The Acrobat and the Fly

No, nothing makes sense, nothing seems to fit
I know you’d hit out if you only knew who to hit
And I’d join the movement
If there was one I could believe in.
Yeah, I’d break bread and wine
If there was a church I could receive in,
Cause I need it now
To take the cup
To fill it up, to drink it slow
I can’t let you go
And I must be an acrobat
To talk like this and act like that,
And you can dream, so dream out loud,
And don’t let the bastards grind you down.

— U2, Achtung Baby, “Acrobat” (1991)

It’s no secret that a conscience can sometimes be a pest
It’s no secret ambition bites the nails of success
Every artist is a cannibal, every poet is a thief
All kill their inspiration and sing about their grief
Over love
A man will rise
A man will fall
From the sheer face of love
Like a fly from a wall
It’s no secret at all

— U2, Achtung Baby, “The Fly” (1991)

Maybe because of their popular appeal, or the fact that our society can’t abide a person like Bono with unapologetic earnestness about his beliefs, or because of the band’s retreat into musical weirdness and emergence into arena bombast, U2 has been treated rather uncharitably by modern commentators. But at their best, U2 were mesmerizing. Stylistically, I prefer Unforgettable Fire or War, and for sheer songwriting genius, Joshua Tree remains one of the greatest albums ever recorded.

But where art about making art (e.g., La La Land, Birdman) can sometimes veer toward self-indulgence, Achtung Baby reaches a different kind of peak. It is raw and self-critical, with no attempt at final redemption. I mean, it is melodramatic as all hell, which is kind of the concept of the whole album, but if its arc carries any absolution for the artist, it is that hypocrisy is the universal result of art and not some unique moral failing. Every artist is a cannibal, every poet is a thief.

But in the end, neither the artist’s cannibalism nor the poet’s thievery invalidate their art. You can dream, so dream out loud, and don’t let the bastards grind you down. There’s a narrow lesson in this that goes like, “You can still read Ender’s Game even though Orson Scott Card once ate a Chick-fil-A sandwich.” But there’s a bigger lesson, too: if you go around looking for hypocrisy in your enemies, you’ll always find it. Doing so will always feel good. Doing so will rarely get you closer to truth, beauty or love.

I was recently explaining to a friend and former colleague what I write about on Epsilon Theory. They asked me if it was a behavioral investing blog, and I wasn’t sure how to answer.

In a sense, yes, of course Epsilon Theory is a behavioral investing blog. We believe that humans and the stories they tell heavily influence, and sometimes determine asset prices. And we write about that. But when most people say “behavioral economics” or discuss investment strategies that account for investor behaviors, what they usually mean is “cognitive biases.”  Yes, we write about those things, too.

But except in the way that all human activities are influenced bv the way that our brains evolved to process information, Epsilon Theory isn’t really about cognitive biases. That isn’t because we don’t believe in those biases. Quite the contrary. Instead, it is a recognition that our biased brains are riding on meat puppets that spend most of their time interacting with other meat puppets. Our brains are rarely tasked with drawing conclusions from raw data. Most of the things that matter to us and our lives are social. That means that the stimuli that reach us, the basis for our judgments and opinions, are usually the outputs of other compromised brains, processed through established cultural and social structures.

It is intuitive that understanding and mastering our own biases should mean not only being aware of innate evolutionary impulses, but also understanding how they manifest in social behavior. This is what Ben meant when he wrote about acknowledging our own vulnerabilities to the introduction of memes and Narrative in This is Why We Can’t Have Nice Things. We like to think that we operate from internally coherent, epistemologically sound ethical, social and political frameworks. You don’t. I don’t. We don’t. We’re making it up as we go along and we all know it.

It is rarely possible to divorce ourselves completely from the ways in which our human brains are wired to respond to society that is increasingly aware of the ways in which other human brains are wired to respond. We cannot pretend that it doesn’t change anything that companies like Tesla and Salesforce now seek to foster rabid audiences and stabilize their stock price through targeted social media engagement strategies — what we write about on these pages as Missionary activity. We cannot pretend that it doesn’t change the priors that drive how we build investment portfolios that standing governments consider markets to be utilities for maintaining public order and assent, and actively employ communications strategies to establish Narrative around fiscal, monetary and trade policy.

And so it is that in our investing lives, and in our public, political lives, it is very difficult to refuse to play the game. Ours is a Narrative-driven world, and surviving in it means doing more than understanding how our biology predisposes us to cognitive biases. It means understanding how our engagement with social structures and with one another creates new biases and pitfalls altogether, a kind of special susceptibility to brutal logical fallacies. Many of these are so-called ecological fallacies, discussed in an ET note from 2013 that still reads very well.

Ben wrote recently that the memeification of information — the transformation of Emails into Emails! or Lyme disease into Lyme disease! — is a big part of why we can’t have nice things. I want to suggest to you that it is possible to have nice things again. Real conversations with other people that result in real outcomes. Perhaps even a move back in the direction of Cooperative Games from the Competitive Game we are in today. I argued in my essay from last August that this would require a critical mass of well-intentioned people willing to give up on, to lose, non-existential battles. I also warned that you wouldn’t like my advice. In the interest of providing you with yet more unsolicited advice that you won’t like, allow me to outline the four Competitive Game equilibrium-enforcing strategies I think we must give up if we’re going to make ourselves and our thinking less vulnerable to memes, abstractions, tribalism and Narrative.

Know in advance that in a Competitive Game, each of these four is a dominant strategy. To wit:

  • The People Who Disagree with Me are Hypocrites
  • The People Who Disagree with Me are Stupid
  • The People Who Disagree with Me are Evil
  • The People Who Disagree with Me are Controlled

If you give up using these strategies as I will recommend to you, you will lose. You will lose credibility. You will lose standing. You will lose popularity. People will believe you are losing arguments. People will believe you are less intelligent. People may believe you are less committed to ethics, morality and justice.

Wondering where you can sign up yet? Good. We’re going to lose so much, you’re going to be so sick and tired of #losing.

You’re Too Biased to Measure the Impact of Hypocrisy on Credibility

Before we get too far, however, let’s get one thing out of the way: the people who disagree with you really are hypocrites.

I don’t know the people who disagree with you and I don’t need to know. Hypocrisy has been the human condition since Adam proclaimed his holiness by blaming the apple eating on his wife (I mean, it was kind of her fault, if you think about it). But the game of find-the-hypocrite isn’t really about finding gaps between the behaviors people condemn in others and the actions those people take themselves. We all know those exist, and I hope you came here for meatier arguments than, “We’re all hypocrites, so live and let live, amirite?” No, the game is about how we go about quantifying that gap. Who is the bigger fraud, the bigger phony? It’s also about why we seek out hypocrisy in others.

You might think that this strategy would be played out by first looking for the worst actions and then aligning them with incongruous statements of condemnation. Turns out that isn’t exactly the case. Four Yale researchers in psychology published a fascinating study in 2017 on this topic. It’s a well-written, very digestible bit of research based on cleverly formulated questions. A rarity for such papers, I recommend reading the whole thing. It holds a few interesting insights:

  • People attribute more moral value to condemnations of bad acts than to claims of good acts.
  • People will forgive admitted actions that don’t jive with values, but they won’t forgive bad acts that conflict with condemnations of bad acts.

In other words, what people hate about hypocrisy isn’t the immoral act, or even the gap between values and actions. It’s the intentionally false signal from moralizing about the act. And while the paper doesn’t suggest this directly, it is my belief that this aversion is one reason why excessively strong signaling or moral condemnation, when coupled with even suspicions that someone may be acting in conflict with those signals, is so distasteful to many of us. You’ve heard of virtue signaling, I presume.

The gulf between a false signal and simple conflict between values and action may seem like a distinction without a difference, but it isn’t. It matters that our anger about hypocrisy is not the response to a moral failure, but to a failure in ideological signaling. That means that it is an opportunity to assault the credibility of those signaling.

It just so happens, of course, that credibility is one of the most important social signals we send, and one of the ones that matters most in Narrative-driven political, financial and other social and civic markets. The mechanisms of credibility within social capital are so pivotal to influence, wealth generation, capital formation, new lead generation and popularity in general that signaling “I am a credible person” becomes for many of us an objective unto itself. We may complain about Missionaries and their attempts to influence us, but we would all be Missionaries in a heartbeat if we could. For those who have read my piece exhorting us to Make America Good Again (and to stop worrying about being great), you won’t be surprised to learn where I come out on this issue. Those who have built on the sands of cringeworthy credibility signaling may come to a different conclusion.

