Humans have flawed brains that cause them to act crazy sometimes. And in groups, people get even more crazy. Many smart people believe dumb things. Sometimes a group of otherwise completely sane people come together and do something insane. History is full of examples of the “ Extraordinary Popular Delusions and the Madness of Crowds, or Manias, Panics and Financial crisis. Humans sometimes join suicide cults. Human literally burned witches not that long ago. Groupthink is a helluva drug.
Financial markets provide an arena in which the biggest gains can be made betting against consensus. Yet statistically speaking, the consensus is usually right. The times when the crowd goes crazy are notable because they are exceptions. One must carefully decide when to be a contrarian.
Under what conditions is the consensus likely to be wrong? Lets invert the question: under what conditions is the crowd likely to be right?
Most of the time, a large group of people actually comes to a more accurate conclusion than any one individual. The success of Estimize, which crowdsources earnings estimates is one useful empirical example. “Wisdom of Crowds” is a well documented phenomenon, and well summarized in the book by the same title.
Why is the crowd so often right? What must happen for the crowd to be right ? Researchers have identified four interrelated conditions that encourage the wisdom of the crowds:Diversity, Information Availability, Decentralization, and existence of an Aggregation Mechanism.
Understanding these conditions can help one know when to follow the zeitgeist, and when to make a contrarian bet against it. A firm grasp of the facts on both sides of a controversy is necessary, but possibly not sufficient. One can never be sure of all the facts. Its also useful to understand the broader social forces, and how they influence the likelihood of the consensus being right or wrong. Searching for these conditions(or their absence), can be a useful method of avoiding cults and identifying opportunity, beyond just the facts of the individual situations.
The biggest gains are available by being a contrarian who understands the crowd.
The key is understanding when the wisdom of crowds flips to the madness of crowds. And the essential insight is that it has to do with a violation of one or more of the core conditions for a wise crowd.Michael Mauboussin: Who is on the other side?
Diversity implies that each person has their own point of view and some private information, even if only their unique interpretation of the available public information. Diversity is important because it adds different perspectives and increases the amount of available information.The Value of Crowdsourcing: Evidence from Earnings Forecasts
Crowded trades have a tendency to crash- leading to no bid markets all the way down. Academics have noted that in a run up to a market crash diversity of population declines. The market becomes fragile, and eventually there is no one to buy from (or sell to).
One reason Estimize’ earnings estimates have tended to be better than Wall Street Sell side is that Estimize analysts are a diverse group of independent thinkers from around the world, holding a variety of different jobs. A lot of Wall Street analysts go to the same conferences, went to the same schools, etc.
When people come to the same conclusion from different backgrounds, logical methods, etc , their collective wisdom refines understanding of reality. The opposite occurs when people feel pressure to conform. Its important to note this is a genuine deep diversity of thought and perspective, not a superficial check the box diversity.
If multiple people with different viewpoints all come to similar conclusions, the odds of the opposite being true decrease substantially. On the other hand, if there is an obivous archetype of the thinker on the other side, then maybe a contrarian opportunity is available.
As Michael Maubossin has noted- conformity is a nonlinear process:
Scientists even have a sense of the neurobiological basis for conformity.Informational cascades occur when individuals follow the decisions of those who precede them without regard to their personal information.
Epidemiological models are useful here.
The wisdom of crowds does not emerge in groups of idiots. It only applies when there is widespread access to information necessary to reach a conclusion. The extreme opposite occurs in totalitarian societies (or large corporations), where information is tightly restricted. Prior to the internet, information sometimes diffused slowly through a market, leading to massive price discrepancies obvious at even a quick quantitative glance.
Quality of input is critical to the success of crowdsource analysis:
Alternatively, it is possible that the inclusion of forecasts from certain individuals, such as Non-Professionals, may provide no value, or worse, cause the Estimize consensus to deviate further from actuals. Surowiecki (2004) states that although diversity matters, assembling a group of diverse but thoroughly uninformed people is not likely to lead to wise outcomes.
Independence is related to diversity. People need to be able to freely analyze reality and discuss opinions. Conventional wisdom is more likely to be accurate when it is freely subjected to challenge. When there are institutional or social factors that make people extremely afraid to speak truth, what everybody says to be true, may be wrong.
