Inadequate Equilibria: Part 1

The world can be a depressing place if you look at the second-by-second news cycle. If you were to have a hundred year newspaper, it’d probably be mostly good news. Of course, we live in the second by second cycle. Much of life is predicated on living in and interacting with these relatively broken systems. This is something that’s played out throughout history. There have been proposed answers to these things from exit—Thoreau’s Walden and those who choose to live off the grid these days—to the revolutionary—communism and socialism to completely overhaul the system. Inadequate Equilibria is in the same vein as Freud’s Civilization and It’s Discontents.

As a human being, I think it’s critically important to contribute to this project. There are individuals that choose to exit the system. The Airbnb host, or the person that just lives off a 4% drawdown of their existing assets (aka a retiree at any age). Of course, indirectly, you’re slowly allocating capital to the right places, but this could be done much better.

As a startup founder and investor and general human being, much of my time in life is spent on these problems. It’s weaseling our way to find something that makes a big difference in the world. Many of the systems seem so hard to flip/change. While this is something that we know intuitively, In a quick 170 pages, Yudkowsky characterizes this in a clear voice without resorting to throwing up his hands. 

Starting from a theoretical basis, he seeks to answer the question, “why are so many aspects of the world not optimized to the limits of human intelligence in the manner of financial prices?"

Depending on your perspective, pouring all of our collective human intellect into optimizing finances over a short-term view could be heartening or disheartening. It can be disheartening to see so much of talent under-allocated to efforts that don’t seem to produce end results. After all, no one likes paperwork. Doubly so, no one likes paper work that doesn’t mean anything. Triply so, no one likes paperwork that was created by “the system” or “the man” and you have to adhere to it or else you won’t be able to eat, but “the man” won’t be able to eat so you can’t even change the system. 

The book can loosely be divided into three sections. This post is the first in a series.
  1. Laying out the meta concepts of inefficiency, inexplicability, and inadequacy
  2. Inadequate equilibria in all areas of society (to be published)
  3. Adding inadequate equilibria to your mental toolbox and life (to be published)
Much of technology can be characterized by the attempt to bring adequacy to human endeavors. Once upon a time, markets were so inefficient with respect to information that Ben Graham could make money buying stocks based on the market value being less than book value. Now that markets and systems are inadequate with respect to our wetware and incentives, these can be many stickier and harder to change. Of course, Charlie Munger has also often noted that he’s underestimated the power of incentives.

This book is a master course in rationality, society, and how to act that I think it deserves a separate post for each section. I’ll cover the first here.

“If I had to name the single epistemic feat at which modern human civilization is most adequate, the peak of all human power of estimation, I would unhesitatingly reply, “Short-term relative pricing of liquid financial assets, like the price of S&P 500 stocks relative to other S&P 500 stocks over the next three months.” But why? We’ve often considered financial markets the nervous system of the economy, the best way to relay information.

Allocating capital allows equities to have a lever.
  • Lower cost of capita RoE + RoIC, better capital structure, easier to retain employees because bonuses are worth more, can leverage stock price to acquire new companies.

Elizier introduces the concept of modest epistemology. The later debunked notion that you should trust the expert view most of the time, unless you really have an opinion/have put in the time. Often, this is the most social status oriented view of the world. 

Last, he introduces his self-treatment of his wife’s SAD (Seasonally Affective Depression) treatment as well as his dandruff problem.

With these three examples, he respectively illustrates the notions of inefficient markets, unexploitable markets, and inadequate systems. 
Type Example With Respect to
Inefficient Apple???/An Equity The average person. HFs can still take advantage of this, gathering specialized information.
Shorting Real Estate/Bad Monetary Policy (Japan Example).

It is adequate to the point where there are not a lot of underpriced houses because you aren’t able to short a single house.
No financial product exists to short things. CDS/funds can take advantage of a systematic level
Inadequate Current State of Venture Funding, Colleges as Credentialing systems and the US Healthcare industry. The normal “in-game” view, God’s View or benevolent dictator can overcome

All these classes of markets or systems are adequate with respect to something. Markets are efficient relative to the average individual but not to hedge funds. The average investor isn’t able to find alpha, because changes are not predictable.

The view presented is that markets and systems have predictable movements in prices until they reach some equilibrium point, the so balance of supply and demand. Each individual agent is trying to sop up as much “free money” in the form of predictable price movements as they can. While inefficient markets are systems where the price can be the sole signal of value, inadequate systems are more complicated. Each agent within the system is trying to fulfill their own incentives. Whether that be striving for fame, curing individuals of diseases, their behavior is shaped by incentives. And right now, these incentives are out of whack. The ways in which they get out of whack are collectively known as “Moloch’s Toolbox”. (Sidebar: if you don’t know Moloch, then I don’t know you ;).) Collectively, these are the the tools below:

  • Principal-agent problem (people who make decisions who don’t benefit)
  • Information asymmetry
    • Example: Colleges act as a filter for 1) hardworking kids 2) smart kids
      • But 4 years and $250k is a lot to prove that...
    • Common knowledge -> how to things settle in this point
      • it’s a signaling/asymmetric information problem
  • Nash Equilibria of misaligned incentives, and not Pareto Optimal
    • Two-factor markets and signaling equilibria
    • Pareto optimal -> a single move that makes everyone better off.

