Why it’s usually crazier than you expect
collaborativefund.com1. I was expecting to read about a gamma squeeze... (people buy far out-of-the-money calls on GME (low delta), option seller is short, buys a bit of GME to get flat, more people buy & price goes up, delta goes up, option seller needs to buy more stock to hedge, and you have your feedback loop going (until option is far in-the-money, delta is one, and option seller doesn't need to buy anymore).)
But that never came... it was just positive feedback in perception.
2. It's not "usually" crazier than you expect. Most everywhere, we have feedback loops that keep things stable. Demand rises, prices rise, people think, eh, too expensive, and demand and supply are in balance again. Airplane gets bumped nose-up a bit, angle of attack increases on the wing and the horizontal stabiliser creating upward forces, but everything (centre of gravity, tail volume, etc.) is carefully designed such that this results in a nose-down momentum until the plane is in equilibrium again. And I could go on.
That's why it is so unusual when things spin out of control (nuclear bomb, anyone?).
3. As for GME, I trust that the forces of the market will pull it back down where it belongs soon enough.
EDIT: closed parenthesis
Re #3: I held off investing significant money into Bitcoin because I was convinced that the forces of the market would pull it back down to $10 where it belonged soon enough. I’ve been asking myself ever since why I felt so sure at the time.
As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.
Your investment thesis would then be that GME becomes a token of value independent of the underlying business, dividends, and so on. More of a collector's item.
Intriguing, and (lamentably) not entirely impossible. But, you know: bubbles do have the habit of bursting.
> Your investment thesis would then be that GME becomes a token of value independent of the underlying business, dividends, and so on. More of a collector's item.
Yes, that's basically the point we've reached with the stock market as a whole right now. Nothing is tied to any kind of fundamentals. It's all about "we like the stock".
> Yes, that's basically the point we've reached with the stock market as a whole right now.
Not really, though. GME and other meme stocks might be out of whack a lot, temporarily, and stocks generally might be overvalued somewhat (and, I’d say, harder to value because rates are so low, making the horizon longer), but I’m pretty sure that the mechanisms are still there that fundamentals will reassert themselves.
At the very least, GME can print as much stock as they want and sell it into the market. They'd be crazy not to.
wouldn't that drive the value of stock down and threaten the company itself?
I am financially illiterate, but I understand the reddit posts to mean that short squeeze is inevitable because GME is >100% shorted and issuing more shares would kill the short squeeze and drive the price down
Unless the company is selling or buying stock (or otherwise exchanging value for stock, as with employee grants), the price is immaterial to it. Just a random number on a ticker.
A low stock price creates risk because it makes it hard (expensive) to raise capital. Well, here you are, it doesn't get better than this!
As Matt Levine pointed out in his columns this week, GME would likely attract a huge amount of SEC scrutiny if they tried to take advantage of this obvious insanity. That doesn't mean they would ultimately be found guilty of anything, but it would be a huge distraction from, you know, adding shareholder value by selling video games.
But that's the thing here. The reason their fundamentals are so terrible is that their business model is going the way of Blockbuster. Selling disks is distracting them from reinventing themselves. Many people buying GME are doing so because they don't want to see a company they have some sentiment for be destroyed by Wall Street. I think of this like a last-ditch public offering or a Kickstarter Hail Mary. They have an opportunity to raise the capital they need to reimagine the company and become worthy of their new valuation and continued existence.
> a company they have some sentiment for
Really? I saw a local Software Etc. and Funcoland both get replaced by GameStops. Both times, it was a straight downgrade in terms of customer experience.
I think raising capital by issuing more shares would provide incredible shareholder value if they leverage that money to pivot into a better business model
> a huge amount of SEC scrutiny
A couple billion dollars in the bank buys you a lot of lawyers.
As Matt pointed out, AMC is doing it. I agree with dougmwne, this is the corporate kickstarter opportunity of a lifetime. They should take it.
It's also a negative feedback mechanism in a market full of positive feedback mechanisms (ie, the short squeeze). Creating more stock makes the market more stable.
> Nothing is tied to any kind of fundamentals. It's all about "we like the stock".
Now, if many peiple start believing that, it will cause an actual bubble. When interest rates are taken into consideration, the global stock market valuation in terms of average P/E rates is about where you’d expect it to be.
Which is higher than but a few times before, to be sure. But still in the realm of plausible fundamentals.
It’s as if it is a cryptocurrency all its own at this point.
Except that it can be arbitrarily inflated.
Asking in earnest: how's that not true for crypto, like what Musk did to Doge?
Musk didn't inflate Doge. He tweeted about it and a bunch of get rich quick folks scrambled to buy, driving the price up like a penny stock.
