Run, Run, Pass

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Source: Fort Worth Star-Telegram

As you might expect, we get a lot of emails.

Most of them are very nice. A few are nasty. After Ben’s “Lord Make Me Chaste…But Not Yet” brief, I think one reader called us “everything that is wrong with America.”

Tough but fair.

The most common emails by far, however, are from readers cluing us into examples of narratives they have observed in the wild. Only the common usage often isn’t the same thing that we mean by the term. When most people say ‘Narrative’, they mean a story that they perceive to be manufactured or artificial. Usually it is a pejorative, referring to something that is intentionally misleading, something which is decided in advance and attaches facts as convenient. They mean spin. This is…not exactly what we mean when we say it. When you read ‘Narrative’ on Epsilon Theory, you should read it as ‘an abstracted and symbolic representation of reality that replaces that reality as the locus of our thinking about a topic.’  A Narrative may be malicious or benign, but it is always most powerful and relevant to our interests when it becomes Common Knowledge, and especially when it leverages or is itself a Meme.

Why is this important to understand? Because if you are always looking for someone telling a story, you’ll miss the far more common types of narrative abstractions: facts, figures and models that stand in as proxies for the mechanic of reality they seek to model. Ben’s piece last year – Cartoons Against Humanity – is probably our clearest explanation of what we mean by this.

Yes, most narratives aren’t twisted, biased interpretations of facts. They aren’t fiat news. They aren’t overtly manipulative. They are numbers and data, unadorned, presented before you to do with what you will. The narrative’s power lies in our presumption of their sufficiently explanatory power.

We’ve talked about labor numbers and other cartoonified numbers. How about one of the most mind-numbingly obvious examples that still manages to suck us into the cartoon? Now, you may not know what I mean when I say, “run, run, pass,” but we have thousands of subscribers and readers in the Pacific Northwest who will know exactly what I mean. It is the clearest description of the Seattle Seahawks’ offensive gameplan for most of the 2018 season, including their most recent unfortunate playoff loss to my Dallas Cowboys. And why not? Any student of the most basic NFL analytics will tell you that the number of rushing attempts in a game is among the most explanatory variables for the team’s victory. No story there. That’s just a fact. If you ran the ball a lot, you probably won the game. Except, you know, if you ran the ball a lot, it’s usually because you were winning. Teams run when they’re ahead. Remember how I said this was mind-numbingly obvious (if you follow the sport, anyway)?

But as a data point, this idea that establishing the run is how you win is the natural progression in logic from the pure data, and it fuels all sorts of other more traditional story-driven narratives and, yes, common knowledge. Well, it sets up the pass. It sets up the play action. It’s necessary as a threat to keep the opposing alignment and defensive schemes honest and closer to the line of scrimmage. And the fact that all these things are a little bit true make it feel like you’re really on to something, when what you have is a garden variety, underdetermined mess of a model for how to win.

In the same way, we investors conveniently tell ourselves that so many of our models don’t work out-of-sample when they worked perfectly well in-sample because the underlying effect got arbed away, and so we move on to finding some new thing that hopefully won’t get arbed away. We convince ourselves that there’s economic intuition behind our variables, a good practice, as far as it goes. Or we convince ourselves that we’re accessing something that can’t be arbed away because it is a fundamental feature of human nature, which is probably true if our investment horizon is infinite (which it isn’t).

But no matter how accurate it may appear to be, a model is always a model. The moment we start believing that it’s as good as reality is usually the moment we get run over by a Mack truck.

What’s to be done?

In the absence of data to continually improve our estimates, we diversify our models. We take in inputs and mechanics from people with different priors. We ruthlessly evaluate the sensitivity of our models to every assumption we can identify, both explicit and implicit. Not just variables, but the structure of our estimation and prediction frameworks. We love the pieces that the team at Newfound Research have put out on this very topic. The last few posts here are focused on it. I highly recommend reading them. As you do, think about how treating your models and data like fact by not diversifying them is, itself, among the most powerful kinds of stories we tell ourselves.  

