Financial investment is just a symbolic representation of investment projected onto a low-dimensional space inside a control system run by the US government

Nassim Nicholas Taleb recommends that instead of the balanced portfolio of investments recommended by portfolio theory, we follow a "barbell" strategy of putting most of our assets in a maximally safe, stable investment, and making small, sustainable bets with very high potential upside. If taken literally, this can't work because no such safe asset class exists.

Taleb typically uses US treasury bonds as an example of an extremely safe asset. This can only be true metaphorically. They are extremely safe if your measure of value is denominated in US dollars. But of what use to me are US treasury bonds in a hurricane, or if the US dollar collapses? Of what use if people like me become targets for state persecution, stripped of our financial assets or ability to access them? Of what use if I'm trying to deal with a spiritual or health problem and don't know how to find competent advice? If I'm trying to feed myself and don't know how to distinguish profit-seeking propaganda or engineered taste from genuine information about which foods are healthful?

Risks, and opportunities, are many-dimensional. And along very few dimensions is there anything like the sort of crystalline perfection of a treasury bond. A personal network extending to a variety of fields can do a lot to help you avoid getting scammed, and get access to at least an ordinary standard of competence, such as it is. A friend with different interests and skills from yours will do a lot to expand the access you have, and the skills and knowledge at your disposal. Friends from different cultures or communities can serve as an important hedge if you and people like you become a target of extraction or persecution for some reason, or simply if your way of life becomes unsustaintable.

Land you are used to occupying and know well is easier to robustly possess and develop than a rented apartment (but the upside is often higher in high-density areas, which is why young people often prefer them). A spouse makes it easier to pool assets into a venture diversified between building up a single household and seeking external trade or mercenary opportunities. And children who grow up well-adjusted to the world can be helpful if you need to navigate a changing incentive landscape when you've already committed your assets to a bunch of permanent bets (which you need to do, since time is limited). In addition, they may be a decent consolation prize if cryonics doesn't work to ensure your personal survival. Intergenerational communities of interest protect you a lot more day to day, though they themselves can have trouble reallocating resources in changing circumstances.

Risk cannot be avoided, only managed. The risk-free asset is an illusion. Someday your natural life will end, you need to invest taking that into account, and taking into account that this is true of everything else on this earth that you can put your trust in. If you allocate too much of your portfolio to "safe" assets you're leaving yourself unnecessarily exposed to the risk that this asset will become irrelevant, and failing to take the chances that are actually available to improve your position.

To a large extent, young people do well in the long run by pursuing things that are genuinely fun but not universal. This engages our natural sense of opportunity, which doesn't understand formal systems like money very well, but understands very well how to look for high-upside bets that are actually good for us. I wish someone had explained this to me fifteen years ago. If this advice helps you, then think of me when you're successful, and remember that I didn't charge you for it at the time. And remember to pay it forward.

Or, as Ecclesiastes says:

Cast thy bread upon the waters: for thou shalt find it after many days. Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth. If the clouds be full of rain, they empty themselves upon the earth: and if the tree fall toward the south, or toward the north, in the place where the tree falleth, there it shall be. He that observeth the wind shall not sow; and he that regardeth the clouds shall not reap. As thou knowest not what is the way of the spirit, nor how the bones do grow in the womb of her that is with child: even so thou knowest not the works of God who maketh all. In the morning sow thy seed, and in the evening withhold not thine hand: for thou knowest not whether shall prosper, either this or that, or whether they both shall be alike good. Truly the light is sweet, and a pleasant thing it is for the eyes to behold the sun: But if a man live many years, and rejoice in them all; yet let him remember the days of darkness; for they shall be many. All that cometh is vanity. Rejoice, O young man, in thy youth; and let thy heart cheer thee in the days of thy youth, and walk in the ways of thine heart, and in the sight of thine eyes: but know thou, that for all these things God will bring thee into judgment. Therefore remove sorrow from thy heart, and put away evil from thy flesh: for childhood and youth are vanity.

14 thoughts on “Financial investment is just a symbolic representation of investment projected onto a low-dimensional space inside a control system run by the US government

  1. Ari

    I can't find any actual disagreement between what you are saying and what Taleb is saying.

    You: "If taken literally, this can't work because no such safe asset class exists....this can only be true metaphorically."

    That's true. And having read all his works, it seems pretty clear to me that his dichotomy is more risky vs. less risky, not high risk vs. no risk. I have never read him as pushing the latter view.

    He always takes at least a two-dimensional view of risk (or, more properly, risk impact): Potential Upside Risk Impact (low to high), Potential Downside Risk Impact (low to high).

    Quoting Taleb: "I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas and taking a lot of small risks in others....Let us use an example from vulgar finance....".

    Playing it safe not the same as being perfectly safe. It is rather focusing on purely minimizing potential downside risk impact, as opposed to small risks, which maximize potential upside risk impact at the cost of more (but still constrained) potential downside risk impact.

