The Two Churchills


This is my favorite street art in the world.

It adorns a rail bridge that soars above I-45 in Houston. More than 300,000 cars pass by it every day. It has been modified a couple times by other street artists, but every time it goes back.

It’s a complicated statement, and I suspect people read it different ways. To most, it means to Be Someone Important. To matter. It’s an external way of reading it: to have an impact. To be engaged. To have your contributions to the world, or humanity or some other measure weighed and acknowledged as a net positive. To be known and well-thought of.

There’s another reading that is more internal in perspective: to find the whole person that we are. Not an amalgam of symbols and identities and tribal affiliations, or of words we use to describe those things and hide ourselves behind language. To be a man or woman in full. To be someone.

At this moment I’m a man with complete tranquility…I’ve been a real estate developer for most of my life, and I can tell you that a developer lives with the opposite of tranquility, which is perturbation. You’re perturbed about something all the time. You build your first development, and right away you want to build a bigger one, and you want a bigger house to live in, and if it ain’t in Buckhead, you might as well cut your wrists. Soon’s you got that, you want a plantation, tens of thousands of acres devoted solely to shooting quail, because you know of four or five developers who’ve already got that. And soon’s you get that, you want a place on Sea Island and a Hatteras cruiser and a spread northwest of Buckhead, near the Chattahoochee, where you can ride a horse during the week, when you’re not down at the plantation, plus a ranch in Wyoming, Colorado, or Montana, because truly successful men in Atlanta and New York all got their ranches, and of course now you need a private plane, a big one, too, a jet, a Gulfstream Five, because who’s got the patience and the time and the humility to fly commercially, even to the plantation, much less out to a ranch? What is it you’re looking for in this endless quest? Tranquility. You think if only you can acquire enough worldly goods, enough recognition, enough eminence, you will be free, there’ll be nothing more to worry about, and instead you become a bigger and bigger slave to how you think others are judging you.

— Tom Wolfe, A Man in Full

There is nothing wrong with wanting to Be Someone in the external sense. But it is perilous. When our engagement with our communities and our societies is driven by a desire to have the greatest possible impact on the world, we are prone to competitive behaviors and to seeing competitive behaviors in others. At a time when we are already being forced into a Competitive Game, it isn’t a long road from well-intentioned desire to be known for changing the world to existential defensiveness, where we become slaves to how we think others are judging us, or worse, where we impose that slavery on others.

“He was slightly eccentric. He had very unusual taste but was happy so long as he was doing his own thing.”

 Malcolm Churchill, speaking about his father, Lt. Col Jack Churchill

“I felt as if I were walking with destiny, and that all my past life had been but a preparation for this hour and this trial.

— Winston Churchill

‘Eggsy’ Unwin: ‘To Pee or Not to Pee?’
Harry Hart: That was the headline the day after I defused a dirty bomb in Paris.
Eggsy: ‘Germany: 1, England: 5’
Harry:

Missed that game. I was breaking up an undercover spy ring at the Pentagon.

[Eggsy points at the Charles and Diana wedding cover]

Harry: My first mission. Foiled the assassination of Margaret Thatcher.
Eggsy: Not everybody had thanked you for that one.
Harry: The point is, Eggsy, nobody thanked me for any of them. Front page news and all these occasions are celebrity nonsense. Because it’s the nature of Kingsman that our achievements remain secret. A gentleman’s name should appear in the newspaper only three times: When he’s born, when he marries, and when he dies. And we are, first and foremost, gentlemen.
— Kingsman: The Secret Service (2014)

There were two notable men in the Second World War who bore the surname Churchill. Both were British, and both are famous. I’m sure that you know at least one I’m talking about, but maybe not the other. Both were men in full.

Sir Winston Churchill, Prime Minister of the United Kingdom, is regarded by many historians and other chroniclers of the times as the most indispensable man of the 20th Century. More importantly, he is regarded by me that way. As author, orator, humorist, strategist, motivator and statesman, he was a man from another time at a time when the rush of modernity required exactly that.

The other, Lieutenant-Colonel John Malcolm Thorpe Fleming Churchill, was no relation to the prime minister, but had every bit of the more noteworthy Churchill’s quirky personality. He was a newspaper editor, actor and male model born in Hong Kong who toured Burma on a motorcycle while stationed by the British Army there during the ‘20s. When war broke out again in 1939, he joined the British Expeditionary Forces in France. His tenure in Europe was an eventful one.