A share of stock represents a tiny percentage share in a company's assets and profits. For simplicity, let's say a company has 100 shares, and you own 1 share or 1%. If they then issue 100 new shares and sell them on the market to raise cash, your ownership in the company has been diluted from 1% to 0.5%.
That's why company shares will never be safe as an arbitrary store of value like bitcoin is. No one can arbitrarily dilute your share of the bitcoin pie.
I think they mean more stock can be issued, rather than the value being driven up.
That's disturbingly intriguing indeed.
In theory, what is stopping any stock from being a cryptocurrency (minus the crypto part)? Can anything tradeable with a fixed supply become a currency? What other magic requirement is missing?
> Can anything tradeable with a fixed supply become a currency?
Yes, very much so (including something with unpredictable supply). Through history, diverse things were used as currency including shells, salt, silver and gold.
The commonly used definition of a currency was coined by Aristotle and is that it's an asset fulfilling three requirements:
- being an intermediary of exchange;
- being a store of value;
- being a unit of account.
You might notice that most cryptocurrencies are not actually currency owning to the first point.
Ease of exchange. I can’t (easily) give you 100 GME to buy a new car. We’d need a particular arrangement which isn’t easy to come by in the current setup.
If anything, cryptocurrencies are becoming more like illiquid equity rather than a currency. I can't exactly go to the store and exchange BTC for milk.
Interestingly, local dispensaries at one point entertained the idea of BTC ATMs to get around the fact that they have no ability to take credit cards due to the illegal state of pot at the federal level, but this was abandoned after a bit because the volatility was too expensive to make this a worthwhile proposition.
What I do is use the virtual crypto wallet in Revolut. Keep money in BTC and when I want to buy something move the exact amount across to the FIAT currency account and tap to pay.
I keep a small float in FIAT so I only do this when it’s the cheaper option.
Once the race for the exits begins, the price will drop the way it rose.
Aren't we in a bubble since march 2020, if not sometime in 2018?
I guess you have to ask what gives stocks value in the first place... especially tech stocks that don’t issue dividends.
Future earnings over the next few decades is the traditional definition of value (returned as dividends, or price increase, doesn’t matter which).
Periodically people lose sight of that and start talking about a new paradigm and new valuations (usually because using that metric means prices are insane), but it always returns to future earnings.
All indicators are we are near the top of a spectacular bubble in assets from bitcoin to spacs to tech stock prices the red signs are flashing. Who knows how or when it ends though.
dividends are irrelevant when valuing a stock - it's the company's earnings (and margins etc), and the future expected earnings that matter.
> dividends are irrelevant when valuing a stock
Aka the Modigliani–Miller theorem.
https://en.wikipedia.org/wiki/Dividend_policy#Modigliani%E2%...
Unless there are dividends, all the factors you mentioned are purely symbolic. The fact that this symbolic -> monetary imputation is now the dominant determinant of stock price was the parent's point.
it's not symbolic - the value of a company (i.e., their share price, if public) can be exchanged with money by selling the share. This is true regardless of the actual dividend payouts. Irrelevancy of dividends is not the same as not _being able_ to pay dividends.
Paying dividends is just one way a company returns profits - but there are plenty of other ways, such as share buy backs, or reinvestments in the company (thus making future returns higher).
It's symbolic in the same way that value accrued by trading pet rocks or beanie babies is symbolic -- the fact that someone will pay money, at some particular point in time, for the asset is irrelevant. It is not generative of money returns on its own.
Dividends, like rents generated by real estate, accrue based on the financial performance of the underlying asset. Dividend payout is the only way valuation has any real basis in financial performance of the underlying business.
No dividend = something else is afoot. Most stocks right now are baseball cards.
You're missing several points:
1)Possibility of issuing dividends means the valuation can't be too low. If it's too low you can just buy it out and issue dividends next year making bank.
2)The the company may hold assets valuable to other (maybe dividend paying) entities. If the valuation is too low they will just buy it out and pay out more dividends.
3)The company may buy its own stock. If the value is too low they will buy a lot of it and issue dividends later at big multiplier.
I am not sure why you're feeling so strongly about that point. It's about the first thing you learn when dealing with equities. If anything paying significant dividends right now means the business is unlikely to grow anymore.
Man, it really doesn't matter if they pay out money or store it in a box. The box still belongs to the company. They can always pay out later or someone else may need a box full of money. Of course it's even better if they do something more useful with the money than just storing it in a box.
They can pay out later, sure. But they needn't pay out anything, ever. They could make a zillion dollars next year and you'd get none, directly. That's the point. Whatever you could get by trading the share is based on somebody's belief in its value, for some definition of "value" (see e.g., Tesla.)