Independence requires relative freedom from opinions and actions of others, not complete isolation. Independence enables people to actually express their diverse information and reduces potential bias in the group decision.
Decentralization allows people to specialize and draw on local knowledge, without any individual or small group dictating the process.
Diversity and independence all fit in nicely with decentralization. Through specialization, decentralization encourages independence and increases the scope and diversity of information. Decentralization reduces the risk that independence and diversity will go away. Similarly having capital flows from all around the world, not just from a small group of schools or similarly thinking firms, increases the likelihood that markets become more efficient.
Existence of an Aggregation Mechanism
Finally, an aggregation mechanism is necessary to collect the individual opinions and harness the ‘wisdom-of-crowds’ effect.
This is basically why capitalism has succeeded. The price mechanism aggregates facts about supply and demand better than any bureaucracy could. At the same time, this why often the best opportunities to earn an investment profit are in illiquid asset classes where the market does not function as an aggregation mechanism to make the price close to right.
Of course, just because the market consensus is wrong, doesn’t mean that is necessarily wise to bet against it today. Must also consider reflexivity, narratives, and capital flows etc, and maintain a balance sheet that allows one to survive long periods of mass delusion.
Postscript: This is all indirectly related earlier post on finding underfollowed opportunities: The hard thing about finding easy things . This linked the ideas of both Sun Tzu and Warren Buffett. Some of the specific opportunity sets mentioned in this post have since been too widely known and we’ve moved further into more esoteric off the beaten path ideas. Nonetheless the basic principal still holds: there are more likely to be opportunities where the crowd isn’t looking.
A recurring motif in Capital Returns: Investing Through the Capital Cycle, by Edward Chancellor is that growth vs. value is a false dichotomy:
Our belief is that stocks should be viewed not as “growth” or “value” opportunities, but rather from the perspective of whether the market is efficiently valuing their future earning prospects.
Marathon’s approach is to look for investment opportunities among both value and growth stocks, as conventionally defined. They come about because the market frequently mistakes the pace at which profitability reverts to the mean. For a “value” stock, the bet is that profits will rebound more quickly than is expected and for a “growth stock,” that profits will remain elevated for longer than market expectations.
Marathon looks to invest in two phases of an industry’s capital cycle. From what is misleadingly labelled the “growth” universe, we search for businesses whose high returns are believed to be more sustainable than most investors expect. Here, the good company manages to resist becoming a mediocre one.From the low return, or “value” universe, our aim is to find companies whose improvement potential is generally underestimated. In both cases, the rate at which a company reverts to mediocrity (or “fade rate”) is often miscalculated by stock market participants. Marathon’s own experience suggests that the resultant mispricing is often systematic for behavioural reasons.
Labelling fund managers as “value” or “growth investors risks distorting the investment process
Warren Buffett discussed a similar idea in Berkshire Hathaway’s 1997 Shareholder letter:
…most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross- dressing.
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening).
Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.
Similarly, business growth, per se, tells us little about value. It’s true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain….
…Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.
Berkshire Hathaway’s 1997 Shareholder letter
False dichotomy, but useful heuristic
Growth vs. value is a false dichotomy, but it might be a useful heuristic for organizing a portfolio. With a “value” investment, you are buying assets, and betting on a reversion to the mean. Generally this means other people are overestimating the bleakness of the future. With a “growth” investment you are buying the future business, betting on change. Generally this means other people are underestimating the brightness of the future.
The key is having an intellectually honest variant view.
Venture capital and value investing
In a similar vein, its easy to see how venture capital and value investing are actually quite similar. Both are mispriced bets on the probability of change.
Tren Griffin wrote about this:
Venture capital and value investing share many different elements but each system is based on a different mispricing. This is a critically important point for an investor to understand. If an asset is not mispriced, market outperformance is not mathematically possible. It is also important to understand that investments can be mispriced for different reasons.
In venture capital the mispricing occurs because very few investors or asset owners understand optionality. This allows a VC to buy what are essentially long-dated, deeply-out-of-the-money call options from companies at prices which are a bargain.