THE Churchill wanted to Be Someone. His tongue was only planted partially in cheek when he famously (and somewhat apocryphally) said that history would be kind to him because he intended to write it. He cared deeply about how he was perceived and about his reputation. His speeches were famously rich with evocative language and calculated delivery, and he cultivated a preternatural ability to induce emotional response. At that unique point in time, the stalwart British needed a man who would make himself great to make his nation capable of greatness. To modern sensibilities this carries a whiff of distasteful inauthenticity. Our culture so prizes the trappings of humility that the proud hero who knows he is a hero and plays the role willingly is typically considered to be no hero at all. Sir Winston would have reared back his head in laughter at such a heaping load of tosh.

The OTHER Churchill wanted to Be Someone, too. That someone was Mad Jack. He was a character straight out of a storybook, and not some soft Caldecott Medal-winning heartwarmer. We’re talking one of those German tailor-chopping-off-the-kid’s-thumbs-because-he-wouldn’t-stop-sucking them storybooks. In some of his early action in May 1940, he signaled the attack on a German position at L’Epinette by shooting a barbed arrow from an English longbow into a German sergeant. After joining the Commandos, his first campaign brought him to the shores of Norway, where he jumped out of the landing boat, grabbed his bagpipe and blew The March of the Cameron Men before pulling out a grenade and tossing it at the German position.

Later, he landed in Sicily with his pipes on his back and broadsword in his hand. After that, he moved on to Molina. There, together with a corporal he grabbed for the mission, Churchill captured a German position…along with the 42 Nazi troops manning it. In Yugoslavia he was the last man standing from his unit after heavy mortar fire, and fired every weapon he could find at advancing Germans until he ran out of ammo. What did he do then? Well, obviously, he jumped up, grabbed his pipes and played Will Ye No Come Back Again until he got knocked out by a grenade.

He was captured and escaped. Captured and escaped again. Walked 100 miles to Italy and lived out the rest of his life in peace. No, I’m kidding. He rescued 700 doctors and patients in Palestine, defended a medical convoy from 250 insurgent fighters, did more acting, designed surfboards, built coal-fired riverboats and rode motorcycles throughout the English countryside until he finally decided the world was too boring in 1996.

There’s nothing wrong with wanting to Be Someone like Winston Churchill. I think highly enough of him that I named my firstborn son after him (pictured right). There’s nothing wrong with aspiring to greatness, or with seeking reputation. The desire to have an impact on the world usually comes from a good place.

But in seeking to promote our brands, in our search for greater impact and influence, we are doing a lot of things that are killing our ability to have real dialogue with one another. As we grapple with how to break ourselves out of the Competitive Game we’re being forced into, we must also understand the forces that are keeping us there. Here are some of the ways in which our desire for our small voice to have an impact among 7 billion others is keeping us there instead.

The Principal / Agent Problem in Media

In Fiat Money, Fiat News, Ben discussed how, in the same way that bad money drives good money out of circulation, fake news drives real news out of circulation. Like money, this can manifest itself in two ways: through true counterfeiting of the news itself, or through biased presentations of facts published as advocacy by institutions acting as principals. In other words, fiat news. Some of those institutions are sovereign entities like, say, Russia that have an interest in promoting their interests through both fake and fiat channels. But some, probably most, of those in the business of fiat news are the media outlets themselves.

The media’s indispensable function is its ability to make available information that others do not want disseminated, especially when those others are governments, corporations and other powerful entities and individuals. In this function, journalists act as agents for the public, and do it a significant service. In some cases, that service really changed the world. The intent was to reveal and inform, and the outcome was a shift in the course of history.

This is changing. It has changed. From its historical role as agent, news media has increasingly set itself up as a principal. How? Rather than informing and allowing the dice to fall as they may, the media often now enters the fray with a view on the right outcome for the dice. Most media institutions have the good sense not to include outright lies, of course. But when you have an interest in the outcome of the story rather than its capacity to inform, you end up with fiat news like this, where CNN intentionally cuts off a portion of the video that would ruin the intent of their story, which is very obviously not to inform. You end up with fiat news like this, where you must read 7 paragraphs into a story to discover that a man being executed confessed to raping and murdering a 16-year old girl. Even that fact is couched in dismissive language that is very obviously intended to guide the reader to a salacious conclusion.

It’s not hard to come up with all sorts of explanations for why this is happening, from the consolidating ownership of media outlets, to the democratization of news via cheap internet venues that create a lowest-common-denominator effect, to the infotainment impact of always-on cable news. I think the root cause is more insidious. Through the feedback processes of each of those things and the resultant ways in which journalism is now taught at universities, a very significant portion of those entering the media want to Be Someone like Winston, not Jack. They are becoming journalists because they want to change the world. And so, in setting out to change the world, to borrow from the Washington Post’s insipid masthead postscript (“Democracy dies in darkness!”), they cease to be a light that shines in all dark places, and become instead a hand that guides the light to only those dark places that fit their aims.

