NFTs are stupid. I don’t feel compelled to make this case. Enough people have already flaunted their opinions (as well as their ignorance).

But how stupid is the conventional fine art world? Fairly stupid:

The drab free port zone near the Geneva city center, a compound of blocky gray and vanilla warehouses surrounded by train tracks, roads and a barbed-wire fence, looks like the kind of place where beauty goes to die. But within its walls, crated or sealed cheek by jowl in cramped storage vaults, are more than a million of some of the most exquisite artworks ever made.

Treasures from the glory days of ancient Rome. Museum-quality paintings by old masters. An estimated 1,000 works by Picasso.

…Swiss officials initiated an audit in 2012, the results of which were published two years ago. The results revealed a huge increase in the value of goods stored in some warehouses since 2007, led by an increase in high-value goods like art. Though the audit did not specifically measure the increase in stored artworks, it estimated that there were more than 1.2 million pieces of art in the Geneva Free Port alone, some of which had not left the buildings in decades.

Or more succinctly from MSCHF [1]:

We bought a Damien Hirst and the first thing the seller asked us was “know anybody in Connecticut to ship it to?” for who in their right mind thinks of anything, upon acquiring work by one of the 21st century’s most name-recognizable artists, than to flinch from the waiting blow of New York sales tax?

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Bitcoin is stupid too. Thanks to the University of Cambridge, you can see that it’s energy costs are somewhere between Argentina and Ukraine, and over 0.5% of all energy consumption globally.

That’s just the negative externality. Bitcoin is stupid for its users too, and can only handle a maximum 7 transactions per second.

Altcoins are better, and Ethereum 2.0 will get up to 100,000 tps, but as a whole the ecosystem is still stupid. Here’s Alameda Research CEO and crypto billionaire Sam Bankman-Fried:

The problem is we didn’t actually have any [Tether] sitting around, so we had to wait for the blockchain, and that took a while… we did not happen to have any Tether on Binance right now, and so you know, it took us basically 20 minutes just to get anything there.

But how stupid are conventional stores of value? Fairly stupid:

The largest gold repository in the country is the Federal Reserve Bank of New York, on Liberty Street, which holds two hundred and sixteen million ounces of gold—worth more than two hundred and ninety-three billion dollars at today’s prices—for thirty-six foreign governments and organizations… And the city’s basements are pocketed with old gold-vault spaces, left over from the days, in the nineteenth and twentieth centuries, when the dollar, like most major currencies, was tied to the gold standard. Banks were required to keep gold in reserve, since anyone with an account could request his savings in gold coins to, say, settle a debt in a foreign country. “People really did this,” the financial historian Richard Sylla said last week. “They’d take gold out of the vaults, and take it a few blocks and put it on a ship.”

But that was the past, surely today’s system is more sophisticated:

Gold bars are moved between the compartments whenever one account holder pays another. Staff wear steel-toe footwear to protect their feet in case they drop one of the gold bars weighing 28 pounds (13 kg). Every time the compartments are opened or gold is moved, three Fed staff members are required to oversee the transaction. Each compartment is further locked behind a padlock, two combination locks, and the seal of the Fed’s auditor.

Or in Europe:

How does one move 14,000 gold bars and 1,000 boxes of gold coins across the city without losing anything along the way? This might sound like the set-up of a joke, but it was the very serious challenge facing the Dutch central bank in Amsterdam as it shifted some 200 tonnes of gold worth around €10bn (£9.1bn) to a new vault outside the city.

The result was a meticulously and closely guarded operation that included an army and police escort with motorcycle outriders and helicopters following overhead. The slow overnight convoy carrying the precious cargo took some 22 hours to travel 20km (12 miles) away at the weekend.

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What about Decentralized Finance? The 2014 Mt Gox. hack resulted in a loss of 850,000 bitcoins, equivalent to $450 million at the time, or $47 billion at today’s value.

But that was just one of many exchanges to get hacked. Binance lost $40 million in 2019. Most recently, $275 million was stolen from Ku Coin in September last year.

It would be hard to imagine a worse system, but centralized finance is trying. The Wikipedia page for AIG reads like a bad anti-capitalist parody. In 2004 they had to pay the SEC $126 million for selling a “non-traditional insurance product” which “would appear to be insurance and accounted for as insurance, but did not involve any actual risk transfer”. In 2006 they paid a $1.64 billion settlement for “bid-rigging schemes”, “securities fraud” and “sham reinsurance transactions”. And then 2008 hit and AIG collapsed, propped up only by a $180 billion bailout from the federal government.

Though work on Bitcoin had begun before the financial collapse, the genesis block does include the line “Chancellor on brink of second bailout for banks”. DeFi isn’t the solution to all problems, but it was intended as the solution to at least one.

