Notes On Metarationality

Recently I had something of a revelatory experience. I went down the rabbit hole with David Chapman’s Meaningness. Here I found a robust framework that clarified and systematized ideas that I’ve recently been exploring in a more abstract way. I am not exaggerating when I say that David’s work has saved me maybe a decade of thinking and writing. This post reflects on those ideas.

 

Modes of Meaning

One of the things that resonated with me most strongly when exploring Meaningness was the progression of “modes of meaning” it describes:

Choiceless: Prior to about 1700, meanings were essentially fixed, either by God or nature. This had the advantage of being simple and unambiguous. It had the significant disadvantage of being obviously wrong.

Systems: Broadly speaking, it took a few hundred years of religious conflict to overthrow the Choiceless mode of meaning. We killed God and tried to replace Him with systems. Capitalism. Marxism. Facism. All of these systems failed to provide a comprehensive and internally consistent system of meaning and social organization. Real-world implementations of fascism and marxism essentially culminated in genocidal wars of aggression. A bastardized version of capitalism has survived to the present day, but only by sacrificing comprehensiveness and internal consistency (every developed nation state I can think of has implemented some socialist welfare programs).

Countercultures & Subcultures: We responded to the failures of the Systematic Mode through the countercultures. Broadly speaking, the two countercultures were hippie and evangelical. Because these countercultures lacked sufficient nuance to accommodate the diverse identities of their participants, they were ultimately superseded by smaller scale subcultures. Boomers most closely identify with the countercultures. Subcultures are more of a Gen X phenomenon.

Atomization: The fundamental inability of subcultural niches to provide breadth and depth of meaning, as well as advanced technology, have brought us to the atomized mode. Chapman writes:

As culture and society atomize, it becomes impossible to maintain a coherent ideology. Religions decohere into vague “spirituality,” and political isms give way to bizarre, transient, reality-impaired online movements. Decontextualized, contradictory, intensely-proclaimed religious and political “beliefs” displace legacy systems of meaning. These are not beliefs in an ordinary sense, but advertisements of personal qualities and tribal identification. The atomized mode generates paranoia, because without the systematic mode’s “therefores,” its structure of justification, there are no memetic defenses against bad ideas.

Atomized politics abandons the outdated convention that political arguments should make sense. Occupy, the Tea Party, ISIS, the “tumblr SJW” and “alt-right” social media movements, and the 2016 American Presidential campaign ignored “therefore” in favor of claims that were false and absurd, but not duplicitous, because they were not intended to be believed—just reacted to for their intense emotional impact.

I am recapping these ideas here because they are fundamental to my own updated mental models of society, religion and politics. For example, my mental model for politics post from a couple of years touches on related ideas. What I’ve lacked till now, and what David Chapman has spent years creating, is a robust and comprehensive framework for exploring all of this (I intend to apply these models to certain trends in investing in future posts).

 

Metarationality in the Atomized Mode

Like me, David does not believe in Answers. He believes in Process. The way forward in the atomized mode is with metarationality.

A self-described rationalist might try to apply Bayesian reasoning as an ordering principle for life. Bayesian reasoning is certainly hyper-rational. But if your only tool is a hammer you will think of every problem as a nail.

A metarationalist recognizes that Bayesian reasoning is only effective for addressing certain kinds of problems. The metarationalist carries a big toolbox. The hammer has its uses. But sometimes a screwdriver or ratchet wrench is the tool for the job. Sometimes unconventional combinations of tools and materials are required to solve certain problems. The experienced craftsman does not arrive at these solutions through systematic reasoning but through experience, intuition, and experimentation.

A rationalist evaluation of the capitalist, marxist and fascist systems might conclude that capitalism is “the best” (or “least bad” system).

A metarationalist critique recognizes that each system contains elements of truth. The capitalist system recognizes that the “free” interaction of market participants is a more robust system for allocating resources in a society than centralized economic planning. The marxist system recognizes that the “efficient” or “robust” allocation of resources can nonetheless threaten social cohesion. The fascist system recognizes the attractiveness of fixed meanings and idealized forms (modernism and postmodernism have always been the twin-headed nemesis of fascist movements).