One of our most potent weapons for winning the credibility game — or so we perceive — is seeking out and identifying hypocrisy in others. We are attracted to assaulting hypocrisy for two reasons. First, it acts as a credibility signal for us. It tells others that we are players in the great game. It tells others that we care about logical consistency and other Good Things. Second, it acts as a credibility reducer for our opponent. It challenges and reduces their believability and standing, and seeks to insinuate that they care less about intellectual honesty and logical and moral consistency. In effect, it is a force multiplier for our arguments, because once we establish that another party has made hypocritical statements, we can summon that spectre again and again to relieve us of the need to dispute further arguments on their merits.

There’s just one problem with this: we are hopelessly prone to bias in our assessments of others’ hypocrisy. Why? Because our anger about hypocrisy doesn’t begin with systematic, objective observation of moral failures or flawed reasoning under our value system. It begins with our selective observation of moral, philosophical or intellectual condemnations made by others — and guess what? We tend to pay a little more attention when someone condemns someone we like or something we believe in. In other words, when someone expresses a criticism of us, our friends, our allies and their behaviors or actions, we are simultaneously inspired to diminish that person’s credibility to protect our ego, and to search for actions that conflict with their condemnation. It’s like handing a three-year old a club and telling him that other boy over there took his favorite toy.

It’s an overwhelming bias that seems so obvious and non-partisan in its pervasiveness when you step back to view it with as much dispassion as any of us can muster. It’s why the political right quickly finds every example of a preening Hollywood numbskull moralizing about some progressive social justice issue right before they end up in TMZ for abetting the abuse of young actors and actresses.  It’s why the political left is lying in wait for any Bible-thumping family values Republican politician to get caught in an ethics scandal. It’s why there are millions of people still penning gotcha pieces on the hypocrisy of Bill Clinton supporters who criticized the moral failings of Donald Trump and why millions of people are still writing pieces on the hypocrisy of Donald Trump supporters who had criticized the moral failings of Bill Clinton. Claims of hypocrisy aren’t about morality. Claims of hypocrisy are about ideology.

But Hypocrisy! the meme isn’t about either of those things. It’s about credibility. And Hypocrisy! the meme is warm, wet garbage. In those rare moments when we are honest with ourselves, we know that the reason we accuse others of hypocrisy rarely has anything to do with a good-faith belief that it justifies devaluation of their opinions or arguments which would often stand on their own merits. Likewise, research tells us it has next to nothing to do with any moral objection on our part. No, we do it because we know that those we disagree with will use this same technique at every opportunity to devalue us and those we agree with. We know that not responding in kind makes us vulnerable.

I saw a lovely anecdote recently from Ethics and Public Policy Center fellow Pascal-Emmanuel Gobry recently, which expresses a similar idea somewhat more succinctly:

My high school best friend’s dad was one of the most talented jazz guitarists of his generation. When my friend was a kid, he asked his dad if he could teach him to play guitar. The dad was of course thrilled. “I’d love nothing more in the world, he said. But first, you’ll have to learn music notation and music theory and chords. Then I’ll teach you to play.”

My friend, being a wiseass, retorted, “Paul McCartney never learned any of that stuff, and it didn’t stop him.” My friend’s dad, being a wise man, replied, “Yeah, but you’re not Paul McCartney.”

Yeah, in the Bible Jesus calls people broods of vipers and whitewashed tombs. And Paul, and the Prophets, and saints, used salty language. Yes, there are times when such language is called for. But the reality of original sin means the odds of you using this language out of pride overwhelm the odds of using it because of the necessities of speaking love in truth.

You’re not Paul McCartney.

Whatever social structure or biological impulse evolved in us to make us respond the way we do to hypocrisy makes us uniquely unsuited to routinely rely on our detection of it as an indicator of anything other than our own bias. Neither you nor I are Paul McCartney (unless you are Paul McCartney, in which case, hello, thank you for reading and what is the weird chord in the second half of the third verse of “Let It Be” when you sing “Mother Mary” because I’ve been trying to figure out what’s happening there for 20 years).

I should be clear about the narrow point I am making, and the point I am certainly not making. From a moral and ethical perspective, there is no particular reason why being biased should prevent us from holding one another accountable for dishonesty, hypocrisy and other flaws. If we only spoke up about injustice and error when we had no dog in the fight, we would comprise an ugly society indeed. But I hope that you can see the difference between the impact of bias on the justifiable use of it as an argumentation technique and the justifiable reference to it in good faith efforts to improve our own behavior or of those who we love, trust and want to grow us with as humans.

Being a Hypocrite Doesn’t Make You Wrong

Even if we can play a mean left-handed bass and believe that we are capable of being even-handed in using accusations of hypocrisy as an element of our political and social engagement, it doesn’t take long to recognize that doing so is frequently counterproductive to the whole point of that engagement in the first place. It’s pretty simple. If what you care about is being considered right and winning those arguments, then the hypocrisy! meme is the right tool for the job. If your objective is to get to a better policy or portfolio outcome, then it isn’t.

The next time you’re looking to bring this tool out in an argument or disagreement, ask yourself: does this person’s false signaling really devalue the argument he or she is making? The data he or she is using to support it? Or is it just a tool I would use to discredit this person so that I don’t have to bother with the whole debate? It’s a bad, biased heuristic.

Consider Warren Buffett, the investing world’s moralizer-in-chief. Here he is on leverage.

Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

Here he is in 2003 on derivatives:

No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, “Ignorance more frequently begets confidence than does knowledge.”

Guess who sold protection on a bunch of munis starting in 2007, not entirely different in scope, although admittedly in scale, from similar trades that sunk AIG around the same time? Guess who, according to research from AQR, has historically generated his returns through effective leverage of 1.6-to-1?

For someone like me, who is convinced that randomness would almost certainly produce a Buffett or two through sheer chance rather than skill, applying the hypocrisy! meme is tempting. I am envious of his reputation, and I hold the good-faith belief that people who follow what Buffett does are focusing on things that don’t matter. I believe that the people who follow what he says about index funds place too much emphasis on costs and too little emphasis on getting the right level and sources of investment risk. It is so easy for me to justify why it isn’t just correct, it’s the right and moral thing to do to throw this guy under the bus for hypocrisy, to try to reduce his influence.

Except he really is an incredibly thoughtful investor with innumerable traits I wish I had, wisdom our world would be worse without, and perhaps the keenest insight into the role of temperament in the success of the investor we’ve seen in the last 50 years. The Competitive Game strategy says to seek to diminish him — to make ourselves the Fly. To kill our inspiration to sing about our grief.

But that’s just the meme talking. The fact that Buffett’s views on leverage and derivatives are insanely hypocritical don’t change the fact that he has a tremendous amount of investment wisdom to share.

Letting Ourselves Off the Hook

Maybe the worst harm this tick has in store for us, however, is the doubt it sows in us. You and I are both hypocrites. There’s a fine balance between internalizing the moral importance of honesty, consistency and forthrightness on the one hand, and not internalizing the hypocrisy! meme in ways that would cause us not to champion causes and values we believe in simply because we know we can’t live up to them on the other. This is a real danger.

In many cases, our hypocrisy is just growth. When I was 23, I put myself at odds with some genuinely nice and thoughtful people I worked with and for. Why? Because I was an arrogant ass who knew that no one could build and code a model as quickly and efficiently as I could, and because I knew that my skills in this area were creating all the company’s value. Except that wasn’t true. Of course it wasn’t true. I was a stupid kid with no concept of the value of different people and skills. Should I let this moral failure keep me from teaching young analysts today that modeling is a commodity skill? That their real value in an organization will come from cultivating trust, honing temperament, identifying business drivers that matter and becoming better communicators?

In some cases, what looks like hypocrisy is just the reality of a world of contradictions. I’ve written and, yes, moralized about the things investors waste time on, and the things they should focus on more. In these pages, I’ve condemned bad behaviors, like focusing too much time on picking stocks, on picking funds, on fees over other costs. And yet, like many who agree with me on these topics, I still spend far too much time doing each. I’ve spent days trying to figure out if my largely systematic framework for selecting U.S. stocks for our wealth management business is missing something on consumer brands. I’ve spent more time thinking about General Mills and Colgate-Palmolive than I have about things that I know will have greater long-term impact on financial markets and investor outcomes. But I know that these things are important to my clients, too. I know that it matters to them to understand what they own, and why, in a very qualitative sense. And if it matters to them, it matters to me. The hypocrisy that seems so clear in others is not always so cut and dry when we apply it to ourselves with all the details. Our life and work are complicated.