In value investing the mispricing occurs because the market is bipolar (i.e., neither always rational nor always efficient). This allows an investor to sometimes buy assets at a price which reflects a discount to intrinsic value (i.e., a bargain) and to wait for a good result rather than trying to “time” the market.The fundamental difference between venture capital and value investing
Marc Andreessen, in an interview with Tim Ferriss, expressed a similar idea, noting how much he studies and admires Warren Buffett:
Business Lessons From Marc Andreeseen
… every time I hear a story like See’s Candies, I want to go find the new scientific superfood candy company that’s going to blow them right out of the water. We’re wired completely opposite in that sense. Basically, he’s betting against change. We’re betting for change. When he makes a mistake, it’s because something changes that he didn’t expect. When we make a mistake, it’s because something doesn’t change that we thought would. We could not be more different in that way. But what both schools have in common is an orientation toward, I would say, original thinking in really being able to view things as they are as opposed to what everybody says about them, or the way they’re believed to be.”
A decent portfolio has a combination of mean reversion bets, and underpriced deep out of the money options. It pays to be an intellectual cross dresser
Investing goes through fads. Investing strategies and fund structures(1) go in and out of style. Nowadays long/short hedge funds are out and infrastructure funds are in. Within the public equity markets, value is out, growth/momentum is in. Each time this happens, people forget how the cycle repeats.
In fact, one CIO contended that if he brought a hedge fund that paid him to invest to his board, the board would dismiss it without consideration — simply because it’s called a hedge fund, and hedge funds are bad.Institutional Investor
Hedge funds may have to do a name change if they want to raise capital.
Remember last time?
And yet people forget:
Allocators woke up craving the next rising hedge fund star and couldn’t invest enough at high and increasing management fees after the widespread success of long-short funds in the weak equity markets of 2000-2002. Board rooms back then castigated CIOs for not having long-short equity hedge funds in their portfolios.
This isn’t the first time:
People forget that 40 years ago, officials such as Paul Volcker of the Federal reserve wanted an active hedge fund industry to absorb the risk that was not well managed by state-insured banks.Financial Times
Each investment strategy picks up a certain type of risk(and potentially earns a profit in doing so)- if a strategy disappears that particular risk can become a systemic issue. Fortunately, around this time it also becomes more lucrative to bear the risk others are unwilling to bear. Eventually the risk reward tradeoff starts to make sense again.
Different, different, yet same
In the 1960’s Warren Buffett put up ridiculous returns, and Alfred Winslow Jones proteges profitably exploited anomalies in markets. By the mid 1970’s of there were many articles about hedge funds shutting down though. Industry AUM declined ~70% peak to trough. Nifty fifty boom and bust followed by the long nasty bear market. But as the institutional architecture of international trade and currency shifted we entered glory years of global macro/commodities traders. Then the 80’s were great for Graham deep value and Icahn style activist investing after the 70’s bear market left a huge portion of the market selling below liquidation value.
Likewise late 90’s again saw the death of hedge funds as day traders in pajamas earned easy returns from the latest dot-com- until the crash. Yet out of the rubble of the tech bubble rose a new generation of great hedge fund managers. There was rich pickings for surviving value hunters- and those with the guts and skills to execute became household names a few years later. Many value managers that nearly went out of business during the tech bubble put up ridiculous numbers 2000-2002 and through the next financial crisis. (See: The arb remains the same)
The greatly exaggerated death of a style gives rise to an environment where there is a plethora of opportunities for something similar to that style to work. Each time the narrative in the greater investment community favors some type of uniform strategy, and LPs give less capital to other strategies- causing them to nearly die off. But then the lack of people pursuing the out of fashion strategy makes its return potential more lucrative. Eventually someone finds a new method to pick up those dollar bills on the ground that shouldn’t exist.
Economics emphasizes rational actors and equilibrium. Yet the messy reality is far more complicated. Ecology is a far more useful mental model.