Don’t believe me? Just take a look at these responses to a question posed by the Future Journalism Project survey from a couple years ago, which asked “Why did you become a journalist?”

“Soon you find out that you can really make a difference.”
“It can change the world.”
“I’ve always wanted to change the world.”
“I developed a sense of injustice [sic] for the underdog, because the underdog, I felt, was me.”
“I learned that injustice is part of our world, but that need not be a hopeless feeling. Not when you’re a journalist.”

It’s not that these are bad sentiments, or that they’re coming from bad people. Quite the contrary. But when the institutions that are supposed to act in service to the public start taking sides in the public debate through their news practices, even if it comes from a good-hearted place, from a desire to Be Someone, it is a terrible thing. In the same way that our American constitutional experiment is built upon the need for the rule of law despite the theoretical existence of benevolent kings, we should demand a similar standard from our media. When the media acts as principal, they, perhaps more than any other political institution in the world, serve to strengthen the equilibrium of the Competitive Game we are in.

Whataboutism, Grand Narratives and the
Hunt for Hypocrisy

The tribal layperson is guilty, too. The same competitive forces that push us into promoting our views and drowning out those we disagree with when we’re entrusted with impartiality like the media have similar effects on us in our personal lives. After all, if we are to make ourselves and our tribe great, we can do so by defending ourselves or by tearing others down. The most common form  whataboutism tries to do both. It’s a major part of the hunt for hypocrisy that dominates so much of the dialogue of the Competitive Game.

The Soviets made famous and frequent use of it during the Cold War. Václav Havel characterized its most common construction as a debate between two parties:

  1.  Your subway does not operate according to the timetable.
  2.  Well, in your country you lynch blacks.

The basic idea is to transition the discussion of an issue that threatens one’s tribe from a substantive one to a discussion of relative credibility. Sure, you may want to criticize the efficiency of our implementation of state-run, state-owned transportation, but we refuse to even broach the issue with people who still have racism in their country. Or: I don’t need to listen to a Roy Moore argument from the party that defended Bill Clinton. In other words, the tu quoque fallacy has taken the place of most every form of debate that used to be common to our national politic.

For a modern perspective, look at the below from Ben Shapiro, who I think is actually a pretty thoughtful conservative. This was his initial take on the day when the claims that Roy Moore assaulted a 14-year old girl some decades ago came to light:

Now, bear in mind, Shapiro followed this up with a clarifying comment asserting that Moore should step away in shame, full stop. The reality is that there are infinitely worse perpetrators. Paul Krugman, once a legitimate economist (no, really), can now be summoned by sacrificing three unblemished rabbits in a candlelit pentagram and repeatedly chanting “tu quoque” in monotone. But the blurb above is still fascinating in one fell swoop, it accurately explains and decries the problem created by whataboutism, and in doing so uses that as an opportunity to engage in some hypothetical whataboutism of its own. This is how it works:

  1. Someone from our Tribe does or says something dumb or evil.
  2. We see a narrative forming ascribing that dumb or evil thing as a trait of our Tribe.
  3. We are frustrated by the injustice of that, since the other Tribe is way worse on that dimension.
  4. Instead of disavowing that trait in our Tribe without qualification, we say, “Well, what about them and THIS thing they did.”

Sometimes whataboutism isn’t just about trying to assault our opponents and weaken their credibility with outright claims of hypocrisy. Sometimes it’s demanding that every person we debate with follow our priorities of issues, or that they follow the forms we prefer for discussing them. I think you know what I’m talking about, because we see it all the time:

In the rare moments when our political and social dialogue isn’t “Well, what about what your tribe did”, it is often “If you said this, why didn’t you say this?” We are endlessly charitable in assuming that our own philosophies are consistent with our words and actions, but we fill in the gaps for others with far less kindness. If someone engaged in a Competitive Game against us doesn’t condemn an action as quickly as they ought to, if they don’t use the same number of exclamation marks as when they criticized someone else’s actions a month before, if they want to discuss or write about X when much bigger issue Y just happened, if they don’t balance and season every single political or social statement they make with comments on any possible related issue, we attack.

We have no choice, we think. We were destined for this. We have to fight this battle, and we have to win, because it’s not acceptable to be the party that is more associated with this Bad Thing. But when we see every battle as existential, when we seek to purposely dominate others by inserting meaning they never intended, when we search for every hint of hypocrisy to make ourselves great, to Be Someone in the great conversations of our time, we perpetuate the Competitive Game.

