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#+title: Stop Asking for Better Horses
#+author: Preston Pan
#+description: It doesn't happen instantly.
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* Times Never Change
#+name: Henry Ford (allegedly)
#+begin_quote
If I had asked people what they wanted, they would have asked for better horses -- Henry Ford (Allegedly)
#+end_quote
Before his time, cars were nothing but a novelty item for people that could afford them.
It's a simple idea, but it's what runs our world today. However, the democratization of information
that the internet has blessed upon us has some side-effects that distort truth signals created
by the market. Let's take a deep dive into the strange difference between what people /say is true/
(i.e. "people want better horses!") versus what people /actually want/ (i.e. real demand or real
risk taking).
* You're Not Vested
You (probably) are not an investor. You have no skin in the game, and you do not lose anything
if your guess is wrong on the internet. Nobody will ultimately point out your mistake, because
you're likely not important enough that your mistakes will be talked about. And, even for people
that are, nobody will call them out on how wrong they are; people are too busy making their
own opinions! So if you're not investor, it does no good to you if you think something is a bubble.
In fact, if you /are/ an investor and have enough capital for what I'm suggesting, you should know
about:
** Information and Markets
In a market, any relevant information that's not reflected in the price is an arbitrage opportunity.
If you believe that some technology's fundamental value is zero (or low), you have a couple of
options: shorting and puts (or some put spread). Of course, the common counterargument is that
the market is irrational, so you'll just end up losing all your money if you buy puts. Well, you
always have a choice of parameters. For instance, you can buy less puts and you can increase your
amount OTM. If you have a couple million dollars, you could make a profit by buying one-week put
options every week, while adjusting your parameters OTM. During a bubble, there are only two
possibilities: either put options are not priced in, so as long as you continue to have capital
there's always some risk exposure (isolating your thesis) that could allow you to make money, or
the put options are priced in, in which case the fact that it's a bubble should be obvious from the
EMH. Therefore, there's always a way to make money off of your twitter prediction! Will you? I
believe that should be our measure of how much we should continue to believe in people on the
internet.
** Napkin Math
Suppose we have a stock that's worth $100 and the intrinsic value is $1 (in the case of a couple
of current assets said to be bubbles, for example bitcoin, this 100x difference is /nothing/, as
people would like to believe that bitcoin is worth $0 -- just like Lehman brothers was in 2009).
The market thinks there is a 1% chance that this asset will go to $1 in the next 10 years,
whereas you, an intelligent investor, believe the real probability is 40% -- significantly higher
than the market wisdom suggests. Because we (and the market) regularly believe in the EMH,
we say that the market pricing for puts reflects the expected value of a put (in other words,
market participants cannot gain money on average by trading puts under their own assumption
that there is a 1% chance that in the next 10 years, there will be a $99 price drop).
The average amount of time that you would need to wait in order for one of the contracts to take
effect, given you're in the universe where the contract /does/ take effect would be 5 years, given
that the probability that you wait $n$ years is uniform.

$5 \cdot 52 = 260$ weeks, so in total, this operation would cost $260x$ on average, where $x$ is the
price of the put share, given that the contract actually falls through. Your net revenue
in this situation would be $99 - 260x$ per contact. If your share doesn't fall through,
you will be paying $520x$ on average. Now to set up the expected value equation
(which, using our simplified model, our expected value should be 0):
\begin{align}
\frac{99 - 260x}{100} - \frac{99 \cdot 520x}{100} = 0 \\
\frac{99}{100} - 2.6x - \frac{514.8x} = 0 \\
2.6x + 514.8x = .99 \\
517.4x = .99 \\
x = \frac{.99}{517.4} \\
x = 0.0019
\end{align}
given these assumptions, put options should be priced around .2 cents per week. The rest
is left up to an exercise to the reader, but needless to say, this is a huge positive EV. Even
if it were 10 or 20 cents per week, you'd still have a huge positive EV. So even for "regular"
multimillionaires, this plan is totally feasible. If you have an idea to make money, it is
likely that at least one multimillionaire would listen to you, or is already doing exactly
this (buying puts).