A giant self over-correcting ecosystem
There is in ecological function to speculative capital and over time there should be some excess returns to those willing to take mark-to-market lossesFinancial Times
Like biological species, financial strategies can have competitive, symbiotic, or predator-prey relationships. The tendency of a market to become more efficient can be understood in terms of an evolutionary progression toward a richer and more complex set of financial strategies.Market force, ecology and evolution
Ecology emphasizes interrrelationships between different individuals and groups within a changing environment, and indentifies second order impacts.
Thinking like a biologist
One can develop a useful framework by replacing species with strategy, population with capital, etc
Flows and valuation interact, self correct, and overshoot.
….capital varies as profits are reinvested, strategies change in popularity,and new strategies are discovered. Adjustments in capital alter the financial ecology and change its dynamics, causing the market to evolve. At any point in time there is a finite set of strategies that have positive capital; innovation occurs when new strategies acquire positive capital and enter this set. Market evolution is driven by capital allocation.
Market evolution occurs on a longer timescale than day-to-day price changes. There is feedback between the two timescales: The day-to-day dynamics determine profits, which affect capital allocations, which in turn alter the day-to-day dynamics. As the market evolves under static conditions it becomes more efficient. Strategies exploit profit-making opportunities and accumulate capital, which increases market impact and diminishes returns. The market learns to be more efficient.
When an ecoystem is overpopulated with a certain species, it eventually overshoots and results in mass starvation. Populations fluctuate wildly across decades, and sometimes species go extinct or evolve into something that seems new.
New conditions give rise to new dominant species.
(1) Although I am frequently pedantic about the differences between structure, strategy, and sector, many in the media seem to use these interchangeably when discussing reversion to mean situations. Fortunately they all exhibit the same boom/bust phenomenon, so I am using them interchangeably here.
“Fuck a wind tunnel. The biggest wind tunnel in the world is up there. Its called reality.”
John Boyd’s OODA loop is in my opinion one of the most valuable mental models to apply in basically all aspects of life, especially where there is high stakes competition. Boyd’s life makes for an entertaining bio, and Boyd: The Fighter Pilot Who Changed The Art Of War is one of the first completely detailed versions to cover his development as a person, and strategist.. The book develops his character through a series of political battles and personal trauma”. He had an intense belief in empirically testing everything, and he was willing to struggle in the wilderness for decades until he got everything right. His bio tracks how his thinking evolved over time, culminating in several important aeronautical engineering theories, along with the OODA loop.
“Do not write it as a formula. Write it as a way to teach officers to think, to think in new ways about war. War is ever changing and men are ever fallible. Rigid rules simply won’t work. Teach men to think.”
“If you want to understand something, take it to the extremes or examine its opposites,”
The OODA loop
The quick version:
… to shape the environment, one must manifest four qualities: variety, rapidity, harmony, and initiative.
A commander must have a series of responses that can be applied rapidly; he must harmonize his efforts and never be passive. To understand the briefing, one must keep these four qualities in mind. After marching through commander must operate at a faster OODA Loop than does his opponent.
Boyd said there are two ways to manipulate information gleaned from observation: analysis and synthesis. We can analyze whatever process or event we are observing by breaking it down into individual components and interactions. And from this we can make deductions that lead to understanding. Or we can synthesize by taking various sometimes unrelated components and putting them together to form a new whole.
Key quotes on the OODA loop and related theories:
The purpose of the briefing was not to reveal the “Answer” but to jar listeners out of complacency and into thinking on their own. Boyd abhorred the idea that his briefing might be considered dogma. In fact, he often said listeners should take the briefing out and burn it before they considered it dogma.
Boyd found many such instances in history, and in these victories by numerically inferior forces he found a common thread: none of the victorious commanders threw their forces head-to-head against enemy forces. They usually did not fight what is known as a “war of attrition.” Rather, they used deception, speed, fluidity of action, and strength against weakness. They used tactics that disoriented and confused—tactics that, in Boyd’s words, caused the enemy “to unravel before the fight.”
Becoming oriented to a competitive situation means bringing to bear the cultural traditions, genetic heritage, new information, previous experiences, and analysis / synthesis process of the person doing the orienting—a complex integration that each person does differently. These human differences make the Loop unpredictable. In addition, the orientation phase is a nonlinear feedback system, which, by its very nature, means this is a pathway into the unknown. The unpredictability is crucial to the success of the OODA Loop. Only three arrows are on the main axis, and these are what most see when they look at the Observe > Orient > Decide > Act cycle. But this linear understanding and its common result—an attempt to use the Loop mechanically—is not at all what Boyd had in mind.