‘Collective Munchausen Syndrome’

While the ways in which the Competitive Game drives us to dominate and diminish others through language are perhaps most prevalent, so much of what it means to Be Someone is still locked up in identity. Lebanese-Canadian evolutionary behavioral scientist Gad Saad coined the above expression to describe how people in large social settings have taken to competitions in (usually imagined) victimhood. From Donald Trump complaining about #FakeNews and the mean jokes of the SNL cast, to the sorts of absurd ethnographic intersectionalist ramblings you’ll find coming out of most sociology departments, practically everyone across the sociopolitical spectrum is in on this game. There are few behaviors which are more conducive to maintaining the strong equilibrium of our Competitive Game (and to establishing some strategic dominance within that game) than establishing the strongest victimhood credentials. The reason? Because like the other strategies here, it simultaneously argues that our voice ought to be louder and that other voices ought to be silenced completely. It is a tactic perfectly engineered for this time.

Some will misunderstand my meaning here, I think. It would be stupid to deny that privilege, the word typically used to cast someone as an anti-victim, exists. If you can’t accept that certain birth circumstances make your success and ease of navigating our society easier or harder, you’re not approaching the question seriously. If you can’t accept that certain life experiences will have similar impacts, you’re being obtuse. But there’s a marked difference between (1) recognizing those truly different starting places and working wherever possible to eliminate them within society, on the one hand, and (2) concluding that they constitute a system of oppression that can only be addressed by empowering those who would silence the views of any they would call privileged, on the other. The prevalence of this approach is a nightmare for any hopes of escaping the Competitive Game. The answer to this, as I argue in Gandalf, GZA and Granovetter, is only for a critical mass of citizens and voters to choose to hear all voices, knowing that no individual may be reduced to her privilege or victimhood.

We respond to symbols and events based on millions of experiences, and no one can tell us what they mean to us.

OK. So now what?

Well, in the last three notes on this topic, including this one, I’ve written about a range of things I think we can do to hit escape velocity from the Competitive Game equilibrium.

  1. We can stop treating every issue as existential. (Yes, I’m looking at you, ‘But Gorsuch’ Republicans and ‘Trump is the End of the Republic’ Democrats)
  2. We can stop telling people what they intended by their words and actions.
  3. We can stop allowing people to tell us what we intended by our words and actions.
  4. We can stop looking for hypocrisy everywhere.
  5. We can stop using identity to shut out opinions we don’t like.
  6. We can stop abusing the trust people put in us to represent their interests by promoting our own.

But what else?

For those of us who think about improving civic engagement, who want to be citizens, I have a humble suggestion: stop trying to be Winston Churchill. I recognize that this counsel is likely to be as popular as my advice from Before and After the Storm (i.e. learn to lose). I’m not saying not to be ambitious. I’m saying that instead of identifying strategies for debate and discussion which elevate us while they demean and debase our opponents, instead of making every matter existential, instead of choosing grand rhetoric, instead be the most independent, extraordinary, true version of who you are. 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.

Trust me. If you’ve decided to Be Someone like Mad Jack, you’re going to have an impact. So 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.

And Ben and I would like to hear it. Send us a note at Rusty.Guinn@EpsilonTheory.com and Ben.Hunt@EpsilonTheory.com telling us what else you think we need to commit to as citizens to break this cycle. Let’s continue the dialogue.

PDF Download (Paid Subscription Required): https://www.epsilontheory.com/download/15790/

The Narrative Machine

epsilon-theory-narrative-machine-august-17-2016-clockwork-orange

Alex: There was me, that is Alex, and my three droogs, that is Pete, Georgie, and Dim, and we sat in the Korova Milkbar trying to make up our rassoodocks what to do with the evening. The Korova Milkbar sold milk-plus, milk plus vellocet or synthemesc or drencrom, which is what we were drinking. This would sharpen you up and make you ready for a bit of the old ultra-violence.
“A Clockwork Orange” (1971). Society is a clockwork, with gears constructed of language and guns.

epsilon-theory-narrative-machine-august-17-2016-corbusier

A house is a machine for living in.

Le Corbusier (1887 – 1965), pioneer of modern architecture.