People trade stock as if the companies were yielding something to the stock owners. Many don't. Acting "as if" the company is making those payments -- imputing a price to the stock according to the underlying fundamentals, or some temporally discounted variant -- is a fantasy. It is a symbolic act. An exercise in recursion, anchored in nothing.
The story the market is telling is a very different kind of story, now.
Not symbolic at all. Stock confers legal ownership of a company. Why is ownership of a company's assets any less valuable than ownership of cash dispersed to your personal account?
What’s the difference between dividends and selling a portion of a holding every year?
> The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals.
It is this week. But let's be honest: (1) wallstreetbets isn't a very large community compared with the whole market, or even the capitalization of GME or AMC and (2) these are investors engaged in a fun revolution.
This won't stay fun for months. These folks want to trade in those portfolios. And if this doesn't go up any farther (it's been flat at ~$300 since Thursday), how many of those will get bored and sell so they can trade whatever the next meme stock is? Not that many, sure. But enough to push the value down lower, to a threshold where more Robinhood traders decide to get out. And we have exactly the kind of feedback loop described in the linked article.
GME is going to fall because there's no reason for GME to stay high. Once the short squeeze is over and the lols play out, it's just another failing company.
(And I continue to believe that this is going to turn out to be a big astroturfed scam when this is all said and done and I'm betting a bunch of the early players will turn out to have been executing a pump and dump.)
Bitcoin is not a stock and has no fundamentals; GME does. There's no objective value metric for Bitcoin so it can float freely. But because GME is at least loosely tethered to the value of a real company, I'm confident that will bring the price back to reality.
I don't follow the logic. Bitcoin has no fundamentals, so it can go as high or low as it wants.
GameStop has fundamentals. But you're free to ignore them; they're not hurting anything. GameStop has everything Bitcoin has, plus some extra things; it is therefore worth even more than Bitcoin is.
Said another way, it is nonsensical to claim that Bitcoin has no fundamentals. If you believe that (1) Bitcoin has "no fundamentals"; and (2) GameStop has fundamentals tethering it to a market capitalization of a few million dollars, what you're actually saying is that Bitcoin has fundamentals tethering it to a market capitalization of zero dollars.
> GameStop has everything Bitcoin has, plus some extra things
Including the ability to keep making losses in perpetuity, which would make it worth negative infinity.
No, it wouldn't. As a stock owner, fiscal losses by the company named on the certificate don't impact you at all.
The only way a business can keep running at a loss year after year and not be declared bankrupt is by raising more capital, i.e. by getting more money from its investors. The price of your existing shares will not fall below zero, but you (or somebody else) will be paying up for new ones.
One caveat is that the insane valuation could let the company raise enormous amounts of cash and attract talent. Perhaps enough to revitalize the company into something with a legit growth story.
I'd say this is very unlikely, but it's not beyond the realm of possibility that GME becomes like a TSLA or AMZN that is constantly trying to catch up to the absurdly high expectations of investors.
GME stock will undoubtedly be carried for some period of time after the squeeze is over (is it already over? I don’t know...) by momentum and hype. But the inevitable outcome is that it crashes, because GameStop fundamentals are simply bad.
Bitcoin is a completely different proposition however, because so much of the demand is driven by black market commerce, and other equally inscrutable factors. Both the supply of and demand for Bitcoin are completely volatile. There’s basically no hope of performing a reasonable analysis of where it’s value might be heading.
Bitcoin did end up dropping about 80% from its late-2017 high. It took about 10 months, but it bottomed out in the 3000s, down from $17K in Dec 2017.
Wouldn't surprise me if GME does the same thing - just the sheer number of shorts will blunt the price declines a bit, as they cover.
Yah, but dropping 80% when you've inexplicably climbed 10,000,000% (depending on the timeline) sorta shows that you're anchoring the reality to something that is already incredibly, ridiculously distorted.
The GME situation is huge mess created by billionaire vulture short sellers shorting more than 100% of stocks. Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. All you have to do is simply buy and hold the stock, and the price will go up.
Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.
> Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price.
Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point.
To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.
This post can explain why you only need smaller percentage to squeeze short sellers.
https://wallstreetplayboys.com/amc-gamestop-and-nokia-why-it...
The bottom line, everyone knows they can sell to short sellers at ANY price, because the short sellers have to buy at ANY price. Why would anyone sell to short sellers at less than ANY price?
> because the short sellers have to buy at ANY price.
no they don't. They can bankrupt, and default on their contractual obligations. And if they are smart, what they will do today is setup a structure that protects their existing assets from seizure, and then short GME, and then default if it doesn't turn out well (or gain massive profit if it does fall).