Application of OODA Loop:
The ability of an aircraft to perform fast transients does two things, one defensive and one offensive: it can force an attacking aircraft out of a favorable firing position, and it can enable a pursuing pilot to gain a favorable firing position. The advantage gained from the fast transient suggests that to win in battle a pilot needs to operate at a faster tempo than his enemy. It suggests that he must stay one or two steps ahead of his adversary; he must operate inside his adversary’s time scale.
Thinking about operating at a quicker tempo—not just moving faster—than the adversary was a new concept in waging war. Generating a rapidly changing environment—that is, engaging in activity that is so quick it is disorienting and appears uncertain or ambiguous to the enemy—inhibits the adversary’s ability to adapt and causes confusion and disorder that, in turn, causes an adversary to overreact or underreact. Boyd closed the briefing by saying the message is that whoever can handle the quickest rate of change is the one who survives.
The danger—and this is a danger neither seen nor understood by many people who profess a knowledge of Boyd’s work—is that if our mental processes become focused on our internal dogmas and isolated from the unfolding, constantly dynamic outside world, we experience mismatches between our mental images and reality. Then confusion and disorder and uncertainty not only result but continue to increase. Ultimately, as disorder increases, chaos can result. Boyd showed why this is a natural process and why the only alternative is to do a destructive deduction and rebuild one’s mental image to correspond to the new reality. Thomas Kuhn, a philosopher of science, and Joseph Schumpeter, an economist, recognized the destructive side of creativity. But Boyd was unique in his explanation of how the process is grounded in fundamentals discovered by Godel and Heisenberg and by entropy.
What will be the scene at your funeral?
Boyd was both a thinker and a doer, the quintessential man in the arena.
Boyd saw himself as a man of principal fighting superiors to do what was best for his country. He wasn’t one to suffer fools, or careerists, or bureacrats beyond the minimum military courtesy required.He took enormous career risk in order to advance the intellectual caliber of the US air force. He document and codified with mathematics techniques that truly worked in the air. This made the world a safer place.
Over time he built up a team of proteges who admired him intensely.
“Boyd’s Acolytes minimize his faults. They say it is more important that his core beliefs were steel-wrapped and his moral compass was locked on true North, that he never misspent his gifts. His motivation was simple: to get as close as possible to the truth. He would have been the first to admit there is no absolute truth. But he continued chasing something that was always receding from his grasp. And in the pursuit he came far closer to the unattainable than do most men. “
This was the description of the eulogy that one of Boyd’s proteges gave for him:
“Not many people are defined by the courts-martial and investigations they faced,” raucous laughter echoed off the white walls of the chapel. Sprey told how Boyd once snapped the tail off an F-86, spun in an F-100, and how he not only stole more than $1 million worth of computer time from the Air Force to develop a radical new theory but survived every resulting investigation. Chuck Spinney, a boyish Pentagon analyst who was like a son to Boyd, laughed so loud he could be heard all across the chapel. Even those in the congregation who barely knew Boyd took a certain pride in his profanity and coarseness and crude sense of humor. He cared little for his personal appearance and could be demanding, abrasive, and unreasonable. And while in his professional life Boyd accomplished things that can never be duplicated, in his personal life he did things few would want to duplicate.
Boyd’s work habits, were, um, interesting. Here was the perspective of one of his colleagues:
He would look up from his work to see Boyd staring at the wall, oblivious to the world, for maybe fifteen or twenty minutes. Boyd was, as he described it, “having a séance with myself.” Then it was as if a switch had been turned on: suddenly Boyd spun around in his chair and picked up the conversation, waved his arms like a windmill in a hurricane, leaned across his desk.
Boyd went to the library—it was open until 1:00 A.M.—and continued working on equations. He made a list of what had to be done next, which equations had to be written and solved, what theories must be followed up and developed. He filled sheet after sheet of his yellow legal pad. When the library closed he drove up Buford Highway, turned onto McClave Drive, entered his home and continued working. Then he called Spradling( colleague with who he worked). It was about 4:00 A.M. in Atlanta, three hours earlier in Las Vegas.