We are complicated, too. Today I relish the trappings of my Texas identity, but it wasn’t always that way. It took me five seconds to decide where I would go to college when the opportunity to escape a small town in southeast Texas presented itself more than 20 years ago. While I can’t imagine harboring that sentiment now, there’s a part of me that can’t figure how much of that refound identity is affectation, a resistance to things I didn’t like about living in the northeast, or an authentic expression of my values. We’re all complicated, conflicted, growing and changing, and there’s no nobility in allowing the hypocrisy! meme to cause us to withdraw from figuring out our own small issues, or helping our communities and societies figure out the big issues.

This isn’t some weird attempt to present hypocrisy as moral, or something we should be more or less prone to forgive or criticize. None of that. It’s awful and you should stamp it out wherever you see it whenever you have the standing with someone to be influential. It is about how you will respond to the tick, the meta-meme of hypocrisy! that seeks to shut off people you would learn from, deepen your falsely held belief in your tribe’s moral superiority, and short-circuit your own brilliance out of false-humble feelings driven by knowledge of your own hypocrisy.

Now because by reason of those daily sins of which I have spoken, it is necessary for you to say, in that daily prayer of cleansing as it were, “Forgive us our debts, as we also forgive our debtors;” what will ye do? Ye have enemies. For who can live on this earth without them? Take heed to yourselves, love them. In no way can thine enemy so hurt thee by his violence, as thou dost hurt thyself if thou love him not… In this he is as thou art: thou hast a soul, and so hath he. Thou hast a body, and so hath he. He is of the same substance as thou art; ye were made both out of the same earth, and quickened by the same Lord. In all this he is as thou art. Acknowledge in him then thy brother.

— Saint Augustine of Hippo, St. Matthew’s Gospel, “Sermon on the Lord’s Prayer”

The most painful realization of all in a world awash with Narrative, of course, is that the people who disagree with us are not especially hypocritical or contradictory. It is that they are our brother. Our sister. Made out of the same earth. And probably every bit as smart, upstanding, independent-minded and, yes, flawed as we are.

When we stop telling lies about why we disagree and start telling this truth, we can grapple with the uncomfortable fact that our brothers and sisters saw the same facts and came to different conclusions. As Narratives force us into ever narrower bands of acceptable views on markets and politics, the speech we must tolerate becomes more uncomfortable, and will feel more extreme. It will also feel more contradictory. Friends, if you would end the Competitive Game, if you would triumph over tribalism, you must learn to tolerate some hypocrisy — in yourself and in others. You must embrace the Acrobat and not the Fly. How?

Dream out loud, and don’t let the bastards grind you down.

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On episode 21 of the Epsilon Theory podcast, Dr. Ben Hunt is joined by Brad McMillan, CFA, CAIA, the chief investment officer at Commonwealth Financial Network®. Brad graciously hosts us at Commonwealth’s headquarters in Waltham, Massachusetts. Ben and Brad talk about their mutual love for Terry Pratchett, narrative causality, the French elections, and how technology is changing the financial advisory business.

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Mailbag: Life in Trumpland

The best part about this job, other than being recognized in random bars by 50-year old financial advisors who are always good to buy me a drink (hey, you take your celebrity where you can), is the correspondence with readers. I began writing Epsilon Theory 3+ years ago from a pretty dark place, and it’s still where I end up a lot of the time. But from the outset I started getting emails from really smart people, truth-seekers all, making their way in this world of mendacity and inauthenticity without succumbing to it, and it’s given me — if not an optimism — then at least the occasional absence of despair about the world my daughters will inherit.

I try to respond to all the notes I receive, but what usually happens is that the really good ones — the ones that require more than a flip answer — end up being marked unread and shunted to the “need response” folder on Outlook, only to die a lingering death of inattention over the following weeks. Ultimately I just mark the entire folder as read and let them pass on to the Great Archive in the sky, as it’s the only way I can live with the guilt. So to all of those Jacobs and Williams of the world … I am truly sorry.

As a partial repentance, if not solution, I’m going to make a regular habit of what I always found to be the most enjoyable part of Bill Simmons’ Sports Guy blog — the reader Mailbag. Geez, I miss the old Bill Simmons. Like Simmons of old, I’ll try to keep it entertaining rather than pedantic, and to that end I’ll sprinkle in some of the haters, as I find them occasionally fun when they’re not threatening rape or murder (Bill Simmons never had to deal with the Zerohedge commentariat). As it happens, I got more than the usual quota of great emails from my most recent note “The Evolution of Competition,” my take on the political and social polarization running rampant in Trumpworld. So without further ado …

I forwarded your note to my better half and she thought it was really good, BUT…

from your note: “…If you cooperate in a game of Chicken — i.e., you’re driving your tractor straight on at Kevin Bacon’s pick-up truck and you veer off from the looming crash…”

She needs you to rethink some things, and after she explained the facts to me, I thought it might be important for you (although I’m sure you have already heard from many of your 40-something-female-readers-who-have-watched-Footloose-multiple times!)

  1. They were BOTH on tractors.
  2. And this is the bender for your game analysis. Kevin Bacon tried and FAILED to jump off his tractor. He was FOILED by his shoe lace and thus WON the game of chicken BY ACCIDENT. Very interesting.

I’m gonna need some follow up from you on this one Ben, as she is leaning on me pretty hard to let you know that you’re not done with this Footloose incident!!


A lot of games of Chicken are won by accidental (or intentional) incompetence. For example, if I see that Kevin Bacon is stuck on his tractor and can’t possibly jump off even if he wanted to, then my only rational choice … the only way to avoid MY death in a crash … is to jump off my tractor. By limiting his competence and degrees of freedom, Kevin Bacon paradoxically becomes more powerful in a game of Chicken.

A variation on this theme is to convince your opponent that you’re not necessarily powerless to decide otherwise, but that you’re so mentally incompetent that you really don’t care if you live or die. Henry Kissinger and Richard Nixon famously played this “madman” strategy (in the form of being crazy enough to launch nukes even if it drew China and USSR into war) to get the North Vietnamese government to attend peace talks in Paris.

 Good piece. Decency and ability to stay above the fray is almost non-existent at this point. Not to be nerdy but I keep replaying the Star Wars quote “So this is how liberty dies – with thunderous applause” (About the only good thing that came from those terrible prequels.).

– Victoria

That’s a good quote! As for the quality of the prequels … I mean, obviously you’re right. I can’t remember any of the Episode 1-3 quotes because I hear everything in a Jar-Jar Binks accent. And the acting … well, let’s be generous and call it Godfather 3 Sofia Coppola-esque. But isn’t it time for a bit of perspective on the entire canon? In meme terms, I think “Star Wars” is the functional equivalent of “Ronald Reagan”, in that both have evolved into expressions of almost pure nostalgia. Fun fact: the word “nostalgia” derives from the Greek nostos (return home) and algos (pain). There’s a wincing quality to so much about the Star Wars movies and the Reagan Administration, but it’s completely trumped by some sort of warm fuzzy emotional balm. I’d like to figure out how to bottle that.

 Nice job. Were you pro Gaga or anti Gaga? Your readers deserve to know!


I was anti-Gaga in the ET note “American Hustle” for what I saw as pretty profound inauthenticity around the U.S. election. But how about that SuperBowl™ performance, huh? I thought that was great. Seriously. And with game theoretic implications, too …

During the halftime show of the Super Bowl on FOX, after Lady Gaga’s performance, they went back to the studio and had someone ready to report on what the reaction to the halftime show was on social media. My immediate reaction – 1) How could I possibly trust FOX to give me an accurate take on the social media reaction to the halftime show that they just broadcast? 2) I don’t care. 3) Doesn’t anyone who does care (and is therefore already monitoring social media for themselves) already know?


Actually, I thought Fox was pretty brilliant in their coverage of Lady Gaga’s halftime show. They assumed that we were incapable of determining for ourselves whether or not it was a good performance until we were told by others (Missionaries in game theory terms) whether or not it was a good show. And they’re absolutely right. A classic example of The Common Knowledge Game in action.

 I am a pretty competitive person/athlete and always lost at Chicken versus my brother. I am still trying to repair the Chicken self-image.