The challenge rationalism faces in the atomized age is the tendency to think of systems in discrete or static terms. Yet all systems are “obviously” inadequate. Metarationality is fully at ease with the notion that elements of capitalism and marxism can be deleted, combined, edited and remixed in ways that more accurately model reality, regardless of whether the resulting system is ideologically or logically consistent. Metarationality accepts the inevitability of internal inconsistencies in any “real world” (especially social) phenomena. The Meaningness term for this is “patterned nebulosity.”

Some may read this post as an argument that a metarational worldview is somehow superior or transcendant. There is no such thing as transcendance. I would argue a metarational worldview offers a higher resolution view of reality than a strictly rational worldview, and certainly a choiceless worldview. But a metarationalist is still human, with human cognitive, emotional and moral weaknesses.

Metarationalists eat, breathe, shit and bleed like everyone else.

There is an interesting parallel here with elements of Buddhist philosophy. A common misconception is that Enlightenment == Transcendence. A more correct understanding is that Enlightenment == Acceptance, or Enlightenment == Equanimity. Likewise, Non-Dualism =/= Monism (“All Is One”).

One thing I have seen repeatedly is the conflation of metarationality with nihilism or existentialism. Candidly, my own personal views have verged on existentialist at times, before the distinction became clear to me. Meaningness explores these distinctions in depth, but a simple summary is as follows:

Eternalists argue meaning is fixed.

Existentialists argue meaning is subjective.

Nihilists argue meaning is nonexistent.

Metationalists argue meaning is nebulous.

Meaning exists. But meaning is also insubstantial. Like a mist, or a cloud. When you get up close to it, it has a tendency to evaporate.

 

Some Personal Reflection

In Meaningness, David hypothesizes that that it is easiest for STEM people to make the transition to rationality and then metarationality.

For the most part, you have to have a thorough understanding of how to work within systems before it’s feasible to step up and out of them, to manipulate them from above. There are other routes to mastering systematic rationality—through experience as a manager in a bureaucratic organization, for instance—but this curriculum will assume a STEM background.

The minimum requirement might be an undergraduate STEM degree; but research experience at the graduate level may be needed. You have to have seen how many different systems work, and—more importantly—how they fail. At the undergraduate level, you are mainly shielded from the failures, and systems get presented as though they were Absolute Truth. Or, at least, they are taught as though Absolute Truth lurks somewhere in the vicinity, obscured only by complex details. Recognizing that there is no Absolute Truth anywhere is a small downpayment on the price of entry to meta-systematicity.

That may already have set off warning bells. Woomeisters and postmodernists say things like that—and if you think they are horribly wrong, I agree!

I don’t disagree with David’s view here. Frankly, it is a pain in the ass to come at this from a non-STEM background. I say that with some confidence, because it was what I did, personally. My undergraduate degree was in the wooiest of woo: English (Writing). I had to do quite a bit of remedial STEM (mainly TM work) work to get a reasonable handle on systems thinking. And I will likely only ever be a mediocre systems thinker at this point.

David goes on to write:

By system, I mean, roughly, a collection of related concepts and rules that can be printed in a book of less than 10kg and followed consciously. A rational system is one that is “good” in some way. There are many different conceptions of what makes a system rational. Logical consistency is one; decision-theoretic criteria can form another. The details don’t matter here, because we are going to take rationality for granted.

Meta-systematic cognition is reasoning about, and acting on, systems from outside them, without using a system to do so. (Reasoning about systems using another system is systematic, and meta, but not “meta-systematic” in this sense.) Meta-rationality, then, is “good” meta-systematic cognition. Mostly I use the terms interchangeably.

One field I draw on is the empirical psychology of adult development, as investigated by Robert Kegan particularly. This framework describes systematic rationality as stage 4 in the developmental path. Stage 5 is meta-systematic. However, as far as I know, no one from this discipline has applied the stage theory to STEM competence specifically. Empirical study of cognitive development in graduate-level STEM students would be helpful, but in the absence of that I’m working from a combination of first principles, bits of theory taken from many apparently-unrelated disciplines, anecdata, and personal experience.

According to this framework, there is also a stage 4.5, in which you lose the quasi-religious belief in systems, but haven’t yet developed the meta-systematic understanding that can replace blind faith. Stage 4.5 leaves you vulnerable to nihilism, including ontological despair (nothing seems true), epistemological anxiety (nothing seems knowable), and existential depression (nothing seems meaningful). It’s common to get stuck at 4.5, which is awful.