That's the funny thing, that's not what's happening. It would make sense for those companies to declare bankruptcy in these scenarios. Instead, these short seller companies are being propped up by even bigger companies and the entire financial press is pushing FUD propaganda to convince normal people to sell.
This has never happened before. Why is this happening the way it has for past week?
From what I read on WSB (caveat emptor), the broker (JP Morgan) is on the hook if the shorts go bankrupt. JPM needs to prepare for that possibility.
Price is a function of supply and demand. Shorting 140% of the stock increases supply by 140% and demand by 140%. It looks balanced, but there is an asymmetry in terms of pressure to close positions.
Those shorting shares have to pay interest, place collateral if price goes up and need to buy back those shares regardless of market price. The ones holding shares don't have that pressure and their losses are bounded.
If options are used, the effect depends on how the price of the underlying moves. Generally they just have a multiplicative effect, the losing side has to increase collateral.
A particularity of shorted calls is that losses are unbounded.
If the short position’s larger than the float, the squeeze will get sqouze.
No. As I’ve explained, the crucial cutoff point is that the squeezers have to hold more than 100% of the long interest to squeeze the shorts. Whether the short positions add to 90% or 110% of the net supply matters only a bit.
Using the airplane analogy, there's a good amount of turbulence in the market. Especially as you look at smaller scales, both in time and price changes. There's a decent amount of literature discussing evidence that low-latency trading has increased market turbulence for little efficiency gain.
I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.
Absolutely... I think HFT is useless rent seeking. It provides little efficiency, I think, and the liquidity often drops out when the market needs it most, anyway.
For exemple Robinhood mostly getting out of the GME trading business because it was too hot and they ran out of credit with their clearing house, preventing their users from participating in the market.
EDIT: closed parenthesis
Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.
Time in the market is more important than timing the market, is a common investment advice.
Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window.
The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work.
The WSB crowd battling the billionaire vulture short sellers are out for more than gains.
>but they decided to pull all the dirty tricks and shenanigans
like what?
>The WSB crowd battling the billionaire vulture short sellers are out for more than gains.
I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.
The WSB crowd complaining about the "ladder attack" (short selling the stocks between themselves at lower and lower prices to drive down the price), misinformation on CNBC, being prevented from being able to buy the stock on various broker (thus prevented from driving the price up and causing the gamma squeeze to cause the short squeeze) "it was supposed to be a free market and we can't trade as freely as the billionaires" which, fair complaint I guess.
Is it illegal
It's only illegal if you're poor enough
nonsense
The Robinhood shenanigans that stopped people from buying GME and allowed selling GME. Melvin Capital claiming they got out of short positions, without any significant changes in short %. The entire financial media propaganda telling people to sell GME. etc.
I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions.
The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?
>Melvin Capital claiming they got out of short positions, without any significant changes in short %.
That's not too strange. It's entirely possible for them to close their short position by doing a private sale to another hedge fund. I don't imagine it's too hard to find takers given how inflated GME is.
Don't they have to buy stock to exit the position? How do you sell a "short position" that is hemorrhaging money?
(genuinely curious, I'm learning about this to distract myself from covid-19)
You can offload it to someone else. Say you shorted 100 shares at $50, but the price later goes to $100. One way to exit the short is to buy 100 shares on the open market, taking a loss of $5000. You can also find someone who wants to short, pay them $10,000, and transfer the position to them. Now the short position is off your hands, and the other person effectively entered into a short position at $100. It's kind of like taking over a lease.
I am wondering the same.
Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants?
The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding?
It really depends at which price they started the short. $8, $20 $350 $450?
But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?
It would seem almost all the GME buying is in the afterhours and premarket, causing these huge 100% gaps. This suggests an effort to squeeze call sellers, as options cannot be traded afterhours and rpemarket. This means call sellers need to buy stock to neutralize the delta.
Anyone want to ELI5 gamma squeeze? Isn’t that just a description of what happened with GameStop? But then I thought that was a short squeeze.
Gamma squeeze has to do with options, short squeeze has to do with just stock.
Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.
Let's give it a shot.
Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from).
With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different.
As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this:
With S below the strike K, it's worth nothing, and as S exceeds the strike, the payoff goes up.__/The price of a call option before expiry looks basically similar, but smoothed out.
The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1.
(Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.)
[Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!]
Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock.
However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again.
So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze.
[Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win.
That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.]
When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.
The gamma squeeze also works going down, if they had to load shares on the way up they have to unload on the way down, accentuating a down trend.