– Kim

Me, too, and to my younger brother, to boot. Although I would bet he would say the same thing about me. It’s amazing how these social competitions in a Chicken format stick with us for a lifetime.

 Spot on. I’m doing daily battle with my family and best friends back home, and getting nowhere.


It’s the “back home” aspect of all this that’s particularly difficult on our social lives, I think. Geography has simultaneously become irrelevant with modern communication technology and the only thing that matters with the balkanization of economic opportunity.

 This guy is just butt hurt that Trump won. He is a delusional asshole. He thinks that what his side did was about is cooperation.

His idea of cooperation is me giving him half of my money and my wife giving him a *** while my kids wash his car.

In exchange he will offer my family some constructive criticism on how we can become better human beings.

Suddenly when I grab him by the back of his neck and throw him out of my house he finds my behavior objectionable.

What a douche.

– BarkingCat

Ah, the haters. I included this note because I think there’s an important point here. The meaning of Trump to BarkingCat is personal empowerment. Trump changes the story that this guy tells himself about himself, which is the most important story that we have!

In the mind’s eye of BarkingCat, he is now the powerful one, able to grab me by the scruff of my neck and physically throw me out of his house. It doesn’t matter that, in reality, the Takers and the Powerful are now more in control of his house and his real-world life than ever before. I mean, if you think we lived in a world of, by, and for the 1% before (and we did), you ain’t seen nothing yet. But the real-world impact of Trump isn’t what drives behavior. In politics as in markets, it’s always the story that drives our behavior, particularly the story we tell ourselves about ourselves.

You know where I see this phenomenon a lot? In SEC college football. Some of the most virulent (and I mean that word in its clinical sense) fans of Alabama football have zero connection to the University of Alabama other than that they live in the same state as Nick Saban. But, like BarkingCat, they derive enormous personal empowerment and psychic benefit from a totemic connection to a powerful man. Roll Tide!

The premise is that all cooperation habits we’ve developed, our ways of getting along, are breaking down to be replaced purely with competition. If the premise were right, the rest of his argument might well follow. But the premise is wrong.

Trump found a NEW COALITION. He often speaks of the LOVE at his events. Trumpsters may compete in business, but basically we like each other and won’t tend to be all that cut-throat, most of us anyway. (Trump himself is more cut-throat than most of us. Look at how he’s dumped Giuliani and Christie now that he’s done with them. But that’s beside the point.) Within this new coalition, we are able to slough off some of the strange bedfellows we were put with before, to treat them in a more arms-length way. We have an alternative to the old coalitions the social engineers had cornered us into.

– Artichoke

Coalitions are constantly reconfiguring themselves on the basis of shared interests. There are millions of people who have always despised the right but lo, in the past few months the right has popped up as the counterculture. It’s now anti war and pro labour. It’s all about free speech and diversity of thought. The left is now the establishment and is making a big effort to crack down on the counter culture that it brands as racist and attacks with violent thugs.

Amazing really, the right is now about peace love and togetherness and the left is angry decisive and hatefilled.

I don’t hate my colleagues for having opposed Trump, but I dare not say I supported him or they would hate and ostracise me. That’s why Trump is always speaking about love. Because hate is on the other side.

Strange days. Everything is the opposite of what it’s supposed to be. People need to understand this.

– Beijing Expat

I gotta say, this was the most unexpected thread in the comments and email I received, this notion that there’s all this Love with a capital L embedded in Trump-the-man and Trump-the-movement.

I think what’s going on here is an expression of the same emotions that you see in oral histories of any protest movement. Why do people go march in the streets and stop traffic and maybe break some windows (literally or figuratively)? Because it’s FUN. There’s an enormous sense of camaraderie and excitement derived from sticking it to the Man, whether you’re in Berkeley, California in 1968 or Mobile, Alabama in 2016.

Just don’t confuse tribal attachment with Love. Because your tribal leaders, whether you’re on the left, the right, or wherever, will eventually sell you down the river. Every single time.  

I think he was trying not to offend and that’s why he could never fully approach his point. He just took swats and glancing blows. I find it offensive.

– IndyPat

Blood alone turns the wheels of history.

– IndyPat

Two brief comments from a guy who believes that “blood alone turns the wheels of history” but is offended by my tone in an email.

You’re delusional. You need to read, “The Art Of The Deal,” and “The Art Of The Comeback” to get better informed about Trump. CNN and MSNBC are not good sources. For instance Trump fixed the Wollman Rink in NY City after the city gov’t had screwed it up for 6 years at a cost of $9M in tax payer money. Trump VOLUNTEERED to fix it. He did it under schedule (given 6 months) and budget (given $3M). I would call that a win-win. It is more than a win-win, it was a game changer that traditional accounting methods don’t credit Trump with the true impact. Traditional methods would say he saved a mere $0.6M (his cost was $2.4M) because traditional accounting does not include the $9M wasted by the gov’t not to mention the 6 years.

You no doubt see that somehow as a win-lose or a lose-lose. The Trump approach broke the status quo paradigm that just was not working and was very expensive. He brings that same game to the stifling U.S. gov’t bureaucracies and international agreements. I anticipate change in those areas that you can’t begin to comprehend and with your poor accounting practices of what counts as win and what counts as a lose you are way off base. Apparently you think it is a win-win to run the U.S. international policies through the Clinton Foundation where motives are clearly self-serving rather than out in the open via the State Dept.

The depth of your ignorance on the Trump business style is breathtaking. Your assumptions on how well the system was working pre-Trump is much like Mayor Koch who screwed up the Wollman Rink for 6 years. Koch thought things were just fine. And your assumptions on Trump being win-lose or lose-lose are equally naive.

– Anonymous

The Wollman Rink. Ed Koch. Hilarious. This guy “knows” Trump by reading Trump’s books, and thinks I’m ill-informed.

 I’ve been reading Epsilon Theory for a while now. I find your material thoughtful, often brilliant, always entertaining.

Recently you have put forth a few ideas that to me seem biased and confuse cause and effect.

I think that the idea that this country has up to now been playing a politically cooperative game is quite simply wrong. For the last two presidencies there has been virtually no cooperation between the two political parties. Neither party has any inclination nor any motivation to play a politically cooperative game. This is what must be changed and this is the challenge for America. But I digress.

I believe that there are two distinct and opposing views for the future direction of the country. Let’s call these agendas. One agenda is to move toward a “Great Society”, now probably more correctly termed a “Global Great Society”. The other agenda is to remain an autonomous country with the personal freedoms, rights, and responsibilities we have always expected as Americans.

Trump is not a great divider who somehow maneuvered his way to the presidency and is ushering in political non-cooperation. Trump is the effect, the pushback against one agenda by voters with a different agenda who have come to realize that this is indeed a non-cooperative political game. The election of Trump simply illustrates that voters have come to realize that we are already deeply entrenched in a non-cooperative political game.

– Bill

I get your point, but I disagree. Trump didn’t just stumble onto a non-cooperative political game in full bloom. He’s a remarkable political entrepreneur who recognized, accelerated, and transformed the zeitgeist. I mean, look at the Republican primary. This wasn’t some grand struggle between globalist Great Society oligarchs and hardscrabble defenders of liberty (and if it were, you’ll have a hard time convincing me that Trump is the latter rather than the former). Trump rolled the field of fellow Republicans because he played the game differently. His gameplay was always Defect and never Cooperate, which was totally new, totally effective, and totally irreversible. It’s like Napoleon (another remarkable political entrepreneur) and the levée en masse (mass conscription). Once Napoleon invented the draft and put a couple of hundred thousand troops on the battlefield, every other country had to follow suit, transforming the game of international conflict forever. One thing I’ve noticed among both Trump haters and Trump lovers: they usually don’t give him enough credit. He’s more than a symptom.

You should go back to writing about investments. Your biases continue to direct you.

The move from Cooperation to Competition (in this case) has proceeded from two conservative realizations:

  1. That the veneer of cooperation maintained by liberals is false; that the Left has been competing all along. ‘Nice’, cooperative public television is about as even-handed as Pol Pot, and just as willing to dictate your life.
  2. That there CANNOT be a balance in benefits arising from the arrangement of cooperation, because of fundamentally different values.

Trump is their big F U to the perceived hypocrisy of continuing to cooperate (even if they don’t like him).

Many Europeans are arriving at the same conclusion.

– Anonymous

What was the pro-Trump “conservative realization” in the Republican primary? That he was tougher on conservative shibboleths like public television or Planned Parenthood or Great Society programs than his competitors? Please. This notion that Donald Trump is somehow the great flowering of the conservative movement is just pure revisionist hokum.