An odd benefit of coming at this in reverse is that I suspect it makes the transition from Stage 4 to Stage 5 thinking easier. One of the (few) advantages of a modern humanities education is that if you approach it in the correct mindset it gets you comfortable swimming in a sea of ever-shifting meanings. In fact, you even do this fairly systematically. The entire process of obtaining a humanities degree consists of processing data through a particular analytical lens.

The major disadvantage of a modern humanities education is, of course, that most systems of meaning you’re taught operate at extremely high bullshit-to-truth ratios. This is exacerbated by the fact that many of the professors teaching you these systems of meaning are not themselves metasystematic thinkers, but rather True Believers with political and social axes to grind. Valuable opportunities to cultivate meta-systematic thinking are thus wasted.

ET Note: Hyakujo’s Fox

hyakujo-fox

(Disclosure: This is another one of those philosophical posts that (optically, at least) has nothing to do with finance or investing. If you’re just here for the finance stuff you’ll probably be happier skipping it)

I’ve been slow to post on the blog lately. Partly because I moved houses recently, and partly because any remaining creative bandwidth had been eaten up by the idea for my most recent Epsilon Theory note.

Teaser:

Recently, a friend and I were texting about the meaning of life. (what? you and your friends don’t text regularly about the meaning of life?) My friend wrote that in the end, all you can really do is carry your cross to the finish line. I quite like this. It cuts right to the heart of the issue. There are no Answers. There is only Process. I did suggest adding an inscrutable Zen twist, however. My version:

In the end, all you can really do is carry your cross to the finish line. Except there is no finish line, there is no cross, and there is no you.  

Read the whole thing at Epsilon Theory.

Must be something in the water lately as I discovered (only after my ET note was written) this Ribbonfarm post by Jacob Falkovich dealing with the “self” and cognition. The money shot:

When the part of your brain that monitors itself notices repeated patterns of thought it creates a high-level model called “self” that it can use for prediction. “I” am interpreting the sound as a stick hitting a woodblock. “I” suffer when in pain. “I” think of everything in terms of predictive processing. And “I” will likely continue to do so in the future.

But when a thought or interpretation arises that can’t be predicted from the habits of my mind, there is no reason to assign it to a consistent thinking “self”. The thoughts I’m used to thinking are mine, but the novel ones could be anyone’s or no one’s.

Have you ever had a random transgressive thought (or even a transgressive dream) that disturbed you? I certainly have. What’s disturbing about the experience is that some horrible idea originated within you. Some horrible idea that’s destabilizing to your conception of self. A “residual” in the predictive model for thought patterns.

Every religious tradition acknowledges the existence of these residuals. Broadly speaking, they’re sins. What differs across religions is how you treat them. In the Catholic tradition I was raised in, there is a whole guilt complex built up around our inherently sinful nature (it’s a bit less apparent in the kinder, gentler, post-Vatican II Catholicism I was raised with than the hellfire and brimstone Catholicism of my parents’ generation). Residuals represent corruption. To cleanse yourself of their taint, you seek absolution through confession and penance.

Zen takes a different view of the residuals. Among other things, it teaches you to see them for what they really are: random noise in your thought patterns. The Zen response to transgressive thought is simply to acknowledge it. Observe it the way you might observe a passing cloud. It will pass.

This is not at all to argue that the Zen tradition is “superior” to the Catholic tradition. It is, however, why I think Zen philosophy resonates more with me than the Catholic doctrine of my youth.

What I’ve found to be most challenging about Zen is squaring it with morality. Indeed, one of the most common reactions to my ET note was: I liked this but isn’t the message still that ‘nothing really matters’?

A true Zen master (which I am most definitely not) would whack us over the head with a stick for asking that question. Not only is it the wrong question, it is an irrelevant question. It is a question only a “deluded” mind stuck in a dualistic thought pattern would ask.

There is no good. There is no evil. The enlightened mind is beyond good and evil.

But doesn’t that mean you can justify anything?

Again, it’s the wrong question. Only a deluded mind requires an intellectual basis for moral action. Likewise, only a deluded mind would interpret “beyond good and evil” as “license to burn, rape and pillage.”