When you drive the price of the stock up you increase the interests the short have to pay on the shares they borrowed to sell, or maybe increase the capital requirements they need to maintain this position on their books, reducing their upside.
If the interests or the capital requirements for maintaining the position get too high, or the owners of the shares want them back, they might have to exit their position, "no matter the cost" hence the "squeeze" part.
(I'm writing it down to see if I understood it all correctly)
You’re right, the option gamma squeeze works on the way down (past the strike) as well in accelerating the movement.
It is as if the option seller (who is short gamma) follows a momentum strategy - when price goes up, they buy, when price goes down, they sell.
As for the short squeeze - why would the owner of the shares want them back from the shorters? Well, presumably to sell them.
The conversation would go like this: BlackRock to Melvin: give me my shares back! Melvin: why? B: the Price has gone up to 300! It’s insane! We are a traditional fundamental investor and bought them at at 15. We want to sell them and lock in our profit! M: ok, how about I buy the whole bunch of you, and we call it even? B: done.
All the redditors that hold on to their shares for dear life: what just happened?
I wonder how much of those shares can BlackRock/etc actually sell. BlackRock has many index funds GME part of so they must hold on to those shares
Fabulous. I really appreciate the in-depth writeup. I couldn’t have hoped for more!
An article last week referred to this as "reflexivity".
* Reflexivity is a theory that positive feedback loops between expectations and economic fundamentals can cause price trends that substantially and persistently deviate from equilibrium prices.
* Reflexivity’s primary proponent is George Soros, who credits it with much of his success as an investor.
* Soros believes that reflexivity contradicts most of mainstream economic theory.
https://www.investopedia.com/terms/r/reflexivity.asp has some additional info.
I wonder if there's a way to marry "efficient market hypothesis" with "reflexivity on the edges" somehow. Well outside my ballywick, in any event.
I think Keynes captured the essence of reflexivity nicely in his beauty contest:
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."
I don't think there's necessarily a contradiction between a weak form of the efficient market hypothesis and the quite evident phenomena of reflexivity. Inefficiencies form, the agents seek them out and in so doing remove them. The question is how fast the inefficiencies are removed and how costly they are to discover. There's decent evidence that the inefficiencies can take quite some time to disappear. The tougher question is how costly they are to discover and exploit. Unfortunately, it's hard to gather evidence on that, because of the confounding variables (trade secrets and competition, selection bias).
Another way to put it: You might be the best poker player at the table, but you might not be enough better to beat the rake. Or, sure, you can count cards and win at blackjack, but the casino ensures through table limits that on average they'll still come out ahead. Card counters will spend too much money finding a table with a good count that they won't win enough back exploiting the count to make up for the cost of information. On average.
No, you can't marry the Efficient Market Hypothesis with any kind of inefficiency. Even less one that isn't compatible with a market settling into equilibrium.
The hypothesis is just false. Markets do seek efficiency, but not the way it states. But the Efficient Market Hypothesis leads to tractable mathematics, so people try to approximate the real world into it.
> I wonder if there's a way to marry "efficient market hypothesis" with "reflexivity on the edges" somehow.
The key to this synthesis is that there is sometimes genuine, fundamental value to be had in creating a Schelling point for a resource or a certain kind of transaction. This is (part of) why online marketplaces are valuable and defensible businesses, for example.
"Reflexivity" is simply what it looks like when a Schelling point is in the process of forming. There are some very rare but very real cases in which a bubble really does create its own reality, and that reality sticks around because a shared delusion turns out to create enough real value to justify its existence. There is an art to identifying those cases, and that art is as well-compensated as one might imagine. (Most of the time, though, a Ponzi is just a Ponzi.)
I've read the Investopedia article, but I struggle to see what's the big deal about it? Where's the conflict?
The best I could summarize it is that "reflexivity" postulates that economic equilibria are usually not stable, but metastable. That is, they can be easily pushed out of their stability regime, at which point the feedback loops will no longer balance, and the equilibrium will get re-established elsewhere (if at all).
That's the only thing I can see that requires some empirical justification. Other than that, the postulates seem to be basically "feedback loops 101", and the "mainstream economics" concepts, as I understand them, are built on the same principles too.
This did not work between 2000-2003. Companies whose share prices went up 10x still want away.
The GME rally amazingly even exceeds the biggest bubbles of 1997-2000 in %-change and volume.
It is very easy to reconcile it with the EMH and risk neutral pricing. If positive reflexivity exists, then presumably so does negative reflexivity, so it cancels out.