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During the weed legalization debates, the rhetoric technique of inverting the Schelling point served to remedy failures of the imagination. In essence: “if weed were legal and alcohol were not, how could anyone justify legalizing it?” In contrast to weed’s relative safety both short and long term, alcohol results in an estimated 95,000 deaths per year in the US alone and accounts for 28% of all traffic-related deaths. Globally, the WHO estimates 3 million annual deaths. Not to mention being “involved in a majority of intimate partner assaults, and over a third of murders and sexual assaults”.

None of that necessarily means weed should have been legalized, but it does force you to question your intuitions, and wonder how much of your rationalizations are just the result of status quo bias.

You can use this same technique to improve your thinking about crypto. If Bitcoin was already the defacto standard, moving to gold would seem ridiculous. If DeFi already worked, no one could credibly suggest greater centralization.

None of that is to say that crypto will win. The existing Schelling point does matter. It matters because it hides the stupidity of the existing system, and blinds us from clear headed comparison.

Crypto is stupid. Everything else is also stupid. It’s all okay.

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See Also
Gwern - Bitcoin is Worse is Better

Disclaimer
I own some crypto assets.

Everyone loves asymmetric opportunities. If the stock goes down, you lose nothing, but it goes up, you win! Taleb has written an entire book (or five) about them. The Naval / James Clear Twitter thread got thousands of likes and retweets.

A recent post from Tom Cleveland illustrates one type of asymmetric opportunity called a call option. It gives you the right, but not the obligation, to purchase an asset at a pre-specified price. If the asset price goes down, you don’t have to buy at a loss so your downside is capped. On the other hand, if the price goes up you can buy at the cheaper pre-specified price to earn a handsome profit.

What’s not to love?

1. The cost of optionality

To start out, understand that asymmetric opportunities are always still part of a larger market. If you’re buying, that means someone else is selling, and you should assume they know at least as much as you do. The more hyped these opportunities become, the more demand there is, and the worse the deal becomes. From Byrne Hobart’s Optionality is for Innumerate Cowards:

Ultimately, there’s a finite net amount of optionality in the world, and it’s zero: every time you pay for the option to buy or sell something in the future, you need a counterparty. If there’s a bias towards being systematically long something with a total net supply of zero, the buyers will tend to overpay.

This is true for financial markets, is it true in real life? Naval recommends investing in startups, and at face value this seems reasonable. If it goes poorly you lose a few thousand dollars, but if it goes well you might have allocation in the next Uber! The downside is capped, but the upside is tremendous.

But consider what happens when everyone has this mindset. As Sam Altman writes:

I should point out that this is a particularly hard time to invest in startups—it’s easier right now to be a capital-taker than a capital-giver. It seems that more people want to be investors than founders, and that there’s an apparent never-ending flow of capital looking for access to startups.

The law of supply and demand has done its thing. Valuations have risen, and the best investment opportunities are flooded with interest. As a friend of mine recently observed, “it’s much easier to get LPs to give you money for your seed fund than it is to get a meaningful allocation in a ‘hot deal’”. [1]

Keep in mind that there’s no guarantee an asymmetric opportunity actually has positive expected value. Any number of bets can have this same shape, and still be arbitrarily bad. It’s worth paying $10k for a 1% chance to make $10m. If you’re risk-insensitive, it might even be worth paying $10k for a 0.1% chance to make $10m. But it takes a particularly innumerate person to pay $10k for a 0.01% chance.

1.b. An exception for exponential growth?

Jerry Neumann has a great post about power laws in venture capital. In a true power law, there is no well-defined mean. As Neumann summarizes:

Power Law distributions must have an alpha greater than one. They do not have a standard deviation if alpha is less than three. They do not have an average if alpha is less than two.

…If you do the same thing with a power law distribution with an 𝛼<2, the average will tend to grow as you make more picks. If you make an infinite number of picks, the average will be infinite. This is strange behavior.

So given that startup valuations do seem to follow a power law, does this imply that you should just invest in every single opportunity that comes your way?

In theory, yes. In practice, there’s no way to generate a random sample. If you stand on a street corner in Palo Alto writing checks, you’re not meeting random companies, you’re meeting the companies willing to take money from a random VC on the street. Similarly, Tom advises us to “go to meetups”. That’s good advice in principle, but it really depends on who’s attending. You’re not pulling from a random distribution of people interested in X, you’re pulling from the pool of people who had nothing better to do with their time.