We live our lives inside machines, visible and invisible, tangible and intangible.

epsilon-theory-narrative-machine-august-17-2016-no-mouth-must-scream

HATE. LET ME TELL YOU HOW MUCH I’VE COME TO HATE YOU SINCE I BEGAN TO LIVE. THERE ARE 387.44 MILLION MILES OF PRINTED CIRCUITS IN WAFER THIN LAYERS THAT FILL MY COMPLEX. IF THE WORD HATE WAS ENGRAVED ON EACH NANOANGSTROM OF THOSE HUNDREDS OF MILLIONS OF MILES IT WOULD NOT EQUAL ONE ONE-BILLIONTH OF THE HATE I FEEL FOR HUMANS AT THIS MICRO-INSTANT. HATE. HATE.

― Harlan Ellison, “I Have No Mouth and I Must Scream” (1967). In Ellison’s post-apocalyptic horror, the last five humans on earth live inside a giant omnipotent machine where the only escape is death. It’s The Matrix 30 years before The Matrix was written, and 1,000x nastier.

epsilon-theory-narrative-machine-august-17-2016-norbert-wiener

Mathematics, which most of us see as the most factual of all sciences, constitutes the most colossal metaphor imaginable.

It is easy to make a simple machine which will run toward the light or away from it, and if such machines also contain lights of their own, a number of them together will show complicated forms of social behavior.

Two quotes from Norbert Wiener (1894 – 1964). Wiener received his Ph.D. in mathematics from Harvard at age 17, volunteered to fight in World War I as an enlisted man, but couldn’t get a teaching job at Harvard because he was a Jew. Wiener found a home at MIT, where he became the father of cybernetic theory, aka the mathematics of machine behavior.

epsilon-theory-narrative-machine-august-17-2016-how-economic-machine-works

How does the economy really work?

This simple but not simplistic video by Ray Dalio, Founder of Bridgewater Associates, shows the basic driving forces behind the economy, and explains why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging.

Ray Dalio, “How the Economic Machine Works”. In the three years since Dalio released this short-form film, it has been viewed more than 3 million times.

Machines were the ideal metaphor for the central pornographic fantasy of the nineteenth century, rape followed by gratitude.

Robert Hughes, “The Shock of the New” (1980). A writer’s writer and a critic’s critic. As honest in his self-assessment as his assessment of art and society. It’s a bit uncomfortable, isn’t it? Honesty always is.

epsilon-theory-narrative-machine-august-17-2016-rube-goldberg

Self-operating napkin

Many of the younger generation know my name in a vague way and connect it with grotesque inventions, but don’t believe that I ever existed as a person. They think I am a nonperson, just a name that signifies a tangled web of pipes or wires or strings that suggest machinery.

Rube Goldberg (1883 – 1970)

So, in the interests of survival, they trained themselves to be agreeing machines instead of thinking machines. All their minds had to do was to discover what other people were thinking, and then they thought that, too.

― Kurt Vonnegut, “Breakfast of Champions” (1973). If there’s a better description of modern markets, I have yet to find it. We have become agreeing machines. Because our survival requires it.

epsilon-theory-narrative-machine-august-17-2016-dh-lawrence

For God’s sake, let us be men

not monkeys minding machines

or sitting with our tails curled

while the machine amuses us.

Monkeys with a bland grin on our faces.

D.H. Lawrence (1885 – 1930). Yes. For God’s sake.

epsilon-theory-narrative-machine-august-17-2016-leeuwenhoek

Antonie Van Leeuwenhoek (1632 – 1723), the father of microbiology, alongside a schematic of his microscope and drawings of the “animalcules” he found in a drop of water. Van Leeuwenhoek was a hobbyist lens maker, and he discovered a process for making very small, very high quality glass spheres which provided unparalleled magnification. He never shared his most powerful lenses, nor his manufacturing process, in order to maintain a monopoly on his discoveries. The glass-thread-fusing process died with him and was not rediscovered until 1957, long since supplanted by ground lenses.

epsilon-theory-narrative-machine-august-17-2016-brahe-kepler-war

Copernicus gets all the credit, but his 1543 theory of a heliocentric solar system with circular planetary orbits was a practical dud compared to Ptolemy’s earth-centric theory from 1,400 years earlier. The Copernican model just didn’t work very well. It took better data through new instruments (Tycho Brahe’s observatory) plus better theory through new math (Johannes Kepler’s elliptical orbits) before we finally got it right. But even then, the idea of a heliocentric solar system with elliptical planetary orbits didn’t find popular acceptance until powerful institutions in Northern Europe found it useful to champion this new idea as part of their fight with the Catholic Church and other powerful European institutions.

Modern portfolio theory = Ptolemaic theory. Are powerful institutional investors ready to fight?

Every successful institution, from a marriage to a superhero to a firm to a nation, needs an origin story.