And go Cowboys.  

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Landvermesser
Member
Landvermesser

I’m going to attempt a kindergarten-level analogy, hopefully not missing the point too badly: If you look at a Coke can from one direction, it looks like a circle. If you look at it from another direction, it looks like a rectangle. There’s a group of people that is emotionally (or otherwise) invested in the belief that Coke cans are liable to roll away if you put them down. Another group is heavily into the idea that a can of Coke will stay where you put it. One news source publishes an article consisting of a picture of a circle accompanied by text like “This is what a Coke can looks like, OF COURSE it will roll away, how else could it be? Have you ever seen a Coke can that WASN’T shaped like this?” Another news source puts out an article with a picture of a rectangle and an analogous caption. When I’m trying to make sense of the world, I call “Coke cans roll away” and “Coke cans stay where you put them” narratives, and I call pictures of circles and rectangles (the “raw data” you refer to in your note) “projections”, for lack of a better word. Low-dimensional projections of higher-dimensional phenomena. Slightly more honest news sources would add to their stories information about the directions of view that led to their respective projections, and a well-read consumer could look at both articles and potentially assemble a more complete, nuanced idea of the shape of a Coke… Read more »

Mike S
Member
Mike S

If I asked you to point to your knee you could do so instantly and wordlessly, but if I asked you to point to the economy, for example, the closest you could come is using a bunch of linguistic symbols to point to a group of concepts. To show me the economy, you’d have to tell me a story. There’s not even a “you” anywhere to be found, because it turns out that that’s made of narrative, too.

Control the narratives of economics and commerce, and you control economics and commerce. Control the narratives about politics and government, and you control politics and government.

Perhaps the cracks that are appearing all over official narratives today are like the first cracks appearing in an eggshell as a bird begins to hatch into the world.

“Mostly, the Maginot Lines we build for ourselves are symbols. Sure, they can be real enough. All those forts and gun emplacements along the Franco-German border were certainly real enough. They even impacted strategic decision making. But our opponents aren’t obligated to act according to the caricature we’ve drawn. They can choose another axis and mode of advance–one that plays to their true strengths and weaknesses. Sound strategic thinking assumes they will. “
— Demonitized

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Victor K
Member
Victor K

“They had to settle for a field goal.” Every time I hear this, I wonder if kicking a field goal earlier would optimize over settling for a fumble (or interception). Maybe a quant could figure it out. Please, just one time football gods: “They settled for a fumble!”

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Victor K
Member
Victor K

Just a little follow up: late in the Saints/Eagles game with the Saints up by 6, the Saints could have iced the game with an incredibly likely field goal. Instead, they (as is typical) pressed on for more yardage which resulted in a giant sack and subsequent missed field goal. Only then did the ‘almost immaculate’ interception turn the game back to the Saints for the win. What followed was glowing praise for the magnanimity of Foles instead of the obvious criticism of the Saints for not taking the field goal win on second or third down. Instead they settled for a sack and possible loss.
Everybody knows Sir John Templeton said the secret to his investing success was that he almost always “sold too soon”! I bet he would never have settled for a ‘fumble’!

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Farmer Don
Member
Farmer Don

Or, more accurately in the case of the Seahawks last four games, run, run, sack.
Sigh..

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Redcat
Member
Redcat

RRP(P) is predictable – most certainly the cause of fan frustration. “Keep ’em guessing” is the key to almost any reasonably matched competition. It resides in the notions of randomness (reality) and expectation (mine or their’s). Poker players would make good investors if they weren’t also gamblers.

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Rob H.
Member
Rob H.

The best poker players aren’t usually gamblers. For them its all about Expected Value and edge exploitation (See Borgata v. Phil Ivey – https://www.courthousenews.com/wp-content/uploads/2016/12/ivey.pdf ). Most of them won’t bother playing any other games in the casino (as they are all EV negative for the player).

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