Put another way: even in religious traditions where a framework for determining “right” from “wrong” is made explicit, people still sin. Literally all the time. Hell, the Catholic Church I was raised in pretty much institutionalized the protection of child rapists. That fact doesn’t invalidate Catholic religious doctrine by any means. All religious institutions are flawed and corrupt to one degree or another, precisely because they are run by fallible humans. But it goes to show that a clear framework for moral behavior isn’t The Answer. To my eye, it’s not even half The Answer.

I conclude with a Zen story that addresses these “substance versus form” issues related to morality and moral action. It is one of my favorites.

Tanzan and Ekido were once traveling together down a muddy road. A heavy rain was still falling.

Coming around a bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl” said Tanzan at once. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he no longer could restrain himself. “We monks don’t go near females,” he told Tanzan, “especially not young and lovely ones. It is dangerous. Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”

ET Note: What You Call Love

don-draper-wide

My latest Epsilon Theory note is about the seemingly obviously nonsensical idea that “words can be violence.”

[I]n case you’re wondering, no, words are not equivalent to physical violence. That is nonsense.

What is not nonsense is the notion that if you can deftly manipulate the symbols people use to assign and create meaning in their lives, you can manipulate their thoughts and behavior. We have a name for this outside academia and the culture wars.

It’s called advertising.

Read the whole note on Epsilon Theory.

Correlation And Meaning

We’re all familiar with the old saw: “correlation is not causation.” Correlation is merely a statistical measure of the strength of the linear relationship between two variables. Correlations can change over time. The fancy stats word for this instability is “nonstationarity.”

Anyway, what I want to suggest in this post is that correlations can often be interpreted as markers of meaning.

For example, stocks and Treasury bonds have been negatively correlated since the financial crisis. The reason is that the meaning of Treasuries to investors, broadly speaking, is “safe haven asset.” A Treasury allocation is an allocation that will perform well in a deflationary environment. And deflation, broadly construed, has topped the list of investor fears for many years now.

A big mistake many investors (particularly younger investors) may make is assuming Treasuries will always be negatively correlated with stocks. This has not always been true historically and will not necessarily be the case in the future. Why? In a highly inflationary environment, both stocks and Treasuries will perform poorly. The two assets classes will become positively correlated.

Another example of this is gold. Traditionally, gold has been viewed as an inflation hedge and has been positively correlated with inflation expectations. These days, however, gold is liable to trade up on deflation fears as well as inflation fears. Why the change in correlation? The meaning of gold has changed. Gold has shifted from a pure inflation hedge to an insurance policy against economic chaos more generally. Gold is now a hedge against policy mistakes by our economic elites (our Ever Wise and Benevolent Central Bankers in particular).

What I’m driving at here is that if you want to better understand the nonstationarity of correlations, you ought to spend some time thinking about narrative.

A stable correlation is a correlation where objective meaning dominates. Objective statements can be proven true or false in a straightforward way. Unstable correlations are correlations where subjective meaning dominates. Subjective statements cannot be proven true or false in a straightforward way.  Subjective statements are reflexive.

George Soros described it this way:

Consider the statement, “it is raining.” That statement is true or false depending on whether it is, in fact, raining. Now consider the statement, “This is a revolutionary moment.” That statement is reflexive, and its truth value depends on the impact it makes.

There’s not much subjective judgement required to evaluate a Treasury bond as an investment. It’s a mostly objective process that more or less boils down to your views on the future path of inflation and interest rates.

Now, your views on inflation and interest rates may make Treasury bonds seem relatively more or less attractive to you at any given point in time. But there’s never any real question in anyone’s mind as to how Treasury bonds will perform in a deflationary environment versus an inflationary environment. This is what I’m driving at when I say the meaning of a Treasury bond for your portfolio is going to remain pretty stable over time. A Treasury bond is protection from deflation.

Credit is a bit more subjective than Treasury bonds because now you’ve got defaults and recoveries in the mix. And equity valuation is far more subjective than credit valuation because the timing and amounts of the cash flows associated with equities are highly variable.

The value of gold is an order of magnitude more subjective than even equities because there aren’t any cash flows associated with gold. Gold is a purely speculative asset. Gold has value because, for whatever reason, human beings have arrived at the collective consensus that it’s a store of value over tens of thousands of years.