2. On optionality and long term value

Naval recommends “go on many first dates” and again, the asymmetric logic seems to work out. A date might take a couple hours, plus you had to eat dinner anyway so the downside is fairly low. Meanwhile, the upside potential is that you might meet your one true love! Fom Byrne Hobart again:

If there’s a low cost to switching to new partners, people expect it to happen and thus invest less in the partnership; if there’s a high cost, people invest more. …Love is an escape from the Prisoner’s Dilemma that is endless dating and indefinitely delayed adulthood.

There’s an analogous case in startups. If you invest in 100 random companies but spend no time actually helping them, they’ll be unlikely to let you in on future rounds, leading to dilution. But who cares? 30% less than $10m is still a lot of money.

I promise this is much worse than it sounds. Dilution does not affect your portfolio randomly. It is a side-effect of future rounds of funding. And since those same rounds are the path to the tail-end valuations you so desperately crave, this means systematically missing out precisely on the deals that generate outsized returns. Over-diversification is antithetical to value creation.

Finally, consider the case of startup employees. The more companies you work for, the more lottery tickets you buy, and the more likely it is that at least one of them goes very well. In this context, optionally seems good at first glance.

Remember Slava’s machiavellian guide on How to get promoted? He shares this Jeff Bezos quote:

When somebody congratulates Amazon on a good quarter, I say thank you. But what I’m thinking to myself is— those quarterly results were actually pretty much fully baked about 3 years ago. Today I’m working on a quarter that is going to happen in 2020. Not next quarter. Next quarter for all practical purposes is done already and it has probably been done for a couple of years."

Along with the interpretation:

The key to corporate opportunism is all there, in this quote. When a normal person reads it, he thinks “wow! Amazon is really thinking long term!” which is perhaps how Jeff intended it. But when an opportunist reads it, he thinks “wow! I can do anything I want for three years and it won’t show up in the metrics!”

That’s fine if you’re a sociopath, but here’s the counter-contrarian reading: you can do anything you want for three years, and still learn nothing. If you want to build anything for the long term, you have to understand what the long term impacts of your decisions actually are. Switching companies every couple years means never seeing how your choices play out. It means never learning what it takes to build something that you’re truly accountable for.

3. Asymmetric opportunities lead to survivorship bias

Tom’s post also provides this nice XKCD comic, can you spot the problem?

Regret is a function of new information. You only experience it when you later learn something that reveals a past mistake. If you exit a failing relationship, you’ll never see how things might have gone, and so of course you’ll never wish you had stayed. [2]

On the other hand, if you stay too long, you might find out it’s a waste of time and wish you had left earlier. Regret in these instances is purely a function of selection bias, and has little to do with which decision was actually better.

Similarly, a round of company layoffs that doesn’t include you could pave the way for rapid promotions. If you leave, you’ll think “thank god I got off that sinking ship!”, and never learn about what could have been.

Ultimately, it’s all opportunity cost both ways. Just note that regret biases us in one direction without good justification.

But that’s not all. A second round of selection bias occurs in determining which stories we hear from others. No one talks about the time they lost $5. More generally, a dynamic of capped downside plus unlimited upside means the exciting and interesting tales will all come from one end of the distribution. [3]

4. The downside risk is bigger than you think

Remember that the whole financial perspective is just a metaphor. In real life, there’s no such thing as capped downside. Tabeb’s Black Swan became popular not because it provided a path to wealth, but because after the 2008 financial collapse it helped explain how arbitrarily bad events can come out of nowhere.

The downside of going on a first date isn’t having a mediocre dinner and then getting ghosted. It’s that they become your stalker and you have to get a restraining order. Or that they sexually assault you. Or accuse you of sexually assaulting them.

The worst case scenario of investing in a startup isn’t that you lose a bit of money, it’s that you invest in Theranos and appear in a documentary defending them. Wait no sorry, it’s that you go to jail for fraud.

Go to a cocktail party? Get roofied. Write a tweet? Canceled. Read a “Lindy book”? Get radicalized and spend the next 10 years neck deep in conspiracy theories.

The point isn’t that any of these things is likely. It’s that the downside in real life is never actually capped. Applying financial metaphors to life can be useful, so long as you understand the limitations.

Conclusion

None of this is to say that asymmetric opportunities are always bad, just that they’re overhyped and poorly understood. They’re one part of your overall portfolio. The meta-lesson here is that in an efficient market for metaphors, there are no silver bullets.

Alternatively: every trading strategy has a counterparty at least as smart as you are. The important life lessons are not about how to imitate finance, but about how to find real life scenarios that resist financialization and still allow for outsized returns.

Or maybe: Your life is already financialized, you just don’t understand how to navigate it. If you really grasped asymmetric opportunities, you would see that they improve with volatility. So the lesson is not necessarily “go on lots of first dates”, but rather “go on a first date with someone you wouldn’t normally”.