The ideas discussed in his post, especially the idea of rapidly expanding spheres of civilizations consuming all resources in their path, were beautifully explored in Stephen Baxter's sci-fi book, Manifold: Space (a spin-off of his earlier book, Manifold: Time, which is also excellent). In his book, alien intelligences are common; once they become sufficiently advanced, their civilizations tend to rapidly expand and consume all available resources, often to the detriment of other civilizations in their path. This pattern leads to some interesting phenomena: first, while the night sky might seem quiet at first, once we do encounter aliens, we tend to see their signals across many star systems in rapid succession. The reason is pretty obvious: there is only a brief period of time when we are on the surface of a sphere - a few years after our first observations of aliens, we are engulfed within their sphere and observe their signals from all over our stellar neighborhood. Another idea he plays with is the idea of "refugee" species, who attempt to flee oncoming spheres by evacuating ahead of their path instead of being consumed.
Actually, he pushes this idea even further: in the book, our solar system was already engulfed in a few spheres millions of years ago. He suggests that this why Venus is such a hellscape: the aliens came, took the resources they wanted, and left behind a polluted mess. In the case of Venus, they left lots of greenhouse gases behind as the result of some chemical process used to extract resources; as a result, Venus quickly became the warmest planet in the solar system. It's a fun twist on the Fermi paradox: signs of aliens are actually all around us, we are just too dumb to notice them.
Another interesting idea he explores a bit is "ownership" of resources. Do the resource-rich asteroids in our solar system really belong to us? Or are they available to any alien race who happens to pass through? In the book, we first notice aliens by observing unexplainable infrared radiation from the asteroid belt (later revealed to be thermal emissions from their resource extraction). He suggests that these aliens will potentially crowd out humans; even if they are not overtly hostile, they could gobble up all the resources we would have used to expand our civilization.
Highly recommend this book.
Had to read this twice, I think you meant to comment on this thread: https://news.ycombinator.com/item?id=25972111
The same sort of ideas are explored in the "three body problem" trilogy (https://en.wikipedia.org/wiki/The_Three-Body_Problem_(novel) ). I love fiction that explore this topic!
Where does one buy said book, "Manifold: Space"? I'd prefer paperback or hardcover (no options on UK Amazon)... sounds very interesting.
Seems like a potential confirmation bias here with regards to GME. GME may be in a feedback loop right now, but how many other stocks had the beginnings of a feedback loop but fizzled out? How many companies started to win but didn't attract the best employees?
Put it another way, is there any predictive power here or is it only something that can be observed after the fact? Seems like the latter.
Also, are we even "after the fact" at this moment? In other words, let's see in three months' time (or one year) whether there really was a positive feedback loop that saved GME or whether there was a rapid boom-and-bust cycle and GME is back to where it was last year (or even bankrupt). It's too early to draw conclusions while we're still in the middle of the frenzy.
> It's too early to draw conclusions while we're still in the middle of the frenzy.
100%. We're certainly not yet after the fact.
There are firms I've heard of who have social media watchers and they play based on "buzz". I don't know how that pans out in long term holdings, but short term I'm guessing they've been successful or they wouldn't keep doing it.
There was a post on wsb where he wrote a bot to keep track of sentiment around tickers. Then he played said tickers based on sentiment and the portfolio was consistent and possibly out performed the market but don't quote me on the last one.
> As the number of elephants declines, tusks become rare. Rarity pushes prices up. High prices make hunters excited about how much money they can make if they find an elephant. So they work overtime. Then fewer elephants remain, tusk prices rise even more, more hunters catch on, they work triple-time, on and on until the number of hunters explodes as everyone chases the last herd of elephants
This is almost the opposite of Jevon's Paradox:
> the Jevons paradox occurs when technological progress or government policy increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the rate of consumption of that resource rises due to increasing demand.
> the number of hunters explodes as everyone chases the last herd of elephant
but the hunter that figure out how to farm elephants will be even richer. So the problem becomes one of technological breakthru coming first, or extinction coming first.
Jevon’s paradox can also lead to virtuous cycles. For example, electric-assist bikes require less user energy per mile, making biking easier, which leads to more time spent biking, resulting in more overall exercise. Similarly, increased transit use can lead to more time spent walking.
There is also the vicious version: Mandating the wearing of helmets for cyclists increases the number of deaths, because of obesity and cardiac diseases due to raising the barrier to cycling.
I've heard that example many times over the years, but I very much suspect it's and urban myth. Do you know if there really are any serious studies showing this?
There were studies showing that mandatory helmet laws coincide with reduced cycling, and more cycling coincides with fewer deaths
https://theconversation.com/ditching-bike-helmets-laws-bette... Has references to many papers
I’ve personally read it from the book Freakinomics, here is the article pointing to one scientific paper. But it could still be false, you are correct: From my experience, a scientific paper isn’t trustworthy until another paper comes and shows which limits it has.
https://freakonomics.com/2010/01/19/do-bike-helmet-laws-disc...