** Economists as Market Participants
When economists predict a recession or predict a Ponzi scheme or bubble, why don't they participate
in the market place? The government has essentially infinite capital; they could roll put options
on their own economy if they wanted to. If the government is correct about a possible recession,
then great: their bet in the market pays off, and it can use that bet to employ people and put
them back to work. If the government is incorrect, more money flows into the private sector,
strengthening the correct market actors and crippling the inefficient market actor. When economists
make predictions, remember: they don't take risks like this, the government doesn't take risks like
this in the same way market participants do. Therefore, this is my rule of thumb: /never/ trust
/anyone/ that isn't vested in the market to tell you what's happening in the market, even
/expert economists/. Economists can advise the government to short or to buy puts, basically
participating in the market in the same way that regular market actors do. In this way, there is
an inherent accountability/feedback mechanism.
* The Internet is the Better Fax Machine
People forget that the general sentiment at the time of the dot com bubble: while there were many
people who were fanatics about the new technology, there were many skeptics, which all said the same
thing: why do we need the internet when we already have [[https://www.laphamsquarterly.org/revolutions/miscellany/paul-krugmans-poor-prediction][fax machines]]? Often, they forget that
they're /not/ market participants, and there's probably some underlying /reason/ why people are
investing money at such a large volume. Of course, real bubbles exist, but it's no use in trying
to distinguish fake bubbles from real bubbles if you're /not vested/. And, often, real bubbles
are in part propped up by the government. In fact, if the government simply bought puts in the way
outlined above, and they were correct, there would /be no bubbles/. Why do we need the internet?
It's not for the economists to comment on, let alone the /average Joe/.
* Blockchain is the Better (or Worse) Bank
The same sentiment is currently being expressed by the public consciousness for blockchain
technology. First, probably 80% of these people have never heard about smart contracts or how
they work. I'm currently vested in blockchain, and I used to work in the industry. I can tell
you a couple things about blockchain, but most of what I'll tell you is that most of the public
is just /wrong/, like horribly wrong, most of the time. It's probably a common theme in most
industries, but for blockchain, where on one hand there is a huge craze, and on the other there
are people saying the technology is worth $0, it is even more so.

Blockchain technology gives people incentives to agree on the state of some data so long as the
native token is valuable, with possibly some state machine that manipulates this database of data.
That's literally it. A lot of research into blockchain technology boils down to this, and its
uses range from supply chain tracking to finance (which I think is the most realistic use-case).
This isn't a debunk of common talking points, but what I can tell you is that for many use cases,
if you didn't have the concept of blockchain, you'd almost have to reinvent it, but worse. That
in and of itself makes the industry valuable, and given my "insider experience" (I didn't do that
much but I was very much surrounded by world class experts), I can tell you that it's not all
vaporware. And yet, despite all of these peoples' hard work, all their long hours and vision and
clever insight, people have the audacity to say that the technology is equivalent to "a worse bank".
* AI is the Better Autocomplete
Now the new kid on the block is AI. Of course, people are already saying that this technology should
be worth close to $0, or that this technology might be a net negative on society, when we haven't
even seen 3 years worth of LLMs existing. People refuse to believe that these LLMs are developing
emergent abilities, despite the [[https://cset.georgetown.edu/article/emergent-abilities-in-large-language-models-an-explainer/][clear evidence]] from LLM researchers suggesting so. People are out
here still talking about next token prediction, meanwhile chain-of-thought reasoning and
[[https://ai.meta.com/research/publications/large-concept-models-language-modeling-in-a-sentence-representation-space/][Large Concept Models]] are under way. The reason why we saw an explosion of narrative that
"AI is just a better autocomplete" is specifically because people are resistant to change despite
it being ultimately more demanded and better for them, in the same way people wanted
/better horses/. When will the public learn to stop tracing the same loop?
* Conclusion: Stop Asking for Better Horses
Silicon Valley often reinvents the wheel in the early stages of large technology. However,
clearly we see that investments into technology that on the surface are just "theoretically better
horses" end up being completely different, and often more demanded and better products than the
original. Of course there are real fuck-ups as well. See Enron and Theranos. But investors don't
want to lose money; the government, on the other hand, won't leave people alone about regulations
on the finance industry without showing us that it actually has better knowledge. And, it'd really
be nice if the general public would stop expecting better horses, and then getting disappointed
when they don't get them.