we are wolves, living by the logic of the pack. In truth we are sheep, living by the logic of the flock.
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.
Benjamin Graham famously said that the market is a voting machine in the short run, and a weighing machine in the long run. This is a right-sounding idea. It is also wrong. Behavior matters over every horizon.
This week’s Rabbit Hole column is more thematic with recent links that I found interesting around the topic of ‘news,’ on which Ben wrote the defining commentary of recent years with Fiat Money, Fiat News.
Back by popular demand, it’s the Epsilon Theory Mailbag! “Always Go To the Funeral” and “The Arborist” Another rifle shot to the crux of the matter. I would like to think that I, as a loyal reader of The Epsilon Theory, am onto many of the manipulations that you describe. But as I was reading …
Leonid Moroz has spent two decades trying to wrap his head around a mind-boggling idea: even as scientists start to look for alien life in other planets, there might already be aliens, with surprisingly different biology and brains, right here on Earth. Those aliens have hidden in plain sight for millennia…
What does the path of history tell us? What does the aftermath of one of America’s greatest natural disasters and human tragedies tell us? What can we do to survive and escape a Competitive Game that doesn’t allow us to pull away from the table? If you’re reading this, you’re probably in the investment industry, or at least have an interest in financial markets. If you’re in the investment industry or in the financial markets, you like to win. So you’re not going to like my answer.
We play. And we lose.
Portfolio Manager — Of all the roles this is where I think things really need to change in terms of who sits in this seat. It can no longer be hedge fund bros, they simply won’t survive here. Nor will the pure gunslingers and tape readers, gone. And you certainly don’t want the pure quants sitting in this seat. PMs of the future are going to be far more interpersonal and process driven….
A couple of weeks back I shared a link to the story of ImageNet and the importance of data to developing algorithms. Ars Technica reports on two ‘at the coalface’ battles over data access with HiQ and Power Ventures fighting with LinkedIn and Facebook over data access. I’m not advocating a position on this but, to be sure, small — and currently obscure — court cases like these will, cumulatively, end up setting the precedents which will have a significant impact on the evolution and ownership of powerful algorithms that are increasingly driving behavior and economics.