At the extreme end of this spectrum you have something like Bitcoin. Bitcoin, of course, has no cash flows. On top of that, there’s no broad consensus regarding what Bitcoin means. Sometimes it’s a currency. Sometimes it’s a speculative risk asset. Sometimes it’s a store of value or even a safe haven asset.

You ought to be extremely skeptical of any MPT-style analysis of Bitcoin’s role in a portfolio at this point. You simply can’t know if, when or how its correlation with other portfolio assets is going to stabilize over time. Just because Bitcoin is uncorrelated today doesn’t mean it will continue to be uncorrelated in the future.

Another practical application of all this relates to factor investing.

Patterns of correlations are the building blocks for factor-based investment strategies (they are literally what the math going on under the hood is measuring). It’s well-known that factor strategies go through extended periods of outperformance and underperformance that are difficult, if not impossible, to time. Factor performance comes and goes in irregular regimes. Regimes are driven by a mixture of objective and subjective factors that influence one another in feedback loops.

Regime_Graphic

If you’re trying to figure out when the relative underperformance of value stocks will end, you need to be thinking about what in the zeitgeist and market regime needs to change so that investors will want to buy stocks with “value” characteristics (how you choose to define “value” is important here). For example, in late 2016 the election of Donald Trump triggered a massive rally in cyclical industrial and financial services stocks. If you’re a long-suffering, old-school value investor who owns a lot of these stocks, what you want at a high level is higher growth, (modestly) higher inflation and (modestly) higher long-term interest rates.

If you’re a growth-oriented investor, such as a VC, who owns unprofitable, high-growth businesses that will not generate free cash flows for many years, what you want is a regime with solid growth but even more importantly with low inflation. More specifically, low interest rates. The value of your equity ownership is extremely sensitive to the cost of capital because your investments are very long duration. Much like a zero coupon bond, their cash flows lie far out in the future.

So anyway, when you’re considering factors such as value and growth what you want to be thinking about when evaluating their potential persistence over time are the drivers of the underlying patterns of correlation. And if you go through this exercise enough, I think you’ll find you keep coming back to investor preferences for different cash flow profiles.

As my friend Rusty Guinn once wrote:

Investment returns are always and everywhere a behavioral phenomenon.

Because, in the words of Marty Whitman, we’re pretty much always looking for a “cash bailout” when it comes to our investments. And our ability to exit an investment almost always ends up depending on a sale to another party. Marty wrote a wonderful explanation of this in an old investor letter (I’ll end on this note because I think it’s a fitting conclusion for this post):

From the point of view of any security holder, that holder is seeking a “cash bailout,” not a “cash flow.” One really cannot understand securities’ values unless one is also aware of the three sources of cash bailouts.

A security (with the minor exception of hybrids such as convertibles) has to represent either a promise by the issuer to pay a holder cash, sooner or later; or ownership. A legally enforceable promise to pay is a credit instrument. Ownership is mostly represented by common stock.

There are three sources from which a security holder can get a cash bailout. The first mostly involves holding performing loans. The second and third mostly involve owners as well as holders of distressed credits. They are:

Payments by the company in the form of interest or dividends, repayment of principal (or share repurchases), or payment of a premium. Insofar as TAVF seeks income exclusively, it restricts its investments to corporate AAA’s, or U.S. Treasuries and other U.S. government guaranteed debt issues.

Sale to a market. There are myriad markets, not just the New York Stock Exchange or NASDAQ. There are take-over markets, Merger and Acquisition (M&A) markets, Leveraged Buyout (LBO) markets and reorganization of distressed companies markets. Historically, most of TAVF’s exits from investments have been to these other markets, especially LBO, takeover and M&A markets.

Control. TAVF is an outside passive minority investor that does not seek control of companies, even though we try to be highly influential in the reorganization process when dealing with the credit instruments of troubled companies. It is likely that a majority of funds involved in value investing are in the hands of control investors such as Warren Buffett at Berkshire Hathaway, the various LBO firms and many venture capitalists. Unlike TAVF, many control investors do not need a market out because they obtain cash bailouts, at least in part, from home office charges, tax treaties, salaries, fees and perks.