Thanks for the link. But that only shows that mandatory helmets reduce bicycling a few percent. The leap that it actually increases mortality is still missing.
Think about it this way: if you choose to wear a helmet, you already have done a personal risk evaluation. You are also, with a high probability, an avid cyclist. You are more likely to invest in quality equipment.
On the other hand, if you are getting a helmet because you have to but don't really want to, your selection criteria will be different. You are less likely to invest in quality equipment.
The problem with dodgy headgear is that a badly fitting helmet will not feel right, or align well with your head movements. This in turn means such a helmet is a source of low-grade irritation and distraction - and due to bad fit, may actually limit your field of vision when you turn your head around. The latter clearly increases the wearer's risk.
Hence, a cyclist who wears a helmet only because it's mandatory is (sadly enough) more likely to get into dangerous accidents. They are unable to give their surroundings their full attention, and may also be suffering from ill effects of their chosen gear.
Net effect? More dangerous situations, with smaller safety margins between the cyclist and their surroundings.
Full disclosure: I prefer to wear a good, lightweight helmet that fits snugly and doesn't accidentally impair my vision. I have also experienced badly fitting helmets and consider them hazardous. This is the reason why I am against mandatory cycling helmets - regulation can not guarantee ergonomics, so with mandatory helmets the truth is that more people will be in the traffic with headgear that will make them less safe to themselves, as well as everyone around them.
It’s not hard to make up stories that sound plausible. That doesn’t make them true.
It is true that mandatory helmet laws do not reduce bike fatalities. It would be difficult to come up with a testable hypothesis as to why that is, so this sort of reasoning is as good as it gets.
Mandatory helmets reduce fun and freedom. Laws should not be passed for marginal improvements in safety or small reduction of public costs, in my opinion.
This paper says it increases mortality for that reason:
There was a TED talk about this, don't know about papers.
You don't need an urban myth when you already have statistics.
Let me rephrase my question: are there reliable statistics that shows that that is the case?
another relevant one: lockdowns cause more deaths because people don't have a job and are depressed.
Edit: According to Elon Musk and others.
The observation from comparing different countries after the fact seems to be that the economy suffers from the epidemic itself (voluntary change of habits plus hospitalizations) as much it does from lockdowns, so the argument is that if you avoided lockdowns then you got both the increased deaths from covid and also the deaths because people lost jobs and are depressed.
The economic issues and the associated death increase was avoided only in countries which successfully managed to limit the spread of disease, which generally involved aggressive early lockdowns.
No doubt, but they also cause fewer deaths from reducing healthcare overload.
My question would then be, what is the natural life expectancy of a suicide or opiate overdose victim, versus that of a person that would have survived COVID only with medical intervention.
We should be looking at deferral of death, not just death count. Death is certain to everyone and I am reluctant to value everyone’s remaining life expectancy equally, at least as far as the healthcare system is concerned.
In the U.K. there’s no evidence of any change in suicide rates in 2020 (it’s normally about 6,000 a year). Registration delays means that we don’t know the numbers for 2020, but early indications are not much change (suicide has been increasing though and is at a record high)
A much bigger issue is the lost of QALYs from lockdown but not from deaths, including the socio-economic impacts.
ONS have a more through report than a Sunday morning post from a phone.
https://www.ons.gov.uk/news/statementsandletters/estimatingt...
The people who mainly benefitted from lockdown measures are the over 60s
The people who mainly lost out were the under 35s
The recovery plan needs to address this - including fixing the massive wealth disparity. A generation of property owning shareholders who have retired have seen their wealth and income balloon over the last year (and decade). But it won’t, millennials will be screwed.
Life years gained is the measure you're talking about, and that's definitely a good measure to take into consideration.
Now on the other side do lock-downs cause less use of healthcare? And will it result in health-debt? If there is less preventive maintenance done on population will that results increased deaths in future? Thinking of elective surgeries and so on...
This article is solely about positive feedback loops (even though the author never says "positive.") If positive feedback loops were the whole story every stock that rose a little would take off like a rocket. Clearly that doesn't happen, and it's because there are also negative feedback loops, like noticing that a stock is overvalued and refusing to buy it until the price comes down.
What makes the future difficult to predict is that negative feedback loops and positive feedback loops are often fighting each other and you never know early on which will ultimately dominate.
Isn't Collaborative Fund the one that got smeared by the CEO of one of its portfolio companies?
