Plus All Weather, Learning to Learn & Why WebMD Sucks
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“When art critics get together they talk about Form and Structure and Meaning. When artists get together they talk about where you can buy cheap turpentine”
Pablo Picasso



Over at Mutiny Fund, we did an interview with Brett Nelson, CIO and founder of Certeza Asset Management. Brett focuses on investments in volatility using proprietary algorithms to capture perceived mispricings in the VIX term structure. We talk about his approach to markets and the start of VIX trading from VRO to modern VIX products.

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Chesterton’s Fences and Gordian Knots

When you encounter a difficult and complex problem, what’s the best way to approach it?

There are, broadly, two ways of doing so: as a knot or as a fence.

The knot approach is encapsulated in a legend of Alexander the Great.

According to legend, Alexander marched his army into the then-Phrygian capital in modern-day Turkey. Upon arriving in the city, he encountered an ancient wagon. Its yoke was tied with a bunch of knots, all so complexly entangled that it was impossible to see how they were fastened.

An oracle had once declared that any man who could unravel its elaborate knots was destined to become ruler of all of Asia. Alexander was a pretty ambitious guy so he was instantly seized with desire to untie the Gordian knot.

After wrestling with it for a time and finding no success, he stepped back from the mass of gnarled ropes and proclaimed, “It makes no difference how they are loosed.” He then drew his sword and sliced the knot in half with a single stroke. Problem solved.

The fence approach is encapsulated in this story from G.K. Chesterton’s The Thing:

“There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road.
The more modern type of reformer goes gaily up to it and says, ‘I don’t see the use of this; let us clear it away.’

To which the more intelligent type of reformer will do well to answer: ‘If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.’”

Chesterton is pointing out that there’s a reason for the fence. Building a fence requires time and money. Someone, at some point, decided that it was worth it to spend those resources to build a fence. They probably had at least a decent reason in their mind for doing so.

It may have been a good reason when they built it, but not a good reason anymore. Maybe they built it to keep in cattle but the cattle don't graze there anymore. However, knowing that requires understanding why they built it in the first place. Maybe they built it to keep the cattle in and the cattle are just on the other side of the hill and you don't see them.

Chesterton’s fence is encapsulated in rules of thumb like Michael Pollan’s suggestion that “Don’t eat anything your great-grandmother wouldn’t recognize as food.” and Nassim Taleb’s Lindy Effect which suggests prioritizing older books over newer ones.

It’s hard to know when the right way to approach a problem is as a fence or a knot. I think one good way of thinking about it is The Robustness Efficiency Trade-off. As I wrote in that note:

If failure is cheap or easy to recover from, then optimize for efficiency. The web developer building a puppy photo-sharing app can optimize for high efficiency at the cost of robustness – hence the startup adage to “move fast and break things.” The cost of making a mistake is cheap. No one freaks out if their puppy photo won’t load for an hour.

If failure is costly and hard to recover from, then robustness is more important. The nuclear power plant engineer is in the precisely opposite position. Nuclear engineers do not “move fast and break things” in the name of efficiency. They move at slothlike speed and quintuple check everything. The impact of making a mistake is catastrophic hence the saying “measure twice, cut once.”

The fourth backup generator is going to be idle 99.9999% of the time. In that sense, having it around is very “inefficient”, but if it gets used only once in a millennium to prevent a catastrophic meltdown, then it was money very well spent.

To cast it in terms of fences and knots, if you are working at a nuclear power plant and thinking about taking out a piece of equipment then you better go hardcore Chesterton’s Fence and make absolutely, positively sure that you understand exactly why it was put there in the first place.

If you are building a photosharing app for dog pictures as a side project and it seems like one of the libraries you are using was set up in a dumb way, then it’s probably fine to just “cut the knot” and see if anything bad happens: the worst-case scenario is not that bad.