I’ve enjoyed reading your column over the years but you are seriously disappointing me lately. I can understand your left leanings make it difficult to grasp how at least one half of your readers feel, but to put something in writing as vile as the statement “So, for example, if you voted for Clinton as an affirmation of a personal identity that rejects the racism and sexism you see in Trump, your natural assumption is going to be that anyone who voted for Trump similarly did so as an affirmation of a personal identity, but one that accepts racism and sexism.”, is totally uncalled for and extremely offensive not just to President Trump, but to all of us who supported a change from the Elite Class we’ve been forced to stomach for the past 20 years.

I’m sorry you’re not comfortable now. Welcome to my world for the past twenty years.

– John

You’ve totally missed my point. I wrote this note because I am so effin’ tired of being called a racist or a sexist because I don’t think that Donald Trump is evil incarnate. There are MILLIONS of people in this country who think that I am a bad human being because I don’t hate Trump. And by the same token, there are MILLIONS of people in this country who think that I am a bad human being because I don’t think that Hillary Clinton is evil incarnate, either. That’s why I wrote this note.

I didn’t vote for Trump (nor Clinton … left prez line blank) because I think he takes us from the frying pan into the fire. But I do understand that we’ve been in a frying pan for 24+ years.

I don’t see Hitler.

– Brendan

Neither do I. I think Trump is a narcissist and an ass, not a Fascist. Like most people in the financial services world, I deal with narcissists and asses every day … they’re not Hitler clones because the only thing they’re really true-believers about is their own self-aggrandizement. Steve Bannon? There’s more than a little Big Lie and Fascism in his self-avowed “economic nationalism”, but he can’t front the band, so he’s no Hitler. Elizabeth Warren? I dunno. More the Madame Defarge type, knitting by the guillotines. Mark Zuckerberg, though, now embarked on his ‘listening tour” through America? Bears watching. Yes, I went there. Big Brother tech plus smiley-face billionaires scare me that much.

There is an old saying that really applies these days. I believe it was from Benjamin Franklin or my mother. “Believe none of what you hear, and only half of what you see.” Unfortunately people don’t let facts get in the way of the Truth.

– Anonymous

Agreed (although I thought it was MY mother).

Your note describes what happens to society, including the best educated, when philosophy disappears. And when 95 million+ people are boycotting the workforce.

Too much time on your hands? Then pay attention to Drudge, ZeroHedge, Huffington Post, etc. Or Ashley Judd, Madonna, Rosie O’Donnell. Or Hannity. Supposedly smart, educated people react what’s going on as if they are watching pro wrestling.

No schooling in or acquaintance with philosophy? Then react to all these mindless, emotion-laden messages like a puppet on a string, unable to resist any impulse to react or comment. We should be dropping Meditations from helicopters.

– Orville

Helicopter Meditations instead of helicopter money? Yes, please.

Once again another good piece. I have seen the same in myself, the question I’ve been thinking is how does it end? or what comes next? You used car crashes, good analogy. I hope society is not using Takata airbags.

– Anonymous

I’m totally stealing that line.

Well done on a tough topic. I am reminded a bit of the religious discussion, where you believe that anyone who doesn’t agree with you burns in hell forever. Somehow, we have to find a way to discuss “my truth” while recognizing “your truth”.


Yes, there are clear parallels between what we’re experiencing as a society today and any religious schism. Not sure what the equivalent of the Peace of Westphalia will be for us, but that’s what it’s going to take for us to get out of this.

Started re-reading Virus of the Mind at 4:00 this am. Some dangerous “memes” are replicating themselves.

– Mike

Virus of the Mind is a 2011 collection of essays on memes, including (perhaps confusingly) the Richard Dawkins essay, “Viruses of the Mind,” that pretty much started the conversation. Required reading.

It seems to me that the Trump phenomena (there are many) are moving us towards the kind of crisis outcome that Neil Howe and William Strauss write about in The Fourth Turning. We only have to wait till the mid-20’s to see the rebuilding of the national and international organizations to allow the next flourishing. Sadly, the crisis usually culminates in a war – if it has to happen this time, let’s hope it is a small one with no big bangs!

– Neil

I get more questions and comments about The Fourth Turning than any other book. It’s also required reading, although I remain … not suspicious … but unconvinced that demographic and super-cyclical transitions are investable ideas in any meaningful way. Meaningful to me, anyway.

Something I wanted to share about Trump. He is the antithesis of orthodoxy. And this makes him dangerous given that all issues seem to be structured as binary choices between two different orthodoxies. Globalist v. Nationalist, Progressive v. Conservative, Anti-this v. Pro-that. It’s everywhere. But what I realized is that the Republican v. Democrat is not one of them. They are the same in fact.

– Sal

Spot on. I’ve written about this polarization and shift in political identification in a couple of notes. It’s not so much the growing distance between the median Democrat and the median Republican that’s worrisome for stable policy in a two-party system. It’s that voter self-identification is becoming more and more distinct from party self-identification, so that “Democrat” or “Republican” is no longer shorthand for a wide range of behaviors. The last time we saw this (and not just in the U.S.) was in the 1930s.

About 10 days ago, marveling and laughing at how everyone back home was going absolutely nuts, I had a Eureka moment. I realized that Trump viewed his Presidency as the biggest and most complicated turn-around in the history of the world. He is following the turn-around playbook exactly. Looking at what he does and how he does it, using this prism, everything falls into a logical pattern. It even becomes logically predictable.

– Anonymous

Interesting piece. I think you may be missing a subtlety with regards to Trump’s negotiating style. He tends to be a “hard out of the gate” negotiator. His process is to push the other side to the mental and emotional breaking point, then back off to assure a “deal” gets done. He has a certain intuitive ability to find out exactly how far he can push, then back off. He’s been operating this way for almost 50 yrs. in the most competitive real estate environment in the world – NYC. It’s not a game of chicken where he doesn’t care if the deal gets done, then he walks away leaving the other party so pissed-off that they refuse to ever do business with him again. If that were true, he would have pissed off everyone in NYC by now and would never get a deal done. His brash outward appearance is quite paradoxical when compared to his pragmatism. He is not a very ideological person. His ultimate goal in any transaction is to maximize efficiency. To make that omelet, you gotta break a few eggs

Now does that make him a likeable character? Hell no! I personally don’t like the guy, but I believe he is the right agent of change that was needed for the current context. In any complex dynamic system, change is only born out of extremes. We were at a point in time where the extreme of Globalism had run its course. As always happens, a counter-vailing force was introduced to send the persistence of Globalism into a bout of turbulence. Hopefully this leads to a new trend in the opposite direction, but that hasn’t materialized yet. We will deal with some anti-persistence (turbulence) for a while. That’s a good thing. Change (turbulence) is messy both intellectually and emotionally, but it’s a necessary pain we must transcend. As the turbulence subsides, a new trend will emerge and gain some of its own persistence. It’s a wild ride living on this rock hurtling 1,000 mph through space. Best bet is to hold on, and try to enjoy the ride/view.

– Mark

These are both smart emails. I put them together because they touch on the run-America-like-a-business meme. I get the appeal of that idea, and I think these readers are correct in that this is a big part of the story that Trump tells himself. I’m also sure that his negotiation style is very effective in business, particularly the NY real estate business (as Mark says, it’s straight out of a Roger Fisher “Getting to Yes” class). But I think it’s both an ineffective and highly damaging negotiation style when it comes to Madisonian political institutions, particularly when coupled with Big Brother tech and enormous concentrations of private wealth. That’s my big problem with Trump, and that’s what I mean when I say that he breaks us.

I suppose that the men we have elected as President are generally representative of our Zeitgeist. It may be at times that spirit is not very strong or clearly defined resulting in a sort of caretaker President. At other times, like now, it is pretty strong and sharply defined. Trump is a very real individual occupying the White House — and Mar a Lago, Trump Tower and whatnot. He also is the result of some sort of cumulative consensus about what matters, what should be done and how it should be done. This Zeitgeist concerns me more than the man because it amplifies him and possibly would continue on even if he doesn’t.