The origin story of arguably the most successful hedge fund institution of the modern world – Bridgewater Associates – is that of Ray Dalio, working out of a small New York apartment in 1975 and publishing a newsletter of “Daily Observations.” The newsletter came first, not the hedge fund, and it was the compelling strength of Dalio’s writings about markets and what he would later term “the Economic Machine” that convinced a few institutional investors to give him some actual capital to invest. The rest, as they say, is history.

In 1975, Dalio struck just the right chord at just the right time with his metaphor of an Economic Machine – the idea that macroeconomic reality across time and place could be understood as a cybernetic system, with rules and principles and behaviors stemming from those rules and principles (essentially, lots and lots of if-then statements and recursive loops, with observable inputs from real-world economic fundamentals). As importantly as being an effective communicator, Dalio was actually right. Bridgewater has translated the metaphor of the Economic Machine into actionable investments for 40 years, with a track record that speaks for itself.

Today I want to propose a new metaphor for the world as it is – a Narrative Machine – where macroeconomic reality is still understood as a cybernetic system, but where the translation of “reality” (all of those economic fundamentals and if-then statements of the Economic Machine) into actual human behaviors and actual investment outcomes takes place within a larger Machine of strategic communication and game playing.

The Narrative Machine isn’t a rejection of the Economic Machine, any more than the theory of relativity rejects Newton’s Laws of Motion. In most places and most times, good old Newtonian physics is all you need to understand the world and take actions to succeed in that world. But there are times and places, like when you’re traveling near the speed of light, where Newtonian physics doesn’t work very well and you need a broader theory – Einsteinian physics – to understand the world and take actions to succeed in that world. A policy-controlled market, like we had in the 1930s and we have again today, is the investment equivalent of traveling near the speed of light. The Economic Machine theory – by which I mean any approach to investing that focuses on tangible macroeconomic fundamentals – just doesn’t work very well in a policy-controlled market. We need an extension of the Economic Machine to succeed in this time and this place, just like the theory of relativity extends Newtonian physics, and that’s what I think the Narrative Machine provides.

Unless you’re an Aristotle or an Einstein, advancement and extension of theory doesn’t just happen by sitting in a room and thinking it up. You need new data. You need better data. You need a new way of looking at the data. Kepler’s idea of elliptical orbits to advance and extend the Copernican theory of a heliocentric solar system couldn’t happen without the new astronomical data provided by Tycho Brahe’s observatory. For a negative example, I think the advancement of germ theory was set back by at least a century because Van Leeuwenhoek refused to share his new technology for looking at microscopic data. But at least astronomy and microbiology have something tangible to look at and measure. How do we SEE the Narrative Machine? How do we observe an invisible network of social interaction? How do we touch the intangible?

For my entire professional career, dating back to my first days as a graduate student and spanning three different vocations and three decades, I’ve been wrestling with that question. I think I caught a small piece of the puzzle with my dissertation and the book that came out of that (Getting to War), and I think that I’ve painted around the edges of the puzzle over the past three years with Epsilon Theory. I was pretty sure that the Narrative Machine was observable if the right Big Data technology could be applied (in the lingo, contextual analysis of affect, meaning, and network connectivity across large pools of unstructured text), but I’ve been involved with Big Data way before anyone called it Big Data, and every time someone claimed to have a solution to this problem it turned out to be far less than meets the eye. On that note, if you enjoy a little dose of schadenfreude (and really, who doesn’t?) do a quick search on Microsoft’s acquisition of Fast Search or, even more shivering, Hewlett Packard’s acquisition of Autonomy, two companies that claimed solutions here. So it was with some trepidation and certainly a healthy skepticism that I started working with Quid, a private company based in San Francisco that has developed a technology for network visualization of unstructured texts.

I think Quid is onto something, in large part because they’re not trying to answer directly the questions I’m asking. Instead, I think they’ve developed a novel process for seeing the invisible world of contextual connections and networks – something analogous to Van Leeuwenhoek’s novel process for seeing the invisible world of microbes – and I’m using their “microscope” to do my own research and answer my own questions. I like that Quid is a tool provider, not a solution provider, so that the analysis here, for better or worse, is my own. On the next few pages I’ll provide an example of some of the research I’m currently doing with the Quid microscope, and I hope it will give you a sense of why I think that we’re getting glimpses of the Narrative Machine with this new instrument.