I am continually amazed by how little appreciation there is by government authorities in both the U.S. and Japan that non-control ownership of securities which do not pay cash dividends is of little or no value to an owner unless that owner obtains opportunities to sell to a market

ET Note: The Life Aquatic

life_aquatic_group

My latest for Epsilon Theory is about surviving and thriving in a highly financialized world. What’s financialization?

Financialization is all about using financial engineering techniques, either securitization or borrowing, to transfer risk. More specifically, financialization is about the systematic engineering of Heads I Win, Tails You Lose (HIWTYL) payoff structures.

In business, and especially in finance, we see this playing out everywhere.

Debt-financed share buybacks? HIWTYL.

Highly-leveraged, dropdown yieldcos? HIWTYL.

Options strategies that systematically sell tail risk for (shudder) “income”? HIWTYL.

Management fee plus carry fee structures? HIWTYL.

Literally every legal doc ever written for a fund? HIWTYL.

There are two ways to effectively handle a counterparty that has engineered a HIWTYL game: 1) refuse to play the game at all, 2) play the game only if you have some ability to retaliate if your counterpaty screws you. Legal action doesn’t count. The docs and disclosures are written to be HIWTYL, remember?

(aside: corporate borrowing can be viewed as management selling put options on a company’s assets. I’ll leave it to you to consider what that might imply about government borrowing)

You need to be in a position to hurt your counterparty for real.

You need to be in a position to hurt your counterparty economically.

A friend (who is not in finance) recently asked me about the relationship between the sell-side and the buy-side. His question was basically this: is the purpose of investment banking just to rip fee revenue out of people by whatever means necessary even if it involves deliberately misleading them to screw them over?

My answer is that the sell-side’s purpose is simply to facilitate transactions. For investment bankers, that means raising capital or advising on M&A deals or whatever. For sell-side research groups it means driving buy and sell transactions.

The sell-side does not exist to make you money.

You can do business with the sell-side. You can even respect the sell-side. But you should never trust the sell-side. The same goes for pretty much all business relationships. Especially transactional relationships.

We poke fun at the sell-side around here, but what we’re poking fun at is just the sell-side’s Buddha nature. The zen master Shunryu Suzuki described Buddha nature thusly:

“If something exists, it has its own true nature, its Buddha nature. In the Parinirvana Sutra Buddha says, “Everything has a Buddha nature,” but Dogen reads it in this way: “Everything is Buddha nature.” There is a difference. If you say, “Everything has Buddha nature,” it means Buddha nature is in each existence, so Buddha nature and each existence are different. But when you say, “Everything is Buddha nature,” it means everything is Buddha nature itself.”

If that’s a bit too inscrutable for your taste, consider the fable of the scorpion and the frog:

A scorpion asks a frog to carry it across a river. The frog hesitates, afraid of being stung by the scorpion, but the scorpion argues that if it did that, they would both drown. The frog considers this argument sensible and agrees to transport the scorpion. The scorpion climbs onto the frog’s back and the frog begins to swim, but midway across the river, the scorpion stings the frog, dooming them both. The dying frog asks the scorpion why it stung the frog, to which the scorpion replies “I couldn’t help it. It’s in my nature.”

ET Note: The Grand Inquisition

Below is the teaser for my latest Epsilon Theory note. The piece is a meditation on freedom, through the lens of Dostoyevsky’s parable, “The Grand Inquisitor”:

The Nudging State and Nudging Oligarchy believe they are giving us a gift: Freedom from Choice.

Except that it is neither a gift nor freedom in any sense. Rejecting it isn’t always easy and it isn’t always costless. But it’s the only choice for anyone who would be free.

Click through to Epsilon Theory to read the whole thing.

There’s an idea embedded in this note, related to the specific mechanism through which the Nudging State engages in social engineering, which is worth making more explicit. I’ve written around the edges of it before on this blog, in The Tyranny of Optimization, when I wrote:

Here you’re not staring down the barrel of a gun but rather at a smartphone screen. Here, the trick is not only convincing people to buy into your optimization, but that buying in was their idea in the first place. This is tyranny updated for the 21st century. Much cleaner than putting people up against a wall.

What I’m describing here is what my friends at Epsilon Theory call “fiat thought.” These are thoughts and behaviors you believe are your own, though in reality they’ve been engineered by the Nudging State and the Nudging Oligarchy to promote some policy or behavior.