As the legendary essay from HBS finance professor Mihir A. Desair opens:

The language of finance can be insidious. Words like leverage and concepts like diversification can morph from narrow financial terms into much more general ways of understanding the world.

These are powerful tools, and we ought to be cautious in their application.

See Also
John Luttig – Finance as culture
Byrne Hobart – Optionality is for Innumerate Cowards
Mihir A. Desai – The Trouble with Optionality

Summary

• Asymmetric opportunities work better on a power law
• Maintain a high quality sample even as you search broadly
• Don’t let diversification get in the way of long-term investments
• Regret-minimization is a bad decision-making framework
• Beware survivorship bias in asymmetric and high-volatility domains
• The downside is never capped in real life
• Delete Twitter

Footnotes
[1] Of course, the Straussian interpretation is that Sam is not really trying to be helpful so much as scare off potential competition.

[2] There are some exceptions, like finding out that your ex is now hot. But you’re much more likely to find out about changes in your current partner than your previous one.

[3] The contrarian take is that you should be optimizing for exciting and interesting tales, and no one cares about the time they lost $5 either. That’s fine, except that systematically making poor financial decisions limits your optionality in the long run. It’s not losing $5 that hurts, it’s buying a lottery ticket every day until you die poor.

I typically work 4 hours a day, and am generous about taking vacations and weekends off.

Recently, Alexey Guzey challenged me to work 12 hours non-stop. The idea was extremely unappealing to me. So much so that it worried me, and I decided to accept the challenge if only to see what I was so averse to.

Does that sound silly? After all, a 12 hour workday is not that long. People typically work 8 hours 5 days a week, surely a single  12 hour day is reasonable?

The difference is that it’s all “deep work”, or at the very least “focused work”. None of the time was spent in meetings, or at lunch, or making small talk with coworkers. In comparison, when I worked at a company, I once told Alexey that I can only accomplish 12 hours of “real work” per entire week.

Here is a brief summary of my findings.

1. I still don’t believe in hyperproductivity

On the day of, I did chores in the morning, then worked from 10am to 6pm, realized I was no longer doing anything productive, and gave up after 8 hours. The second 4 hour period was less than half as productive as the first, and I felt much more tired at the end of the day.

2. You should quit while you’re ahead

One view is that diminishing returns are okay, and you should just keep working so long as you’re accomplishing anything at all.

The downside is that you just won’t enjoy working as much, and it will be more difficult to return the next day. By definition, you stop once you’ve become useless and are no longer making progress. When you wake up the next day and sit back down, the idea of returning to that point is unattractive.

3. It’s really easy to convince yourself you’re doing important work

So long as you’re sitting in front of a desk and typing words, you can trick yourself into thinking you’re doing work, even when you’re not.

When I look back at the work I did in the second 4 hour period, it seems worse than useless. I wrote several posts, which in retrospect, I do not actually believe. Had I published them at the time, I would be embarrassed and lose credibility.

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Having said that, there were some benefits.

1. You’re forced to think about what work is worth doing

Typically, I sit down in the morning, work for 4 hours, and feel pretty happy the whole time. This could lead to accidentally working on things I don’t care about, just because they feel engaging in the moment.

In contrast, by hour 7 I didn’t want to work at all, and was not engaged. This forced me to think about what work I actually wanted to get done, which may be more rewarding in the long term.

2. Clear the mess out of your mind

I always have a lot of posts I want to write, and a bunch of ideas I’d like to spend more time on. This sometimes gets in the way, or makes me feel stressed. Even without a real deadline, there is still a sense of “work that I’m meaning to do”.

By working very hard for a day, I was able to start on drafts of many of these posts, at least enough to realize I didn’t actually want to write them.

3. The next day went very well

Even though I felt tired at the end of the first day, I slept for a long time, then woke up at 6am the next day feeling extremely motivated. It was like I had finished all my chores, and was finally free to work on the project I was most excited about. I woke up at 6am, wrote for 5 hours, and although I haven’t published it yet, feel good about the result.

Then I took 3 days off.

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Conclusion

Overall, I am not excited to do this again, but I might anyway. Typically, when I’m feeling exhausted or burnout, I immediately take the day off, and hope to come back refreshed. A better strategy might be: work very hard for a day, attempt to accomplish everything, then take a longer break right afterwards.

A week day, I did another “12 hour day” that ended up being 8 hours again, and had similar results. So there is at least some repeatability.

Some other people have had much better results. This might work better for some domains than others.

See Also
Stephen Malina - Upcoming Maniac Week
Stephen Malina - Manic Week Review