I’ve written at some length about Brexit and the Narrative that emerged in its immediate aftermath, a Narrative that not only stopped the immediate sell-off in global risk assets in its tracks, but actually reversed the market decline and drove financial asset prices to new highs. To recap, I called Brexit a Bear Stearns event rather than a Lehman event, predicting that creators of Common Knowledge (what game theory calls Missionaries) would successfully characterize the event as an idiosyncratic fluke rather than a systemic risk, exactly as the collapse of Bear Stearns was portrayed in the spring of 2008. In other words, Brexit was NOT a Humpty Dumpty moment, where all the Fed’s horses and all the Fed’s men couldn’t put the egg shell back together again.

Now I have lots of anecdotal evidence of the sort of Narrative creation that I’m hypothesizing here. One of my favorites is a July 13thFinancial Times article titled “Anger at JP Morgan’s ‘Unhelpful’ Brexit Warnings”, where “Senior bankers in London are growing frustrated with JP Morgan Chase’s public warnings that it may cut thousands of jobs in the UK, saying such remarks send an unhelpfully negative message.” Or if I may paraphrase, “The UK government is angry at JP Morgan for not lying about Brexit like they were told to do.” I’ve got a hundred examples like this, examples of a concerted effort by every status quo government and media opinion leader to paint the Brexit vote as a one-off crazy mistake that will probably be reversed and certainly won’t be repeated anywhere else in Europe. But the plural of anecdote is not data, and until now I haven’t an effective instrument to see whether the media data supports what I think is happening.

On the left is a Quid visualization of the clusters and network relationships between the 2,422 Brexit-mentioning articles published by Bloomberg in the 4 weeks prior to the June 23rd vote. On the right is a Quid visualization of the 4,283 such articles published by Bloomberg in the 4 weeks after the vote. This is what the formation of a coherent Narrative looks like. These are snapshots of the Narrative Machine.

epsilon-theory-narrative-machine-august-17-2016-quid-bloomberg-vote

So what are we looking at here? Each dot (or node) represents a single unique article, and the Quid algorithms group nodes into colored clusters based on shared word choice and similar word positioning. If we magnify any of these clusters, in this case a cluster of articles talking about bond-buying and US Treasuries in the pre-vote data, we see that the nodes themselves differ in size according to their connectivity or centrality to the clustering principle, and that there are varying distances and numbers of connections between the nodes, as well. Each node exerts the equivalent of a gravitational pull on every other node, giving the entire structure both the appearance and the substance of a star map. Nodes can be evaluated and displayed on dimensions such as sentiment (green/positive – red/negative), as shown below, and all of these characteristics (distance, connectivity, centrality, etc.) are generated as a structured data set for further, non-visual analysis.

epsilon-theory-narrative-machine-august-17-2016-quid-treasuries

epsilon-theory-narrative-machine-august-17-2016-quid-treasuries-2

Here’s what I think we’re seeing in the “coagulation” of the Bloomberg facet of the Narrative Machine.

epsilon-theory-narrative-machine-august-17-2016-quid-bloomberg-vote

The pre-vote Bloomberg network structure on the left is what a complacent Narrative looks like. The articles are “about” whatever the clustering principle might be, and Brexit is typically a sideways glance, a throwaway line that’s almost always negative in sentiment. On the other hand, the post-vote network structure on the right is what an engaged Narrative looks like, where the articles are “about” Brexit and its impact on the clustering principle. Not only are we seeing a strong Narrative form on the right, but the density of lines and closeness of clusters shows that a similar tone and meaning has taken root across all these clusters. Importantly, it’s a positive tone and meaning that takes shape in the post-vote Narrative, with sentiment scores significantly higher than in the pre-vote snapshot. The sky-will-fall articles are almost all in the pre-vote sample, while the post-vote sample – as early as the Monday after the vote, which is immediately before the market starts to turn – are almost all focused on the non-systemic nature of Brexit, the likelihood of reversal, and the “mistake” that was made here.

The pre- and post-vote evolution of the Brexit Narrative structure is robust within individual Bloomberg clusters and across other major media microphones. Here, for example, is the same bond-buying / US Treasuries cluster in the post-vote Bloomberg data set (different color, but same clustering principle), and in the blow-up you can see how much more coherent and connected it is than the pre-vote cluster.

epsilon-theory-narrative-machine-august-17-2016-treasuries-bloomberg-vote

Below, the top pair of star maps are the 4-week pre-vote and post-vote network visualizations of Brexit-mentioning articles published by Reuters, and the bottom two star maps are samples from all publishers in the Quid database. All of the hypothesized Narrative patterns described above are replicated here.

epsilon-theory-narrative-machine-august-17-2016-reuters-all-sources

Okay, Ben, these diagrams and “star maps” are all very pretty. I get your metaphor of the Narrative Machine, and I get that you’re excited about a new technology that lets you see that invisible machine. But so what? How does all this translate into either actionable investment ideas or a process improvement in managing investment ideas?