My fund of historic knowledge isn’t sufficient, but it is all I have. I’ve thought about how other so called developed nations that marched into totalitarianism moved back to more civil and pluralistic states. The only examples I’ve come up with where this happened peacefully are Spain and Portugal. And that took about six decades. Some might suggest Burma but I think that jury is still having lunch. Otherwise it seems that a comprehensive social collapse usually brought about by international or civil war has been required to exhaust the spirit of the totalitarian ghost and thoroughly discredit the ideas it promulgated. Germany, Italy and England (Cromwell) come to mind. Most of the others are still totalitarian.

I hope my paucity of historic information has obscured many shining examples of societies that awoke from their paranoid dreams of universal competition to remember the benefits of being nice and cooperative. I hope I’ve dramatically exaggerated the fix we are in. I hope…..

– Tom

I don’t think you’ve exaggerated the fix we’re in. Not at all. I think we’re more likely to see 21st century totalitarianism delivered with a smiley-face than a jackboot, but only because the technology of persuasion is that good. And I also think that the ultimate winners in this struggle for control is less likely to be Trump and his apologists than whoever leads the Thermidorian Reaction against Trump.

I have increased my conversation-avoidance skills (something as a libertarian / monetarists / Classical economics-leaning guy I had to learn to do to live in NYC) since the Trump election. As you note, today, everything is a trip wire.

Many years ago, I realized (1) you very, very rarely change people’s minds even a little bit, (2) I don’t really care that much if I do and (3) even if I did, it would not have any impact on changing anything in the world. Hence, I try not to talk with anyone, but a very small number of people, about, to be honest, anything that means anything as – probably should have started here – I’m tired of arguing (see points 1 – 3 as to why).

Hence, my day to day, which was always a bit of topic avoidance, has been in full-on topic-avoidance mode since the election.

I fear my exhaustion is only going to increase.

– Anonymous

People are quick to take offense (where none was intended) at the slightest indication I am not on board with their political or economic leanings. Not nearly as much “give and take”, but more “take it or leave it”. I find myself having to explain that certain economic/investment principles I hold dear are not an endorsement of Trump (or any political stripe) and that because I happen to eschew identity politics doesn’t make me a lesser human, it just means I hold that certain unintended consequences happen when following certain paths of behavior. Hard to believe that such innocuous sounding phrases can be “trigger words” for those who are seeking redress for slights no matter how small or unintended.

I’ve been called many names by people who either refuse to have rational discussions or refuse to consider views that are alternative to their own. When I explain the situation we are currently in, nationally, in terms of economic consequences (game theory is generally too far out there for the average citizen) and how I am trying to make a buck (no different than under the previous six administrations) for myself and for clients, I’m treated with borderline loathing and disdain.

There is a feral quality to the angst experienced by those who lost in this election, something I’ve not experienced before. Trying to maintain a level head and an even-handed view of the world has become its own challenge. My response has been to start at home (getting things straight with my wife about what a Trump presidency does and does not mean, news media hysteria to the contrary), then work on our circle of friends, all well-educated but deeply biased to the blue side of the ledger, both socially and politically. The experience with our friends was interesting in that they know and like me, personally, but it took a three hour dinner party and some follow up, to finally get through to them that Tweets do not policy make and reactions to same do not make good bases for decisions, economic or otherwise.

Thanks for the lucid and erudite essays. They help more than you know.

– Anonymous

I’ve anonymized these two emails as best I can because they speak for me and, I think, lots of others out there.

The last two lines in your piece, “Know Thyself” and “Treat others as you would have them treat you” are the essential wisdoms from two traditions – Buddhism and Christianity. Buddhism attempts to guide a person seeking a true understanding and relationship with themselves and Christianity seeks to guide people toward a true, healthy relationship with others.

A minister I heard last summer (he was an old Episcopalian who formally taught at Harvard Divinity) lamented that we, our culture, has sunk toward the “morbid pursuit of advantage”. Which I find to be such a brilliant phrase that I have frequently recalled it. That is the Competition Game in a nutshell. Morbid – because it is ultimately deadly. Deadly to the soul and deadly to the culture.


The “morbid pursuit of advantage”. Yep, that’s our zeitgeist.

Thanks for this. It is exactly what I’ve been experiencing and have tried to formulate into words, and the words into actions.

Good lessons for us and our children, and sooner or later we will all be forced to hear it. Like it or not.

They will run and not grow weary, they will walk and not grow faint. Isaiah 40. Keeps me focused on perseverance.


Words into actions. Perseverance. Sounds like a plan.

Thank you for taking the time to write this and share your thoughts. After having read it only once, I don’t know what to say, but I do know what I am going to do. I am going to share this with my 14 year old daughter. I am certain that it will foster a meaningful discussion and teach us both a few things.

– Natalie

As many readers know, I have four daughters. I write Epsilon Theory for them. And now for Natalie’s daughter, too. This is how we keep the darkness at bay. One daughter at a time.

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Essence of Decision


The essence of ultimate decision remains impenetrable to the observer — often, indeed, to the decider himself.

John F. Kennedy (1917 – 1963)


“The Manhattan Projects” by Jonathan Hickman and Nick Pitarra (©Image Comics)

I have found that the best way to give advice to your children is to find out what they want and then advise them to do it.
―Harry Truman (1884 – 1972)

As far as I was concerned, his decision was one of non-interference ­— basically, a decision not to upset the existing plans.
―Lt. Gen. Leslie Groves (1896 – 1970), commanding officer of the Manhattan Project, discussing Truman’s okay to drop atomic weapons on both Hiroshima and Nagasaki.


“Ah,” she cried, “you look so cool!”

Their eyes met, and they stared together at each other, alone in space. With an effort she glanced down at the table.

“You always look so cool,” she repeated.

She had told him that she loved him, and Tom Buchanan saw.

 ― F. Scott Fitzgerald, “The Great Gatsby” (1925)

And that was the end of the party. When Tom Buchanan saw.

Lear: Create her child of spleen, that it may live
And be a thwart disnatur’d torment to her!
Let it stamp wrinkles in her brow of youth,
With cadent tears fret channels in her cheeks,
Turn all her mother’s pains and benefits
To laughter and contempt, that she may feel
How sharper than a serpent’s tooth it is
To have a thankless child!
― William Shakespeare, “King Lear” Act 1 Scene 4 (1606)

Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.

Jon Hilsenrath, “The Great Unraveling: Years of Missteps Fueled Disillusion with the Economy and Washington” (August 26, 2016)


John Hale: Theology, sir, is a fortress; no crack in a fortress may be accounted small.
  Arthur Miller, “The Crucible” (1953)

Few of us can easily surrender our belief that society must somehow make sense. The thought that the State has lost its mind and is punishing so many innocent people is intolerable. And so the evidence has to be internally denied.

The structure of a play is always the story of how the birds came home to roost.

That’s a very good question. I don’t know the answer. But can you tell me the name of a classical Greek shoemaker?

Arthur Miller (1915 – 2005)

That last, one of my all-time favorite quotes, was in response to a shoe manufacturer who asked why Miller’s job should be subsidized while his was not. Miller’s finest accomplishment: when McCarthy and crew forced him to testify in their Communist witch hunt, he refused to name names. Miller was a leftie and a huge ego. And a freedom lover. Imagine that.


Yet each man kills the thing he loves

By each let this be heard

Some do it with a bitter look

Some with a flattering word

The coward does it with a kiss

The brave man with a sword

 ― Oscar Wilde, “The Ballad of Reading Gaol” (1898)

We’ll get the kiss, not the sword. Don’t know when, but it’s going to kill this market that the Fed loves.


In 1969, Graham Allison published an academic paper about the Cuban Missile Crisis, which he turned into a 1971 book called Essence of Decision. That book made Allison’s career. More than that, the book provided a raison d’être for the Kennedy School of Government at Harvard, which — combined with Allison’s fundraising prowess — transformed a sleepy research institute into the most prominent public policy school in the world.


The central idea of Essence of Decision is this: the dominant academic theory to explain the world’s events is a high-level, rational expectations model based on formal economics, a theory that ignores the impact of bureaucratic imperatives and institutional politics. If you look at the Cuban Missile Crisis through all three lenses, however, you get a much better picture of what actually happened in October 1962. In fact, the more you dig into the Cuban Missile Crisis, the more it seems that the actual people involved (on both sides … Allison wrote a follow-up edition in 1999 when Russian archives opened up post-Gorbachev) made their actual decisions based on where they sat (bureaucracy) and where they stood (internal politics), not on some bloodless economic model. Publicly and after the fact, JFK and RFK and all the others mouthed the right words about geopolitical this and macroeconomic that, but when you look at the transcripts of the meetings (Nixon wasn’t the first to tape Oval Office conversations), it’s a totally different story.

