The Recipe for Agent Orange – The Projection Racket, Pt. 3

Every parent with more than one child knows the trick.

If you have one piece of cake and two children, the piece of cake must be cut in half. Under no circumstance can you be the one who cuts the cake. Neither can you be the one who allocates the slices, nor can you allow any child to perform both the cutting and the choosing. There is but one solution: You must allow one child to cut and the other to choose their slice. Anything else is asking for violence, recriminations and wasted cake.

It is a classic game theory problem in the field of envy-free choice. It also explains some of the thinking behind most nudges, the worst of many terrible ideas to come from the desk of Cass Sunstein. The perception of agency does a lot to help us accept an outcome. After all, if we were responsible for it, surely we made a good decision.

In practice, however, the designer of the Nudge doesn't always play fair. Especially if they have stakes. Especially if they are a principal, too. Hey, even the most soft-hearted libertarian paternalist can't be a perfect parent all the time.

Which is why I set up a little principal-involved variation on the envy-free cake experiment with my son. Because kids are weird, his favorite thing to drink is Orange Fanta. Plus, it's his birthday today and he wanted to have what is a pretty rare treat around our house for breakfast. So I filled up one glass with a half cup of Fanta. I filled up another glass with a full cup of it. I added a cup of ice to the glass with half as much. I then presented him with the choice between the tall, well-presented glass with half as much and the short, unassuming glass with twice as much.

Want to continue reading this and the other 1,500+ essays you won't find anywhere else?

Already a subscriber? log in here

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Avatar for Brian Brian says:

    Wow - absolutely fantastic conclusions. B/C passive investing has become so large, their votes on proxy items need to be scrutinized more and they need to become more accountable. I really like the idea of more disclosure on SBC, but it might not go far enough b/c of the rampant corruption. Before 1982, buy-backs were illegal and considered manipulation. Until we make changes on how much capital is being used for SBC, stop buy backs all together for a time until better rules can be put in place. We also need to break some of these companies up and step-up efforts to do away with monopolies! Thanks Rusty great work! Brian

  2. Analysis of the current situation was excellent, as usual. Your reform proposals seem entirely sensible.

    But my reading of this series suggests that the real problem is that political forces have figured out how to successfully promulgate the narratives that convert the historic justification for governance rules into “yea governance!” and “yea share buybacks!” just as they used “yea college!” and “yea patriotism!” and “yea democracy!” to horribly warp other norms and institutions that once served the greater good. And figured out how to use that political power to totally capture the mainstream/business media so that they endlessly repeated the desired narratives and blocked awareness of any alternative views.

    Even if initially enacted, don’t think reforms of this type could survive ongoing attacks from those political forces any more that similar reform efforts have any impact in areas such as tax law or antitrust enforcement.

  3. The huge fund companies spent the ESG window-dressing bullshit era focusing on the ‘E’ and the ‘S’, and completely neglected the ‘G’, which is the only one that ever mattered.

  4. Avatar for rguinn rguinn says:

    Thanks for reading and thanks for joining the conversation, Brian! I, too, worry about the passive investors abdicating their duties most of all, but I don’t want to give the run-of-the-mill active long-only or hedge fund managers a pass, either. They have ignored this part of their work for far too long as well.

  5. Avatar for rguinn rguinn says:

    Once we’re back in a bull market, the ES-or-bust vibe will be back in effect. I don’t think there’s an environment where G matters again. Doesn’t do anything for anyone (except long-term value for shareholders, but who cares about that?).

  6. Avatar for rguinn rguinn says:

    Hubert, astutely observed, and the intractable problem of any BITFD proposal.

    In this case, I do think that we benefit from the wonkishness of those who must be convinced. The exchanges are susceptible to narratives running against them, and the regulators do not like being on the wrong side of reputational risk. As @bhunt has observed, if we’re going to do this, it’s by creating our own effective narratives to make the dangers of these issues real to this narrow set of institutions.

    As you point out, still no mean task.

  7. Jack Bogle applauds.
    Vanguard could fix a lot of this, but sadly neglects the responsibility that comes with its great power…

  8. Avatar for rguinn rguinn says:

    It’s part of the danger of seeing financial markets as a utility to deliver returns, I think. It blinds us to a lot.

  9. Avatar for jewing jewing says:

    Outstanding essay Rusty, made all the more compelling by your proposed remedies. Of them, it seems the most important would be the separation of Chairman and CEO - something that is required in many countries outside the U.S., and the clarification of stock-based compensation.

    There is a reason many countries force the separation of owners and management, and there is no reason it cannot be the same here.

    And on accounting: if one could plainly see how shareholders’ capital is going right back to insiders in the form of sterilization, then I think this racket would be over quickly. Outside shareholders, particularly active fund managers, would quickly see them as another expense.

    The director limitations would be nice to have, though as you mention there are already some marketplace restrictions in place. The ‘say on pay’ clause would also be great for clarification purposes. But I think you would be over 90% of the way there with just the Chair/CEO split and clearer accounting standards.

  10. The idea of a free lunch from indexing is likely to be another sacred cow that will be slaughtered by this bear market. The underpinnings were completely undone by negative interest rates and the valuations they allowed. While it seems obvious to active equity investors with any sort of valuation anchor in their investment process; indexing looked like a magic money machine with max monetary ease accentuated by emergency fiscal policy.

    The math of losing money buying the $17 trillion bond pile that traded for negative yields at the global rate trough was obvious to everyone but those forced into those trades by indexing. Stocks always have the potential optimism that 40 multiples of pro forma revenue forecasts might turn out okay if the company invents a new category and gets all of the market share. But, the logic of buying the most of the most expensive securities fails the test of a secular bear market. The fact that the indexers did not exercise their vote with care either will be part of a change in that free lunch narrative.

Continue the discussion at the Epsilon Theory Forum

17 more replies


Avatar for bhunt Avatar for rguinn Avatar for huberthoran Avatar for cplourde Avatar for jpclegg63 Avatar for Desperate_Yuppie Avatar for jewing Avatar for Protopiac Avatar for LudwigvonMises Avatar for Avatar for Brian Avatar for jtpocean Avatar for duncdmurdoch Avatar for merrillintl

The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.