Boyd, as a senior officer, lived in a trailer. By all accounts he worked eighteen- and twenty-hour days. He bought a reel-to-reel tape deck, and every night as he did paperwork his trailer was filled with the ominous “Ride of the Valkyries” or the majestic “Entry of the Gods into Valhalla.”
His search ranged far afield. From the base library he checked out every available book on philosophy and physics and math and economics and science and Taoism and a half dozen other disciplines. He was all over the map, searching but not quite knowing for what.
It was obvious from Boyd’s phone calls that he was not only spending a disproportionately large amount of his retirement pay on books but was reading them all. Christie’s phone might ring at 2:00 A.M. and when he picked it up Boyd would say, “I had a breakthrough. Listen to this.” And without a pause he would begin reading from Hegel or from an obscure book on cosmology or quantum physics or economics or math or history or social science or education. Christie thought Boyd had taken leave of his senses. Except for the year at NKP, the past nine years of Boyd’s life had been devoted to hosing his superiors. He was a man of action. But when he walked out of the Building, he walked into a world of ideas. There was almost no transition. One day he was on the phone checking on the progress of the F-16 and the next he was calling people at 2:00 A.M. to read German philosophy. And for what? What was this learning theory he kept talking about? He said he had begun work on the thing back at NKP and he still had nothing to show for it. Why didn’t Boyd just retire?
One of John’s favorite stories, one he was to tell all his life, revolved around entering high school on September 2, 1942. He said he took a series of tests, one of which showed he had an IQ of only ninety. When offered the chance to retake the test, he refused. The test gave John what he later said was a great tactical advantage in dealing with bureaucrats—when he told them he had an IQ of only ninety, they always underestimated him.
Of course Boyd did have an advanced degree in aeronautical engineering. So he obviously wasn’t dumb. Apparently he worked harder than anyone at checking every single equation he worked on. Even if he wasn’t the smartest, his intense study over his lifetime allowed him to make all the important contributions that he did.
The right side of history
The 1960s were years of protests and demonstrations on college campuses across America. But not at Georgia Tech. In 1961 the president of Tech called a mandatory all-student meeting and announced that the first black students had been accepted, that all students would welcome them in friendship and cordiality, and any student who behaved otherwise would be dismissed and there would be no appeal. Thus, Tech became the first desegregate peacefully and without being forced to do so by court order. Tech and its students were too serious about academics to become sidetracked by such issues. During the 1960s the most avant-garde activity at Tech was the English professor who sometimes held classes at Harry’s Steak House on Spring Street. This professor’s “liberalism” was the talk of the campus.
Unconventional technique of internal politics and internal diplomacy
If your boss demands loyalty, give him integrity. But if he demands integrity, then give him loyalty.
In his new job, Boyd saw problems that needed immediate attention everywhere he looked. But 7th Air Force sent down paperwork daily that took hours to answer. Boyd thought Air Force bureaucracy was keeping him from the job at hand. His solution was to respond but to add material that caused 7th Air Force more paperwork than 7th Air Force caused him. “Pain goes both ways,” he said. In only a few weeks the time-consuming requests from 7th Air Force shrank to almost nothing.
John Boyd as a diplomatic representative
Then there was the story of the junior officer who was having an affair with a Thai woman. There was nothing unusual about this. Thai women are extraordinarily beautiful and many American officers formed close relationships But this particular officer was married and soon was overcome with guilt. He broke off the relationship. The woman in question was the daughter of an influential village official who felt his family lost face when his daughter was spurned. He was about to charge the young officer with rape. Boyd said he called in the young officer and gave him the big picture of how many base activities depended on the good will of Thai officials. He ordered the young officer, guilty or not, to continue the relationship.
“I’m giving you a direct order to screw her every night until you are transferred out of here,” Boyd said he told the officer. “Sir, I don’t believe that is a lawful order,” the officer said. “Goddammit, I issued it and you better obey it. We’re at war and bigger things are at stake here than your guilt. Your dick can cause you problems but it is not going to cause problems for America. You do as I say or I will make your life a living hell
Hey, sometimes a guy needs to take one for the team.
