Prologue Part 2: A Brief Tour of Symmetry
Exposure symmetry is the idea that one should assume as big of a risk as the reward is (and that the risk cannot be assumed by someone else).
Symmetry was the main idea behind the oldest written law, Hammurabi’s law.
Symmetry was imposed in the law so that nobody could transfer tail risk. Tail risk is an extreme event that doesn’t happen often (a Black Swan) but that creates ruin for the one that is a victim of it.
The most famous example of the symmetry principle within Hammurabi’s law was that if a builder builds a house and the house collapses and kills the owner, the builder should be put to death.
This law made sure that the builder would build a solid house -> it created SIG for the builder.
Symmetry evolved from Hammurabi to the golden rule of “treat others how you want to be treated” which evolved to Kant.
Kant said you could do anything as long as it wouldn’t be a problem if everyone did it in society.
Eg:
- Before frauding in the subway, ask yourself if society would work well if everyone did it as well -> the answer is no -> you cannot fraud in the subway.
This rule though, is a problem because it is a universal rule.
And universal rules are great on paper, but disastrous in practice.
Why? Because of one of the most important principles in this book.
Things don’t scale.
Small ≠ large.
In life, we don’t think in planetary, universal terms, but in terms that relate to our direct environment -> we need practical rules.
Symmetry, as we explained, is the idea that risk = reward.
Now, what happens when risk < reward?
2008 is a good example.
Risks are transferred to somebody else -> risks increase -> profits increase -> risks increase -> profits increase -> crash.
When risk < reward, risk will continuously increase to maximize reward, until the system blows up.
This leads to more regulation, which worsens the problem since regulations facilitate risk hiding.
As a result, the pattern becomes as such: risks are transferred to somebody else -> risks increase -> profits increase -> crash -> more regulation -> risks better hidden -> risks are transferred to somebody else -> risks increase -> etc.
The Agency Problem
Which leads to the agency problem. Agency is the capacity of one party to move risks around the equation (eg: the government).
Let’s take an example.
The Silver Rule says: do not do to others what you do not want them to do to you.
The extension of this principle could be: avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.
Taking advice from someone creates uncertainty, and uncertainty is dangerous due to two elements: the fools of randomness and crooks of randomness.
The fool takes risks he doesn’t understand, thinking his past successes were due to skill while it may have been luck.
The crook transfers the risks to other people.
Economists mainly deal with the crook.
Agency, as a result, is playing out with the risk you transmit to other parties.
Eg:
- Signing up for insurance when you know you are getting sick. You’re shifting risks (hospital costs, in this case), on the insurance.
- Buying a car that actually doesn’t work (the seller has agency in transferring the risk to you).
Now, we need to realize that in the case of the fool, the fool does not know its own interest.
Fools are addicts, workaholics, people who support large governments, the press, the bureaucrats, all people who often act against their own interests.
So, when the system evolves and gets filtered, fools of randomness are purged and stop harming others.
Epistemological Dimension of Exposure
Exposure is about the real world and in the real world, you need to win.
You win by doing, not talking.
That’s the difference between a skilled member of society, and a charlatan. The skilled member wins by doing, not by convincing (the doing does the convincing).
Entire fields of studies (economics, social studies) are charlatanic because they have no exposure to what they create (they only talk and don’t do).
They are not connected to the consequences of their actions and mainly try to convince, without exposure.
As a result, we should never focus on what people say, but focus on what they do, since this is tangible.
Forecasting (in words), has no relation to speculation (in deeds).
Understand: there is a difference between predicting the future, and betting on the future (betting implies possible losses -> exposure).
Being wrong when it doesn’t cost anything, does not count, since you have no SIG.
And when you do have SIG in real life, it is difficult to measure. Many are non-linear (rain, which is positive, VS floods, which isn’t).
Simply consider that forecasting “based on science” is charlatanesque, and has always been so.
The Inverse Problem
Let’s talk about the inverse problem.
The inverse problem can only be solved by SIG.
Here’s why. It’s harder for humans to reverse-engineer than to engineer.
Eg: we see the results of evolution, but we cannot replicate them.
Time and its irreversibility require filtering that is only possible if you have SIG.
-> you lose the game only if you play in it.
