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Reality strikes back

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Reality strikes back

On hubris

Rohit Krishnan
Nov 10, 2022
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Reality strikes back

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“…whose frown, And wrinkled lip, and sneer of cold command”

This is not the essay I set out to write this week. I had a whole commentary on philosophy of business following on my previous essay, and a draft on innovation from distilled knowledge being a function of information density, but it’s been overtaken by a seismic events pretty much everywhere. I thought I’d try think through them in the usual Strange Loop fashion. The events:

  1. Natural stupidity demonstrated oh so well in my chosen island nation that is the United Kingdom, where a new government decided battling crippling inflation and a staggering productivity loss is best done through stimulus in the form of tax cuts for the rich and further spending

  2. Twitter, which was bought by Elon, went on a spree to try and alienate everyone - the advertisers so they don’t buy c.$1B of ads upfront, the users, the super-users with the checkmark, the employees, and pretty much everyone else including the media and the pundits

  3. FTX, the JP Morgan of crypto world, turned out to be closer to Bear Stearns, when they got hit with a liquidity crisis (like a bank run), prompted in part by their rival Binance tweeting that they’re going to sell all of FTX’s token since it sounded like they were in a liquidity crisis.

Three very different events, but I find a common thread. Which is that each of them consists of very smart people making seemingly dumb mistakes and it catching up with them. Forgetting the corollary of Buffett’s rule number 1 to not lose money, which is to not do dumb things.

pride goeth before destruction, a haughty spirit before a fall

In the case of the UK it was not being able to imagine that a piece of rhetoric that’s been used for years, decades probably, won’t work anymore because the world had changed. With Twitter it’s the absurd realisation that you can’t just brazen your way through a corporate acquisition by antagonising everyone, like firing people without thinking it through. With FTX, its more prosaic, which is that highly volatile assets make for liquidity crises, especially when you use your client’s money to bail out your private hedge fund.

(If you want to read the details, I’d recommend this from Matt Levine and most of his previous month, this from Byrne Hobart, and re the UK fiasco I recommend literally any article from the BBC from a couple weeks ago.)

Every banker knows that if he has to prove he is worthy of credit, in fact his credit is gone — Walter Bagehot

Three observations here.

  1. The crises here weren’t unexpected black swans, like Vesuvius erupting, but instead were the kind of things that old fogies like Buffett talk about all the damn time, sort of a grey swan I suppose

  2. The actions were entirely hubristic (except maybe FTX, which I don’t know enough about but seems accurate) where the accurate white swan predictions were ignored

  3. The virtue of simple guidelines were entirely thrown away behind the razzle dazzle of complex ideas and hidden super secret plans, like a double bluff game in a caper movie

This was essentially the price of comeuppance, where testing your ability, against all odds, to push a narrative, doesn’t work. Everyone is so enamoured by success that came before, patterns that were matched, or the sheer genius of the parties to be able to play 5-D chess to get out of scrapes that normal folk don’t fall into. When you relegate the responsibility of thinking to someone else, the results are bad.

Twitter avatar for @cobie
Cobie @cobie
The rumours for this blowup seem so egregious and unnecessary to me. I can’t imagine running an exchange that does mid 8 fig PER DAY in revenue and thinking “how can we leverage this for more?”. I can’t imagine risking a 40+bn business to try & get a multiple on client deposits.
4:01 AM ∙ Nov 9, 2022
4,206Likes325Retweets

Is this an example of trying out brazen new ideas and seeing if it works? Not quite, it’s closer to being brazen about ideas that most people agree aren’t smart but using your previous success to write that criticism off. “… stupid clever people do much more damage than stupid untutored morons” as the master said.

Thinking you’re smarter than everyone else is of course bad when you’re wrong, but its especially harmful when you’re right. Because it allows you to justify smaller mistakes which eventually snowball into enormous mistakes. See Enron.

The beliefs we sign on to are separated from hallucinations by the thin veil of reality. Since the veil is so often translucent and unreadable we act as if the veil doesn’t exist, but it does, and we all too often skip back and forth between the two places.

There is a whole lot you can accomplish if you’re brazen enough. This feels like an unspoken strategy. If you’re a startup, VCs will give you money because doing very deep due diligence is not their business model. But the same applies in media, in banking, in journalism and in politics. The cost of doing this is that it leads you to hubris, not listening to reality, and taking large hail marys when its not needed. The benefit of doing this is that you get to be seen as a genius, over and over again.

Hubris has had a long history and a complex etymology. It always meant excessive and undue pride. In ancient Greece it meant religious transgression or actual theft or assault, violating the natural order of things. Later it came to mean well deserved comeuppance, like getting punched live on stage to shame someone.

Today though, we use it akin to a deserved regression to some mean or the justified due coming to Dr. Frankenstein. And all of the three stories above are closer to this meaning.

The thing that strikes me, in all these cases and many more beyond, is that it is almost entirely self inflicted. The UK didn’t need to be a profligate spender in the face of excessive inflation, like almost everyone told them not to. Elon didn’t need to antagonise the employees, shareholders, users and advertisers. SBF didn’t need to take on excessive leverage to become the JP Morgan of this crisis or trade his customer holdings.

But they did.

Because hubris, at the moment of decision, feels very much like sticking to your guns and following through. It feels like strength of personality. It feels righteous.

We’re inside an age where narratives move the world. And when narratives move, so do fortunes. And our pavlovian brain connects the movement of fortunes with the implications of genius.

Not just genius in the sense of being able to accomplish something great, but genius in the sense of being just so much smarter than everyone else that you’re playing an entirely different level of game. The multifaceted face of genius has been replaced by chessmasters and puzzle solvers, to our collective detriment.

Twitter avatar for @elonmusk
Elon Musk @elonmusk
Please note that Twitter will do lots of dumb things in coming months. We will keep what works & change what doesn’t.
4:44 PM ∙ Nov 9, 2022
431,669Likes33,284Retweets

We have been told time and time again that boldness and vision is necessary for success. But the cost of this has been that being pig-headed has gotten an assist too. This is a reminder that guardrails exist for a reason, simple and safe can be highly useful in a crisis, listening to others is not antithetical to being smart.

The rule of “don’t be stupid” holds especially true to those who have proven themselves to not be stupid. Because the world is much more complicated, and the fact that your previous gamble paid off doesn’t make the next one likely to work. Musical chairs don’t run forever.

Doing something that has a low likelihood of success does not by itself make the payoff high. We like to say high risk high reward, but that’s not like a law of nature. Sometimes it’s high risk no reward. And wisdom is knowing to tell the difference.

Ozymandias as Spiderman: with great power comes great responsibility

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Reality strikes back

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Judah
Writes Be Wrong
Nov 11, 2022Liked by Rohit Krishnan

"high risk, high reward", i mutter, as i begin my 6th round of russian roulette

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Max Conradt
Writes Max Conradt
Nov 28, 2022Liked by Rohit Krishnan

Mathematically, it seems real, long-term success is exponential, whereas hubris tends to be hyperbolic (people tend to think it’s THE next big thing, similar to a singularity).

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1 reply by Rohit Krishnan
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