Boyd also thought the Base Exchange (B-X) at NKP was an unnecessary indulgence. He said a store selling everything from hair dryers to television sets to stereos had no place on a combat base—that such things made Americans “soft.” Persky recalls that once, he and Boyd were talking when Boyd pointed at the B-X and said everything in the store should be loaded aboard C-130s and parachuted into North Vietnam. “Let them get used to the good life and then we can just walk in and take over,” he said. Boyd also dealt with situations
Seems Capitalism did sort of do this in the long run.
In a Blitzkrieg situation, the commander is able to maintain a high operational tempo and rapidly exploit opportunity because he makes sure his subordinates know his intent, his Schwerpunkt. They are not micromanaged, that is, they are not told to seize and hold a certain hill; instead they are given “mission orders.” This means that they understand their commander’s overall intent and they know their job is to do whatever is necessary to fulfill that intent. The subordinate and the commander share a common outlook. They trust each other, and this trust is the glue that holds the apparently formless effort together. Trust emphasizes implicit over explicit communications. Trust is the unifying concept. This gives the subordinate great freedom of action. Trust is an example of a moral force that helps bind groups together in what Boyd called an “organic whole.”
Backgammon: the cruelest game provides a guide to some key principles of backgammon, and contains analysis of several games between top players. It also gets philosophical about the vicissitudes of randomness that make backgammon so challenging and intriguing:
From the start there is a complicated interplay of possibilities, probabilities, good fortune and bad, which influences every facet of the game. in backgammon, to seek position is to take certain calculated risks, and because all players are ruled by the dictates of the dice- or by chance, which Karl von Clausewitz, the ninetheenth-century military theorist, described as “an agency indifferent to the actor’s preference for the outcomes” – no player is ever in control of his particular destiny. One of the game’s chief tactics, then, is to shield oneself against the dice. The player with the strongest position can withstand the greater number of unfavorable rolls, or “bad luck,” than can the more weakly protected player, who, because he failed to protect himself, is more easily assaulted and overrun.
Nonetheless, no matter how cunningly you play, you are virtually always vulnerable. One unexpected horror roll can undermine the best positions, and derange the most sensible of plans; this is bot hthe charm and the frustration of the game. The best players know they must employ the craftiest of tactics, not because of the dice, but in spite of them. It is the enormously high luck factor in backgammon that causees it to be a game of skill. Without luck or accident, the game would not only be monotonous, but infinitely less skillfull.
In backgammon, to be skillful is to be self protective. At any given point in the ggame, the better players are aware of Murphy’s Law, which states that if anything can go wrong, it will.” Given the whimsical nature of the dice, all players have a chance in the game, but some players have more chances than others, because they have created in environment in which the more propirious is more likely to occur.
In backgammon, an understanding of the correct percentage moves in specific situations qualifies as “inside information” and will enable you to win in the long run. But not every time, alas, and often nt even in what you believe to be crucial games. This condition must be accepted philosophically, of course, and should not deter you from continuing a detailed study of the game.
Learning to think probabilistically is one of the most critical skills one can master. Nate Silver’s The Signal and the Noise: Why So Many Predictions Fail–but Some Don’t is a valuable book on thinking probabilistically and forecasting in an uncertain environment. It compares and contrasts examples across multiple disciplines, including weather forecasting, seismology, finance, and more.
This book pairs well with Against the Gods, Fortune’s Formula and Superforecasting. Against the Gods is in my opinion, the most important book on the development of probabilistic thinking. Early civilizations were good with geometry and logic, but helpless with uncertainty. Ironically it was gamblers and heretics who moved mankind forward by developing the science of probability, statistics, and ultimately risk management. Fortune’s Formula shows the connection between information theory, gambling, and correct position sizing for investors. It helps the answer the question: when you have a slight edge, how much should you bet? Nate Silver draws heavily on Superforecasting. Particularly important is the idea of “foxes and hedgehogs”. Foxes are multidisciplinary, adaptable, self critical , tolerant of complexity, cautious and empirical. In contrast, Hedgehogs are specialized, stalwart, stubborn, order-seeking, confident, and ideological. As you might expect, foxes make far better forecasters than hedgehogs, even though hedgehogs make for better television.