Allison’s conclusion: the economic Rational Actor model is a tautology — meaning it is impossible to disprove — but that’s exactly why it doesn’t do you much good if you want to explain what happened or predict what’s next. It’s not that the formal economic models are wrong. By definition and by design, they can never be wrong! It’s that the models are used principally as ex-post rationalizations for decisions that are actually made under far more human, far more social inputs. Any big policy decision — whether it’s to order a naval blockade or an air strike on Cuba, or whether it’s to drop atomic bombs on Hiroshima AND Nagasaki, or whether it’s to raise interest rates in September or December or not at all — is a combination of all three of these perspectives. But for Allison’s money, we’d do better if we focused more on the bureaucratic and political perspectives, less on the rational expectations perspective.

Allison is writing this in 1969! And here we are, almost 50 years later, still consumed by a theology of formal economic models, still convinced that Fed decision-making can be explained or predicted by our armchair analysis of Taylor Rule inputs. From an anthropological perspective, it’s pretty impressive how the high priests of academic economics have expanded their rule. From a human perspective, it’s awfully depressing.

What follows is my analysis of the Fed’s forthcoming decision on interest rates from a bureaucratic and an internal politics perspective. Seen through these lenses, I think they hike. Maybe I’m wrong. These things are always probabilistic shades of gray, never black and white. But what I’m certain about is that the bureaucratic and internal politics perspectives give a different, higher probability of hiking than the rational expectations/modeling perspective. So heads up.

First the bureaucratic perspective.


What I’m calling the bureaucratic perspective, Allison calls the “Organizational Behavior” perspective. His phrase is better. It’s better because entities like the Federal Reserve are, of course, large bureaucracies, but what we’re trying to analyze here is not the level of do-nothing inertia that we usually associate with the word “bureaucracy”. What we’re trying to analyze is the spirit or culture of the organization in question. What is the institutional memory of the Fed? What do personnel, not just the Fed governors but also the rank-and-file staffers, believe is the proper role of the institution? Most importantly, how do these personnel seek to protect their organization and grow its influence within the jungle of other organizations seeking to grow their influence?

The spirit, culture, and personnel composition of the modern Federal Reserve is almost identical to that of a large research university. That’s not a novel observation on my part, but a 30-year evolution commonly noted by Fed watchers. Why is this important? It’s important because it means that the current marriage between Fed and markets is a marriage of convenience. As an organization, the Fed doesn’t really care whether or not markets go up or down, and as an institution it’s not motivated by making money (or whether or not anyone else makes money). Like all research universities, the Fed at the organizational level is motivated almost entirely by reputation. Not results. Reputation. A choice between “markets up but reputation fraying” and “markets down but reputation preserved” is no choice at all. The Fed will choose the latter 100% of the time. I can’t emphasize this point strongly enough. From a bureaucratic perspective, the Fed absolutely Does. Not. Care. whether or not the market goes up, down, or sideways. When they talk about “risk” associated with their policy choices, they mean risk to their institutional reputation, not risk to financial asset prices. And today, after more than two years of a “tightening bias” and “data dependency”, there’s more reputational risk associated with staying pat than with raising rates in a one-and-done manner.

Why? Because the public Narrative around extraordinary monetary policy and quantitative easing has steadily become more and more negative over the past three years, and the public Narrative around negative rates in particular is now overwhelmingly in opposition. When I did my Narrative analysis of financial press sentiment surrounding Brexit prior to that vote, I always thought that would be the most hated thing I’d ever see. Nope. I’ll append the Quid maps and analysis at the end of this note for those who are interested in digging in, but here’s the skinny: the negative sentiment around negative rates is now greater than the negative sentiment around Brexit. The public Narrative around ever more accommodative monetary policy has completely turned against the Fed. And they know it.

It’s not only the overall Narrative network that has turned with a vengeance against the Fed, but also some of the most prominent Missionaries, to use the game theoretic term. Over the last few weeks we’ve seen Larry Summers take Janet Yellen directly to task, as the runner-up in the Obama Administration Fed Chair sweepstakes has apparently taken to heart the old adage that revenge is a dish best served cold. More cuttingly, if you’re Yellen, is the heel turn by Fed confidante and WSJ writer Jon Hilsenrath. His August 26thhit piece on the Yellen Fed feature article — “The Great Unraveling: Years of Missteps Fueled Disillusion with the Economy and Washington” — is the unkindest cut of them all.

I think that Summers has been emboldened and Hilsenrath has been turned because they’re picking up on the same sea change in public opinion that the Quid analysis is identifying with more precision. For Hilsenrath, here’s the centerpiece of his j’accuse: a long-running Gallup poll asking Americans to rate the relative competence of federal agencies. Yep, that’s right, the Fed — which used to have a better reputation than the FBI and NASA — is now at the absolute bottom of the heap, dragging behind (by a significant margin) even the IRS! It’s one thing to bring up the rear in 2009 polls, what with the immediate aftermath of the deepest recession in 70+ years. But to still be at the bottom in 2014 after a stock market triples (!) and The Longest Expansion In Modern American History™? Incredible. And the most recent poll was in 2014. If anything, the Fed’s reputation is even lower today. I mean … this is really striking, and I can promise you that none of this is lost on the current custodians of the Fed’s prestige and reputation. Or, like Summers, the wannabe custodians. If you’re a professional academic politician like Summers, you can smell the blood in the water.

How Americans Rate Federal Agencies
Share of respondents who said each agency was doing either a ‘good’ or ‘excellent’ job, for the eight agencies for which consistent numbers were available.


Source: Gallup telephone polls, most recently 1,020 U.S. adults conducted Nov. 11—12, 2014, with a margin of error of +/-4 percentage points. As reported by the Wall Street Journal.

So what does all this mean for the September FOMC meeting?

Look … does “the market” want more and more supportive policy? Of course it does. We’re addicts. But if the Fed takes a dovish stance now — and anything less than a hike is going to be perceived as a dovish stance — from an organizational perspective the Fed is risking a lot more than a market sell-off from a rate hike. It risks being blamed for anything bad that happens in the economy going forward. This is the risk of being an unpopular political actor. This is the risk of losing your reputation for competence. The Golden Rule of organizational behavior is quite simple: there must ALWAYS be plausible deniability for culpability if something goes wrong. There must ALWAYS be some other political actor to blame. Unless the Fed takes steps now to stem the erosion in their reputation and their position in the public Narrative, they will own this economy and the downturn that everyone (including the Fed) suspects is coming.


By raising rates now, on the other hand, the Fed can declare victory. We achieved our dual mandates of price stability and full employment! Mission accomplished! And unlike George Bush and his infamously premature declaration of same, the Fed has someone to blame when the “mission” unravels (which of course it will) — those dastardly fiscal policymakers who didn’t follow up with structural reforms or pro-growth policies or whatever when they were elected this November. While the consensus view is that the Fed loathes to do anything to rock the market boat before the November election, in truth this meeting is the perfect time to act if your political goal is to declare victory and pass the buck. Hey, we did our part, says the Fed. Prudent stewards of monetary policy and all that. Now, about that consulting gig at Citadel …

That’s the bureaucratic or organizational perspective. Here’s the internal political dynamic as I see it.

An internal politics perspective is similarly driven by questions of reputation, but at the individual level rather than the organizational level. In an academic organization like the modern Fed, your internal reputation is based entirely on how smart you are, as evidenced by the research you do and the papers you write and the talks you give, not on how effective you are in any practical implementation of organizational aims. It’s not that the Fed or major research universities are intentionally ignoring or trying to put down practical implementations like teaching or outreach to commercial bank staffers, but every hour you spend doing that is an hour you’re not spending impressing your colleagues and bosses with how smart you are. It’s just how the internal political game is played, and anyone who has achieved any measure of success in an organization like this knows exactly what I’m talking about.

What this means in practice is that FOMC meetings are driven by a desire to form a consensus with the other smart people around the table, so that each of you is recognized by the other members of the consensus as being smart enough to be a member of the consensus. It’s the precise opposite of the old Groucho Marx joke: “I don’t want to be a member of any club that would have me as a member.” Every FOMC member desperately wants to be a member of the club that would have him or her as a member, because it means that you’ve been recognized as one of the smart kids. The internal political dynamic of academic cultures like the Fed, at least at the highest levels of Governor to Governor interaction, is NOT antagonistic or divisive. On the contrary, it’s cooperative and consensus-forming.