    Reply
    1. Benquo Post author

      I'm not sure I disagree with Taleb's literal content - that's why the "if taken literally" qualifier on a thing that might have been meant as a sort of analogy. But in practice he nearly always emphasizes the financial framing of investment, skin in the game, etc, and this seems like something that people actually *do* wrong very frequently, not a simplifying device unrelated to real-world errors, so it seemed worth criticizing.

      Reply
      1. Ari

        Interesting. I experienced the focus on the purely financial to decrease significantly from "Fooled By Randomness" to "Black Swan" to "Antifragile" to "Skin in the Game".

        "Skin in the Game" had a whole chapter on ancient religious practices as representing the "safe" side of the life-choices barbell, as they had empirically proven value over thousands of years.

        He favorably quotes the Talmud quite a few times in that book.

        Reply
        1. Benquo Post author

          I should read it then. I gave up after "Antifragile" because it seemed like he had good intuitions but consistently believed that finance was the world. (E.g. advice he still repeats centering "start a business" as an example of "skin in the game," vs "start a household.")

          Reply
          1. Zvi Mowshowitz

            He definitely does not do that in Skin in the Game. I don't think he actually does it in the other books either, he very much gets this kind of attitude. But it's something that deserves more highlighting.

            I can't think of an *actually good* discussion of how to deal with these questions, anywhere.

          2. Benquo Post author

            I trust you on a lot of things, but not on whether someone’s constantly conflating finance with reality, profits with value-creation, and dollars with utilons, despite very clearly and explicitly knowing better and saying so. It seems to me like you and early-mid Taleb are in the same class here.

          3. Benquo Post author

            I read Skin in the Game and it mostly seems like a change of subject where Taleb is saying more reasonable things because he's primed by things harder to quantify and do statistics on. Taleb still says stuff like Medicine is really a branch of (multivariate) statistics, which suggests that he still regularly forgets that anything outside his preferred dataset can be engaged with.

        2. Benquo

          On the face of it, though, it seems to me that the religion thing is still exaggerating the possibility of safety. Some religions may persist while being bad for their carriers, due to virulence. Early Christianity, for instance, experienced rapid lateral transfer inside the old Roman empire, before it was ever really tested by an outside force, and self-contained Christian communities like monasteries seem to do poorly for the reproductive interests of participants, and the Christianity-infusd Western world is going through a “demographic transition” now that it seems to have hit something like the limits of rapid growth. Things with track records seem likely to have future performance resemble past performance so long as conditions remain similar in the relevant ways, but you have to check whether what’s actually being selected for is what you actually want.

          Reply
  2. Daniel

    This is a bit of a petty point, but not all financial investments are made in a system run by the US government, because the US government does not own the entire world. Correcting this doesn't substantially change your point, but it does slightly help us move towards a future where the internet is not presumed to be American by Americans.

    Reply
    1. Benquo Post author

      True that America is often wrongly conflated with the world. In this particular case, though, the majority reserve currency is the US dollar and the runner-up isn't close. More broadly the current global financial system was (re)built after WWII around the US, and it shows.

      Reply
  3. Andaro

    I never understood the "pay it forward" meme. That's not how reciprocity works. If I owe gratitude to someone, then paying it forward makes sense iff that someone wanted me to pay it forward. Not otherwise. Helping people who did nothing for you may be a good investment in their future reciprocity, but that only works in a culture that pays back, not forward.

    Reply
    1. Ben S

      Andaro — "pay it forward" is basically a folk implementation of Kant's categorical imperative. You're correct that reciprocity can't create an incentive to pay it forward, but that's beside the point for people who advocate for paying it forward. Deontology assumes you already have the abstract goal of behaving ethically, and then it says you should perpetuate any chains of paying-it-forward that you encounter just because it's the ethical thing to do. The categorical imperative argument here would be something like "if everyone accepted paid-forward gifts and then neglected to pay them forward in turn, that would be the end of paid-forward gifts, and everyone would be that much worse off."

      In this particular case, since the gift is advice (information, very cheap to give away), I think Benquo's use of the phrase meant something simpler: "spread this meme if you agree."

      Reply
      1. Andaro

        "spread this meme if you agree."

        That's fair enough.

        "if everyone accepted paid-forward gifts and then neglected to pay them forward in turn, that would be the end of paid-forward gifts, and everyone would be that much worse off."

        The problem with the categorical imperative is that "it would have huge benefits if everybody did X, therefore I should do X" is fallacious, since "if I do X, this will cause everybody else to also do X" is false in most contexts. This doesn't mean you shouldn't do X, or that you can't live by a categorical imperative anyway if that's your preference, but it's not good consequentialism, and it's rather idiosyncratic (of course, so is intrinsic motivation for reciprocity, but I happen to like it better). Reciprocity is also more useful in the open-ended iterated prisoners' dilemma, and if you can credibly signal it, it solves Parfit's Hitchhiker dilemma, which paying things forward can't.

        I think there might be some practical overlap when phenomena like societal norm-setting are concerned.

        Reply
  4. Pingback: Links and stuff – Dennis Schmolk

Leave a Reply

Your email address will not be published.