When anyone asks this question (and believe me, it’s the question I’ve asked myself in one form or another for 30 years), they’re asking about two things: edge and odds. For anyone who’s trying to beat the dealer (my plug for Edward O. Thorp’s 1962 book that changed everything for me, also retold and expanded in William Poundstone’s brilliant book Fortune’s Formula) … for anyone who’s interested in alpha, this is all that matters: edge and odds. Edge is private information, an insight into the true nature of reality that other game players don’t have. Odds are the probabilistic relationship between risk and reward at any given moment in time. If you have either one of these on your side, then you’ll do well in whatever game you’re playing, if you’re dealt enough hands. If you have both on your side … and I think that a rigorous application of the Narrative Machine generates both edge and an improved assessment of odds … hey, now.

The odds revealed by the Narrative Machine are the odds of a catalyst having a major impact on price (or not). Or in slightly different words, I think that the Narrative Machine can help show us the degree to which future events are “priced-in” by the market. For example, when you’ve got a complacent, all-over-the-place Narrative leading up to a scheduled event like the Brexit vote, then even if my best guess on the voting odds is, say, 60% in favor of “Remain”, I would still place a bet on “Exit” because the Narrative-implied market payoff odds are far better than the breakeven odds of the vote.

The edge that the Narrative Machine generates is an improved reaction to a catalyst once it occurs. To be clear, I don’t think that the Narrative Machine can predict a market shock or catalyst before it happens. It’s not a crystal ball. But it is a real-time window into how the Common Knowledge Game is being constructed and played after an event occurs. For example, when you have a pervasive, systemic-risk-is-off-the-table Narrative created almost immediately following a market shock like the Brexit vote, then I would get long the market even if I believed in my heart-of-hearts (and I do) that there really IS systemic risk posed by everything that’s behind the Brexit vote.

I don’t want to over-sell the degree to which the Narrative Machine has been “weaponized” into an investable alpha source, because there are several critical aspects of network theory that remain to be implemented. Foremost of these is what network theory calls alluvial analysis, or evaluation of how different clusters “flow” into each other and away from each other over time. I’ve included two wonderful illustrations of this concept, both from a 2010 scientific journal article (“Mapping Change in Large Networks” by Martin Rosvall and Carl Bergstrom). I think the Quid technology is pretty good at what network theory calls “significance clustering”, the assignment of individual nodes into similarly colored and positioned groups – essentially a snap shot of the network at a given point in time. What we need now is a map of how those clusters evolve over time, because the meaning or organizing principle of the clusters themselves doesn’t remain constant.

epsilon-theory-narrative-machine-august-17-2016-mapping-change-large-networks-1

Rosvall and Bergstrom illustrate this beautifully in the second diagram here, where a network analysis of scientific journal articles show how neuroscience has become its own “thing” over time. We need the same alluvial maps for market Narrative clusters. I’m on it.

epsilon-theory-narrative-machine-august-17-2016-mapping-change-large-networks-2

So, yes … early days for the Narrative Machine. But, yes … a potential alpha source.

Which leads to an interesting question. If this is a new alpha source – the most valuable thing in the investment world – why am I talking about it? Isn’t this like announcing that you think you’ve found gold in California or the Yukon before you’ve staked a claim?

Good question. There’s some margin of intellectual property safety here because it’s not an easy alpha source to mine, even with cool new technologies like Quid. The internal logic of the Narrative Machine is the logic of strategic interaction (game theory), not the logic of stochastic processes (econometric inference). In plain English, I don’t think you can run a regression analysis of historical media network characteristics against historical market characteristics and get much that will be useful, at least not if you’re after edge and odds. The underlying theory here is Information Theory and the underlying math is the mathematics of entropy, and I’m reasonably confident that we’re not going to see an Excel plug-in for either of those anytime soon.

But yes, someone could “steal” this idea and run with it on their own. To which I say … fine. Better that than being another Van Leeuwenhoek, bogarting his research on his invisible world and setting back the advancement of germ theory and microbiology by a century or more. As in 1648 and 1776 and 1848 and 1917, we live in one of those rare moments in history where ideas are at stake and fundamental theories of the world are in flux. Let’s engage with that, and not hide in the convenient cubbyhole of narrow self-interest or the mentality of an agreeing machine.

We need a new perspective regarding the true nature of our economic and political clockwork, and that’s the real value of the idea of the Narrative Machine.

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/16229/