Is failure cheap or easy to reverse? You can probably slice away
Is failure devastating or hard to reverse? You might want to talk to whoever originally built that fence and make sure you understand why they did it.

Solving any complex problem requires both some fence studying and some knot slicing. Many companies prior to Paypal tried to cut the Gordian knot of getting people to put their credit cards online and failed. It turned out there were some fences that couldn't just be torn down.

Next time you encounter a complex problem, consider asking yourself and your collaborators: Is this a fence or is this a knot?

H/t to Mike Dariano’s notes on a TMBA podcast where I first heard Venkatesh Rao originally mention this dichotomy.

The Best of What I’ve Been Consuming
In recent years, Ray Dalio has come more into the public light for his writing about Principles, but his original source of fame was Bridgewater, his hedge fund which grew to over $100 billion in assets.

One of the core products of Bridgewater is their All Weather strategy which was partially responsible for the birth of what is now called risk parity strategies. For many institutional investors, risk parity is the broad approach to creating a well-diversified portfolio, but it’s still a poorly understood topic by non-institutional and retail investors.

Though I have my objections to risk parity (a topic for a forthcoming article), I believe the basic four-quadrant model (growth, recession, inflation, deflation) used by risk parity strategies is a very helpful framework and a much better starting point than the exclusively stock and bond focused portfolios that are typical with most investors.

This piece is a good background on why that is and some starting points for investors to think about better diversification.

One of the best books on learning ever written is the Inner Game of Tennis by W. Timothy Gallwey. I read it years ago, but I still think about it any time I am trying to learn a new skill. The crux of the book is images are better than words, showing better than telling, too much instruction worse than none, and that trying hard often produces negative results. From Galloway:

Getting it together mentally in tennis involves the learning of several internal skills:

1) learning how to get the clearest possible picture of your desired outcomes;

2) learning how to trust Self 2 to perform at its best and learn from both successes and failures; and

3) learning to see “nonjudgmentally”—that is, to see what is happening rather than merely noticing how well or how badly it is happening.

This overcomes “trying too hard.” All these skills are subsidiary to the master skill, without which nothing of value is ever achieved: the art of relaxed concentration.

This video is computing pioneer Alan Kay showing Galloway’s method of teaching as a way for designing user interfaces, but I think that anyone trying to teach anything would benefit from seeing Galloway's method in action.

WebMD, And The Tragedy Of Legible Expertise
Astral Codex Ten

One of the most fascinating elements of COVID has been the widespread popular appreciation that a lot of high-profile experts actually aren’t very good at predicting things.

As COVID ramped up in January, it wasn’t the head of the CDC and WHO that were worth listening to, it was seemingly “random” people on Twitter that were much further ahead.

This post is one plausible explanation for that (though there are likely many causes).

When the Director of the CDC asserts an opinion, she has to optimize for two things - being right, and keeping power. If she doesn't optimize for the second, she gets replaced as CDC Director by someone who does. That means she's trying to solve a harder problem than Zvi [seemingly random internet person] is, and it makes sense that sometimes, despite having more resources than Zvi, she does worse at it.

The way I imagine this is that Zvi reads some papers on whether the coronavirus has airborne transmission, sees the direction they're leaning, and announces on his blog that it probably has airborne transmission.

The Director of the CDC reads those same papers. But some important Senator says that if airborne transmission is announced, important industries in his state will go bankrupt. Citizens Against Lockdowns argues that the CDC already screwed up by stressing the later-proven-not-to-exist fomite-based transmission, ignoring the needs of ordinary people in favor of a bias towards imagining hypothetical transmission mechanisms that never materialize; some sympathetic Congressman tells the director that if she makes that same mistake a second time, she's out. One of the papers saying that airborne transmission is impossible comes from Stanford, and the Director owes the dean of Stanford's epidemiology department a favor for helping gather support for one of her policies once. So the Director puts out a press release saying the evidence is not quite strong enough to say airborne transmission definitely happens, and they'll review it further.

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