How do you test for fiat thought?

Ask why.

“Why do I believe [whatever]?”

For fiat thought, the answer is always some permutation of “because someone told me so.” Maybe that’s a politician. Maybe it’s a business leader. Maybe it’s a public intellectual or “thought leader.” Maybe it’s a go-to media outlet (or several). Bottom line is you won’t have a principles-based reason for believing whatever is at issue.

Having your thoughts replaced with fiat thought is perhaps the purest form of slavery I can imagine. It’s like being transformed into a pod person, except you don’t even realize the transformation is taking place. In fact, to the extent you notice the transformation at all, you’ll believe it was your own idea. This is the nature of “choice architecture.” It’s a kind of rigged game–a simulation of free will.

In reading some of the responses to my note, there are a couple common threads:

  1. Aren’t constraints on our behavior necessary to some extent to have a functional society?
  2. Most of the folks who serve the State do not have malicious intentions and are sincerely doing the best they can to balance tradeoffs when making policy.

These are both excellent points. I totally agree with both of them.

Constraints on our behavior and incentive systems are terms we negotiate as part of the social contract. The negotiation process is ongoing and dynamic. It never ends. An important aspect of freedom is the ability to participate in the negotiation process as a principal. “Nudgers” do not treat us as principals. Nudgers treat us as biological systems to be engineered.

ET Note: The Alchemy of Narrative

I revisited some of George Soros’s writing on reflexivity over the weekend (thanks Ben Hunt!). In doing so, I realized my initial reading, years ago, had been extremely superficial. Back then, I focused on feedback loops as amplifying the usual cognitive and emotional biases we point to in investment writing. Things like confirmation bias and loss aversion and overconfidence. This reading of Soros wasn’t necessarily wrong. But it was narrow and incomplete.

When Soros writes about reflexivity, he isn’t just arguing cognitive errors made by market participants cause prices to diverge from the objective reality of the fundamentals in self-reinforcing feedback loops. He’s arguing the fundamentals are often, if not always, themselves subjective realities.

Click through to Epsilon Theory to read the whole thing.

But since you got here through the blog, you also get some bonus content. Note that if you continue reading, things will get conceptual, abstract, philosophical, and maybe a little weird. Consider yourself warned. If you’re not interested in that kind of thing you can safely skip the rest of this post.

My ET note is about subjective reality in the context of financial markets. At the very end, it alludes to the fact that reflexivity and subjective realities influence all social systems. Politics. Geopolitics. Economics. It’s all reflexive. The Big Idea is this: reflexivity is what drives the cyclicality we observe throughout history. Reflexivity is why we appear to learn from history and yet are doomed to repeat it.

Back in 2013, Venkatesh Rao of Ribbonfarm wrote what turns out to be a pretty compelling explanation of how Missionaries come to an intuitive understanding of both reflexivity and subjective reality, in the context of the TV show, The Office. Rao uses “Sociopath” in place of “Missionary” in his piece, but for our purposes here the terms are interchangeable.

It’s important to understand that when Rao writes about Sociopaths, he’s not writing narrowly about serial killer wannabes. He’s writing about people who want to know The Truth. Specifically, Sociopaths want unmediated access to the Truth, because they (rightly) suspect other people have a vested interested in obscuring or distorting it for their own ends. The Beginner Sociopath is vaguely aware of Narrative. In pursuit of Truth she begins unmasking reality–ripping away Narrative abstractions.

Over to Rao:

As the journey proceeds, Sociopaths progressively rip away layer after layer of social reality. The Sociopath’s journey can be understood as progressive unmasking of a sequence of increasingly ancient and fearsome gods, each reigning over a harsher social order, governing fewer humans. If morality falls by the wayside when the first layer is ripped away, other reassuring certainties, such as the idea of a benevolent universe, and predictable relationships between efforts and rewards, fall away in deeper layers.

With each new layer decoded, Sociopaths find transient meaning, but not enduring satisfaction.

Much to their surprise, however, they find that in the unsatisfying meanings they uncover, lie the keys to power over others. In seeking to penetrate mediated experiences of reality, they unexpectedly find themselves mediating those very realities for others. They acquire agency in the broadest sense of the word. Losers and the Clueless delegate to them not mere specialist matters like heart surgery or car repair, but control over the meanings of their very lives.