The weak players lose first and the strong players win last -> time acts like a filter.
If you don’t play (if you don’t have SIG), you can’t be filtered, because you can’t lose nor win.
-> Without SIG, we fail to get the Intelligence of Time.
What is strong survives -> this is the Lindy effect.
The Lindy effect states that the longer things have existed, the longer they will exist.
The Intelligence of Time combined with SIG (playing the game) helps define rationality, that is, helps distinguish what works from what doesn’t, and what works is what enables one to survive (as the rest has died, hence, didn’t work).
A practice may appear irrational, but if it has worked for a long time, is it really irrational? No.
-> What works, by definition, cannot be irrational.
What is irrational is what threatens the survival of the collective first, and the individual second (and that’s going against nature).
-> what is rational is what enables collectives and individuals to live for a long time.
As a result, overestimation of tail risk (extreme events that threaten survival) is not irrational, as it is required for survival (or at least, to avoid death).
-> there are risks we cannot afford to take, and risks we cannot afford not to take.
SIG is a necessity, but let’s not apply it to everything.
There is a difference between exposure in the context of war, and exposure in the context of voicing an opinion in a random conversation.
What we want is to focus on the people who take risks without exposure thanks to the structure of the system – and weed them out.
While these people cause a lot of problems, there are ultimately, rare.
Intellectualism
Overall, the statements made in this book go against 150 years of modern thinking – which we will call intellectualism.
Intellectualism is the belief that one can split an action from its consequences; theory from practice; and that a complex system can be fixed by a hierarchical approach.
Intellectualism has scientism for siblings. Scientism is the interpretation of science as a complication rather than science as a process.
Today, science has been hijacked by peer-reviewed journals and vendors using it to sell stuff – people that talk, and don’t do.
As we have seen, those who talk should instead, do, and only those who do should talk.
Modernism
As technology progresses, separation between the user and the maker grows -> The maker has less and less SIG.
Eg:
- speakers get uncomfortable on stage because the light is shoved to their face like the police does with a suspect -> light engineers have no exposure (they don’t speak on the stage).
- train designers don’t design trains well because they don’t take the train.
- architects don’t live in the buildings they make.
One of specialization’s side effects is the separation between labor and the fruits of the labor (or at least, the enjoyment of what has been created. Eg: the baker does not eat all of his bread).
-> exposure (SIG) brings simple solutions to problems (to feel good on stage, change the lights)
People who see complicated solutions don’t have incentives to implement easy ones because they are rewarded for perception, not results.
A bureaucracy will always increase complexity to solve problems because they don’t have SIG.
Things designed by people without SIG tend to grow in complication before they collapse.
People have two brains. One for things they have exposure to, and one for things they do not.
Eg: Checking plane safety because that’s your job VS checking plane safety if you’re a passenger
The first one is boring, the second isn’t.
-> exposure makes things more fun and less boring!
And we also become more creative.
Eg: drug addicts are dumb, but will create very ingenious processes to get their drugs.
-> when we don’t have exposure, we’re dumb, uninterested.
Now, as we said, exposure arises with risks. And the thing about risk is that the strength you gain when facing the risk stays after the risk leaves.
Eg: you must lift up the barbell not to be crushed by it, and once it is back on the rack, you keep the strength you developed to lift it.
Regulations VS Legal Systems
There are two ways to protect citizens against corporations: regulations, and legal systems.
Regulations, because they are additive, restrict freedom and choke life. It’s a problem. Freedom (the freedom to make mistakes) is what enables one to progress and advance.
Legal systems are different since they add exposure to the equation. If you harm me, I sue you.
This led to a very sophisticated, balanced system created out of trial and error. The UK and the US use this system, while the EU has regulations and fines.
Honor and SIG
Finally, exposure is about honor as an existential commitment, and risk-taking as a separation between man and machine and a ranking of humans (the higher the risk, the higher you go in the hierarchy).
-> If you do not take risks for your opinion, you are nothing.
The author considers that the best life is an honorable one. Honor means never doing x under any type of context, while it also means always doing y in any context.
Modernity has destroyed some of that.
Today, the people with exposure are the artisans, those that do what they do because they have self-interest and other incentives to do it.
These are the people you should learn from. The people that did first, and talked second.