Anyways, here are a few key insights from my notes on The Signal and the Noise
1) Data is useless without context.
There are always patterns to find in data, but its critical to understand the theory behind the system you are studying to avoid being fooled by noise. This is true in forecasting the weather, investing, betting on sports, or any other probabilistic endeavor. The ability to understand context is also a critical advantage humans have over computer programs.
“Statistical inferences are much stronger when backed up by theory or at least some deeper thinking about their root causes. “
The importance of understanding context comes to the forefront when you compare human’s success with weather forecasting, vs relative failure with earthquake forecasting.
“Chaos theory is a demon that can be tamed- weather forecasts did so, at least in part. But weather forecasters have a much better theoretical understanding of th earth’s atmosphere than seismologists do of the earth’s crust. They know more or less, how weather works, right down to the molecular level. Seismologists don’t have that advantage. “
The ability to understand context is what separates success from failure in all pursuits dealing with uncertainty. The profile of professional sports gambler Bob Voulgaris, is highly instructive. Voulgaris focuses on NBA basketball. A key insight is that Voulgaris has powerful tools for analyzing data, and he makes good use of the data, but he also has deep understanding of the qualitative subletities of how NBA basketball works. Obvious statistical patterns are quickly incorporated into betting lines, whether they are signal or noise. Voulgaris looks deeper, and finds places where the line misprices true probabilities.
“Finding patterns is easy in any data rich environment; thats what mediocre gamblers do. The key is in determining whether the patterns represent noise or signal. “
2) Beware of overconfidence
“… the amount of confidence someone expresses in a prediction is not good indication of its accuracy, to the contrary, these qualities are often inversely correlated. “
3) Think big, and think small. Mix the macro and the micro.
“Good innovators typically think very big, and they think very small. New ideas are sometimes found in the most granular of details where few others bother to look. And they are sometimes found when you are doing your most abstract and philosophical thinking, considering why the world is the way that it is and whether there might be an alternative to the dominant paradigm.”
This is reminiscent of the “global micro” approach used by several manager’s profiled in Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets
4) Recognize the Value of Bayesian Thinking
The work of Thomas Bayes forms the framework underlying how good gamblers think.
Bayes was an English minister who argued in his theological work that admitting our own imperfections is a necessary step on the way to redemption. His most famous work, however, was “An Essay toward Solving a Problem in the Doctrine of Chances,” which was not published until after his death. One interpretation of the essay concerns a person who emerges into the world( ie Adam, or someone from Plato’s cave), and rises to see the sun for the first time:
“At first the does not know whether this is typical of some sort of freak occurrence. However each day that he survives and the sun rises again, his confidence increases that it is a permanent feature of nature. Gradually, through this purely statistical form of inference, the probability that he assigns to his prediction that the sun will rise again tomorrow approaches(although never exactly reaches) 100 percent.”
In essence, beliefs on probability are updated as new information comes in.
Ironically Bayes philosophical work was extended by the mathematician and astronomer Pierre Simon-Laplace, who was likely an atheist. Although Laplace believed in scientific determinism, he was frustrated with the disconnect between (what he believed to be the perfection of nature, and human imperfections in understanding it, in particular with regards to astronomical observations. Consequently, he developed some measuring techniques that relied on probabilistic inferences, rather than exact measurements. “Laplace came to view probability as a waypoint between ignorance and knowledge.” The combined work of Laplace and Bayes led to simple expression that is concerned with conditional probability. In essence Bayesian math can be used to tell us the probability that a theory or hypothesis if some event has happened.
5) The road to wisdom is to be less and less wrong.
forecasting, or at least operating in an uncertain environment, is an iterative process.
Nate Silver titles one of the chapters “Less and Less Wrong, as a homage to the Danish mathematician, scientist, inventor, and poet Piet Hein, author of Grooks:
The road to wisdom? — Well, it’s plain
and simple to express:
and err again