So in seeking to unmask the gods, they find themselves turning into the gods.

When they speak, they find that their words become imbued with divine authority. When they are spoken to, they hear prayerful tones of awe. The Clueless want to be them, Losers want to defer to them.

[…]

Once the Sociopath overcomes reality shock and frames his life condition as one defined by an absence of ultimate parental authority, and the fictitious nature of all social realities, he experiences a great sense of unlimited possibilities and power.

Daddy and Mommy are not hereAnything is possible, and I can get away with anything. I can make up any sort of bullshit and my younger siblings will buy it. 

The sense of freedom is one I like to describe as free as in speech, and as in lunch

Free as in speech describes the Sociopath’s complete creative freedom in scripting social realities for others.  Cherished human values are merely his crayon box.

Free as in lunch describes the Sociopath’s complete freedom from accountability, in his exercise of the agency ceded to him by the Losers and Clueless, via their belief in the reality of social orders.

Non-Sociopaths dimly recognize the nature of the free Sociopath world through their own categories: “moral hazard” and “principal-agent problem.”  They vaguely sense that the realities being presented to them are bullshit: things said by people who are not lying so much as indifferent to whether or not they are telling the truth. Sociopath freedom of speech is the freedom to bullshit: they are bullshit artists in the truest sense of the phrase.

What non-Sociopaths don’t recognize is that these aren’t just strange and unusual environmental conditions that can be found in small pockets at the tops of pyramids of power, such as Lance Armstrong’s racing team, within a social order that otherwise makes some sort of sense.

It is the default condition of the universe. The universe is a morally hazardous place. The small pockets of unusual environmental conditions are in fact the fictional realities non-Sociopaths inhabit. This figure-ground inversion of non-Sociopath world-views gives us the default perspective of the Sociopath.

Non-Sociopaths, as Jack Nicholson correctly argued, really cannot handle the truth. The truth of an absent god. The truth of social realities as canvases for fiction for those who choose to create them. The truth of values as crayons in the pockets of unsupervised Sociopaths. The truth of the non-centrality of humans in the larger scheme of things.

When these truths are recognized, internalized and turned into default ways of seeing the world, creative-destruction becomes merely the act of living free, not a divinely ordained imperative or a primal urge. Creative destruction is not a script, but the absence of scripts. The freedom of Sociopaths is the same as the freedom of non-human animals. Those who view it as base merely provide yet another opportunity for Sociopaths to create non-base fictions for them to inhabit.

Regardless of how I qualify it in advance, the word Sociopath carries with it decidedly negative connotations. But again, Sociopaths as described here are not inherently evil. Rao only tangentially touches on the difference between Good Sociopaths and Evil Sociopaths. Here it is: Good Sociopaths choose to adhere to some kind of moral code. Evil Sociopaths choose to live in a state of amorality.*

I’ll expand on this slightly.

The Evil Sociopath embraces nihilism as a license to treat others as playthings. Most often Evil Sociopaths do this through legal means, for example under the cover of business and financial dealings. Others do it through criminal activity, or by playing manipulative games within their personal relationships. And yes, a very small minority of Evil Sociopaths go the serial killer route.

The Good Sociopath, on the other hand, rejects nihilism as a license to treat others as playthings. Critically, this is not because there is some fundamental, verifiable Truth out there affirming an underlying moral order. Instead it’s because, for whatever reason, Good Sociopaths find the thought of embracing nihilism repulsive. The Good Sociopath chooses to believe other people are worthy of some level of dignity.

I have been annoyingly consistent in highlighting the word choose here just to emphasize that we’re dealing with subjective reality. Social systems are reflexive. Facts and small-t truth do exist, but to Sociopaths they’re negotiable.

In the immortal words of Don Draper: “if you don’t like what’s being said, change the conversation.”

And the Sociopath/Missionary is free to do so.

Free as in speech.

Free as in lunch.

 

* For another pop culture reference that may make this more concrete, the first season of HBO’s True Detective is pretty explicitly about Rust Cohle’s Sociopath journey, and how he and various and sundry other Sociopaths cope with “reality shock.”