Using these as a lens with which to view society is pretty powerful. But the real question is how we can break the grip of these equilibrium points? Usually, it’s come in the form of billionaires or those with the requisite skills + luck to reset the systems. Examples of these reset points might be Bitcoin and SpaceX. They both act as a reset for the systems that they are compared against, centralized banking systems and traditional contract-based space agencies.

While Moloch’s Toolbox is extremely simple, there are different counterarguments against it. On one hand, you can say that everyone is self interested and things won’t change because of that, a “cynical economist” view. Or, you can refer to the view that systems are bad because people are bad, and people are just bad at coordinating, a more nihilistic view. Either way, if you’re a startup founder or trying to change the world for the better, you’re fighting against multiple forces, the “system”, the “haters”, and the “cynics”. The problem is that the combination of those three forces make it quite hard to craft a clever solution. You can’t just build a better mouse trap and hope people will come, instead you need hit some critical mass for different stakeholders to “flip things". That is incredibly hard, but extremely worthwhile.

So What's in a PhD

I remember watching Dragonball-Z, where Gohan’s mom, Chi-Chi, wanted him always to get a PhD. This really hammered home of getting the importance of the credential, the PhD, to be recognized as an expert. However, since that time I’ve become somewhat of an autodidact that learns just for the sake of. However, I recently tweeted this:

The response was surprising. However, I stand by the statement. I first stumbled across this quote while reading "The Mathematical Experience.” The "80 book benchmark" shattered the final remnants of the childhood illusion that you need a PhD to become an expert, a PhD being some mystic level of achievement. In its place now stands a new belief, that becoming expert-level is not that hard. It’s a concrete milestone that anyone sufficiently motivated can achieve.

I really like this 80 book expert benchmark because it has all the classic signs of a good goal. It’s measurable, achievable, but still decently ambitious, especially if you love books. Becoming an “expert” is not that hard, especially if you don’t need the credentials. And thankfully, if you work in startups or are creating something, credentials are not that important. If you really do need credentials, you can always hire someone with the right three letter acronym.

80 books, while seemingly daunting is not that bad. An average US working citizen spends almost an hour commuting to and from work. If she decided to use that time instead of ‘gramming or texting and instead read, she’d be able to get through a decent amount of a book per year. For a book printed with normally-sized font, a reader of this blog could probably read a page per minute. This includes the appropriate highlights made in-text for subject matter retention. That means you, dear reader, could probably finish an average-sized book per week, ~360 pages or ~50 books per year. You could get a PhD in 2 years with time to space! [1]

The eighty book-mark is also great because it illustrates how little knowledge an individual needs to know to become an expert. Within startups specifically, the low barrier to becoming an expert makes investment decisions in “inexperienced” or “young” founders less risky than they actually are. I’ve already written on how young founders often found the biggest, baddest, and best companies. If you believe the thesis of this piece, then being young is less of a disadvantage because it’s so easy to get up to speed in an industry.

Expert-level specialization is very real and necessary. Even a small town library will usually have at least a few thousand books waiting to be checked out. If we only know 80 books worth of knowledge, it’s hard to imagine how you’d be able to build a multi-faceted business. Also with knowledge expanding at an exponential rate, it seems even more daunting. This is one of the reasons why being an expert or getting things done in the world still requires you to collaborate with others and/or use tools to manage knowledge.

Of course, the 80 book goal doesn't cover all the nuances of being an expert. On Twitter, others brought up several counterpoints. First, books aren’t always the best source of knowledge. I think this is certainly true. To the original goal, I would then add the caveat that, you do need to read 16000 pages—or 80 books worth of material at 200 pages per book. This is especially true in fast-growing fields such as blockchain or AI, where preprint, blogs, and Twitter. Where you choose to get the 16k pages certainly makes a difference in what you learn. The best practitioners are often the ones that aren’t teaching the subject. Their knowledge is either much more implicit, or codified in a much more free-flowing form factor such as a blog post. Take, for example, some of Vitalik’s writings on cryptocurrencies. If you’re getting into crypto, his posts will serve you much better than any book proclaiming that blockchains are the second coming of the internet.

Another common retort to “80 books" was that being an expert is mostly about creation. However, I’d say people still need some base level of knowledge to be able to be productive in a field, and as we’ve established before 80 book-length pieces of information or 16,000 pages or two years of learning seems about right to me. You’re probably familiar with the “Whartonite Seeks Code Monkey" or “I can handle the business side" meme pages. In short, they both poke fun at B-School students who don’t really understand the mechanics of product or startups. When I first read TechCrunch and watched the Social Network, I 100% asked a technical friend of mine the same questions. I didn’t have the requisite mental models on what a “startup” was to know why this was a bit silly of a request. Yet after reading blogs, working on products, and talking to folks to get the implicit domain knowledge, I now do. More generally, understanding the domains lets you know what's at the "adjacent possible", the stuff that's hard enough that no one's done it yet and not impossible. In physics this would be the difference between working on gravitational waves and working on time travel.

I look forward to getting my PhDs in bio, brains, and blockchains soon :)

[1] The speed at which a person reads will definitely depend on the subject matter as well. While reading Molecular Biology of the Cell, I read at approximately 15 pages per hour while taking detailed notes. At 1000+ pages, MBOC would take me ~70 hours to read it cover to cover. A normal college-level bio class probably covers half the material in the book. So I could a semester in ~40, or a normal work week. Of course, the caveat to this is that I can read 8 hours per day… Of course, I don’t, but for sufficiently motivated individuals who find the subject matter at hand interesting, you could do it. Warren does it.