Not sure what I’m talking about? Read this Jon Hilsenrath interview of St. Louis Fed Governor Jim Bullard again (I say again because I published it for other reasons in the last Epsilon Theory note, Magical Thinking), where Bullard describes this consensus building dynamic.


Mr. Hilsenrath: What kind of compromise would it take to get the FOMC to move in September? I mean, so the tradition is there’s some kind of — like you say, some kind of agreement. What would it take to get them there?
Mr. Bullard: Well, I have no idea, so — and it’s really — it’s really the chair’s job to fashion that. But I will say that — I’ll talk historically about the FOMC, the kinds of things that the FOMC would do. You would trade off. You would say, OK, we could hike today, but then we’ll not plan to do anything in the future. That would be one way to — one way to go about a consensus. So that often happens on the FOMC. Or vice versa. If you read the Greenspan-era transcripts, he’ll do things like, OK, we won’t go today, but we’ll kind of hint that we’re pretty sure we’re going to go next time.
Mr. Hilsenrath: Right.
Mr. Bullard: And so you get this inter-tempo kind of trade-off, and that often — that often is enough to get people to sign up.
Mr. Hilsenrath: So, hike today and then delay.
Mr. Bullard: Yeah. (Laughs.)
Mr. Hilsenrath: Or, no hike today and then no more delay.
Mr. Bullard: Yeah, yeah.
Mr. Hilsenrath: Something like that.
Mr. Bullard: Yeah, those kinds of trade-offs are, historically speaking — I’m not saying I know what Janet’s doing, because I don’t. But, historically speaking, those are the kinds of things that the FOMC has done.
Mr. Hilsenrath: I came up with my catchphrase for the — for the month. (Laughter.)
Mr. Bullard: Those are great. That’s worthy of a T-shirt. (Laughs, laughter.) You could have one on the front and one on the back.
Ms. Torry: Or a headline.
Mr. Hilsenrath: Well, that’s the St. Louis framework now, right?
Mr. Bullard: Yeah.
Mr. Hilsenrath: Hike today and then delay.
Mr. Bullard: Yeah. That’s what it would be, yeah.
― Wall Street Journal, “Transcript: St. Louis Fed’s James Bullard’s Interview from Jackson Hole, Wyo.” (August 27, 2016)

What Bullard is describing from a game theoretic perspective is a dual-equilibrium coordination game. Either it’s “Hike today and then delay” (Bullard’s preferred equilibrium outcome) or “No hike today and then no more delay”. Those are the two possible consensus outcomes. Both are stable equilibria, meaning that once you get a consensus at either phrase, there is no incentive for anyone to change his or her mind and leave the consensus. Importantly, both are robust equilibria in their gameplay, meaning that it only takes one or two high-reputation players in the group to commit to one outcome or the other in order to start attracting more and more reputation-seeking players to that same outcome. You can think of individual reputation as a gravitational pull, so that even a proto-consensus of a few will start to draw others into their orbit.

It’s always really tough to predict one equilibrium over another as the outcome in a multi-equilibrium game, because the decision-making dynamic is solely driven by characteristics internal to the group, meaning that there is ZERO predictive value in our evaluations of external characteristics like Taylor Rule inputs in 2016 or US/Soviet nuclear arsenals in 1962. (I wrote about this at length in the context of games of Chicken, like Germany vs. Greece or the Fed vs. the PBOC, in the note Inherent Vice). But my sense — and it’s only a sense — is that the “Hike today and then delay” equilibrium is a more likely outcome of the September meeting than “No hike today and then no more delay”. Why? Because it’s the position both a hawk like Fischer and a dove like Bullard, both of whom are high-reputation members, would clearly prefer. If one of these guys stakes out this position early in the meeting, such that “Hike today and then delay” is the first mover in establishing a “gravitational pull” on other members, I think it sticks. Or at least that’s how I would play the game, if I were Fischer or Bullard.

Okay, Ben, fair enough. If you’re right, though, what do we do about it? How are markets likely to react to the shock of a largely unanticipated rate hike?

In the short term, I don’t think there’s much doubt that it would be a negative shock, because as I write this the implied “market odds” of a rate hike here in September are not even 20%. My analysis suggests that the true odds are about three times that, as I give a slight edge to the “Hike today and then delay” equilibrium over “No hike today and then no more delay”. Do I think it’s a sure thing that they hike next week? Give me a break. Of course I don’t. But if I can be dealt enough hands where the true odds of something occurring are three times the market odds of something occurring …

The medium-to-long term market reaction to whatever the Fed decides next week is going to be driven less by the hike-or-no-hike decision and more by the Fed-directed Narrative that accompanies that rates decision. That is, if they hike next week and start talking about how this is the next step of a “normalization” process where the Fed will try to get rates back up to 3% or 4% in a couple of years … well, that’s a disaster for markets. That’s a repeat of the December rate hike fiasco, and you’ll see a repeat of the January-February horror show, where the dollar is way up, commodities and emerging markets are way down, and everyone starts freaking out over China and systemic risk again. But if they hike next week and start talking about how they’re rethinking the whole idea of normalization, that maybe rates will be super-low on a semi-permanent basis, or at least until productivity magically starts to improve … well, that’s maybe not such a disaster for markets. Ditto if they don’t hike next week. If the jawboning associated with a no-hike in September sets up a yes-hike in December as a foregone conclusion, that’s probably just as bad (if not worse) for markets than a shock today.

Of course, the Fed is well aware of the power of their “communication policy” and the control it exerts over market behavior. Which means that whenever the Fed hikes — whether it’s next week or next month or next meeting or next year — they’re going to sugarcoat the decision for markets. They’re going to fall all over themselves saying that they’re still oh-so supportive of markets. They’re going to proclaim their undying love for markets even as they take actions to distance themselves.


But here’s the thing. The Fed is now revealing its one True Love — its own reputation and its own political standing — and that’s going to be a bombshell revelation to investors who think that the Fed loves them. Investors are like Tom Buchanan in The Great Gatsby. We’re married to this really swell girl, and we get invited to these really great parties, but then we see that Daisy is truly in love with Jay Gatsby, not us. And everything changes. Maybe not on the surface, but deep down, where it really matters. I’m not saying that the Fed abandons the markets. After all, Daisy stays married to Tom. But everything changes in that moment of realization that she truly loves someone else, not you, and that’s what the next Fed hike will mean to markets.

That’s when the party stops.

Appendix: Quid Narrative Analysis

For a recap of how I’m using the Quid tool kit to analyze financial media narrative formation and evolution, please refer to the Epsilon Theory note The Narrative Machine. Below are two slides from Quid providing a quick background on the process.


Source: Quid


Source: Quid

Here’s the network of all 941 Bloomberg articles over the past year mentioning negative rates, colored by topic cluster:


Source: Quid

This is a prototypical focused narrative network, indicative of articles that are truly “about” negative rates, as opposed to articles about something else that provides the clustering characteristics and only mention negative rates in passing. So now let’s look at the same network, but colored by sentiment rather than by topic clustering.


Source: Quid

Fully 50% of the articles are negative, 42% neutral, and only 7% are positive in their sentiment.

How does this compare to other Bloomberg networks and other sentiment scores? Horribly. The only subject issue that even comes close is Brexit, with 47% negative, 42% neutral, and 10% positive in the weeks leading up to the vote. Post-vote, the negative sentiment around Brexit drops to the mid-twenties.

To be sure, few topics associated with monetary policy have an overtly positive sentiment distribution, at least in recent years. For example, here’s a chart of the Quid sentiment scores for all Bloomberg articles mentioning Quantitative Easing (QE), by year over the past three years. The Narrative is steadily deteriorating, but we’re still not close to negative articles taking the lead over neutral articles.

Sentiment Scores for Bloomberg Articles Mentioning QE, by Year

9/13 – 9/14 9/14 – 9/15 9/15 – 9/16
Neutral 58% 52% 48%
Negative 24% 31% 38%
Positive 17% 16% 13%

Source: Quid

One final network observation. Of the positively-oriented Bloomberg articles, they tend to cluster in the topic circled below. That topic? Gold. The articles have a positive sentiment because negative rates are great for gold prices. Of course, that’s a very negative thing from the Fed’s reputational perspective, which means that many of the articles that speak positively about negative rates are actually intimating something negative about central bankers! Bottom line: there is no more hated policy initiative in the world than negative rates.


Source: Quid

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