Previously: https://news.ycombinator.com/item?id=24793170
It usually is crazier than you expect but I feel the authors answer “small trends” is a cop out answer. Small trends can be found in any success, the contrarian view is more interesting: why do things go right when they’re not supposed to? “Small trends” is a bad answer for GameStop, the answer is more complex and the variables aren’t covered in this article
It seems like cheap thought but he tries to present it like it's deep insight.
And in 2008/09, people probably didn't want to buy from a bankrupt GM because it's hard to get spare parts from bankrupt car manufacturers. At least for the common definition of bankrupt (i.e. shuttered).
Interesting read about feedback loops and self-fulfilling prophecies.
However, the author made it sound as if "momentum" is the only thing that drives human behavior. While it's certainly a part, I wouldn't say it's the only force driving human decisions.
I don't think the author was claiming it's the only force. But I do agree this was interesting but felt like something was missing. If feedback loops are so powerful, why are most things actually fairly stable? How and when and why does something get sucked into a positive feedback loop? I'd be curious to read more thoughts about that.
isn't that the question of what makes things go viral?
To link it to the world of investing, other key factors that drive returns/risk of assets are value, size, quality, yield and volatility, besides momentum. It's a multi-variate equation.
You may be interested in Douglas Hofstadter's Gödel Etcher Bach, or if you are into something shorter, 'I am a strange loop', by the same author.
Thanks for the suggestions. They seem interesting.
>It’s simple: As the number of elephants declines, tusks become rare. Rarity pushes prices up. High prices make hunters excited about how much money they can make if they find an elephant. So they work overtime. Then fewer elephants remain, tusk prices rise even more, more hunters catch on, they work triple-time, on and on until the number of hunters explodes as everyone chases the last herd of elephants whose super-rare tusks are suddenly worth a fortune.
Or maybe simply selling tusks is profitable and there does not need to be a feedback loop for elephants to go extinct.
> Or maybe simply selling tusks is profitable and there does not need to be a feedback loop for elephants to go extinct.
but that's not logical, because if selling tusks is profitable, then more people will want to join in, thus increasing the number of tusks being sold (implying more elephants being killed for it). Until profit goes away due to drop of demand at least.
Wow, a really interesting read, nice to think about.
Agree. I thought about how how my personal image perceived by others may affect my success or failure in life or career. Interesting and scary at the same time.
There seem to be survivorship bias and the examples he demonstrated are probably at the tail end of a distribution
Title should say what "It" is.
Question: Is it possible foreign actors can drive up the price to try to cause adverse unintended effects?
Has anyone seen surprising feedback loops they can share?
There’s a name for that: the snowball effect
Seems like another way to read this is to say that unchecked capitalism leads to some pretty unhealthy behaviors.
If people weren’t trying to get rich selling tusks we would have more elephants and if people weren’t trying to get rich with GME stock we would have less fear of our other investments being randomly targeted.
If people could not become rich by profiting from their efforts, we'd all still be living in teepees and spending our days foraging.
My criticism of unchecked capitalism isn’t the same thing as opposition to capitalism itself. In fact it’s easy to argue that capitalism cannot function without the limits we place upon it.
taking the anarchist's approach: if people are happier owning tusks and using the stock market as a casino than seeing elephants and having stable finances, let em do it.
Do anarchists really believe that the profit motives of the few outweigh the collective interest of the masses?
It's a pretty varied group defined around a negative. That's like asking whether atheists believe a specific positive statement about the world. That said, to try to answer your question, my guess is left anarchists would say "absolutely not, capitalism is full of unjust hierarchy and the profit motive is bad news altogether", and right anarchists would say, "there's no such thing as the collective interest, but nobody gets to violate the individual rights of anyone else for whatever motive".
they do, because they believe they themselves are going to be at the top. If you showed them where in society they will end up (i.e., at the bottom), they will change their tune.
> than seeing elephants
I don't want to strawman anyone. Are there really Anachrocapitalists who believe that the market should decide whether or not we have mass extinctions, or is this post mostly satirical?
There are so many problems with this idea, not the least being that markets aren't designed to eliminate niche ideas, they're designed to support them -- and because wild populations of elephants are a shared common resource, even a small number of people who are happier owning tusks means that their preferences suddenly outweigh the vast majority that want them to stop killing elephants.
Markets aren't designed to stop people from irreparably damaging commons and messing up the world for everyone. That doesn't mean markets are bad, it just means... that's not what they were ever designed to do. You're using them to try and fix a problem that they're not optimized to fix.
This is very much a, "if all you have is a hammer, everything looks like a nail" proposal. We don't need to solve literally every single problem with Capitalism. We especially shouldn't look at every single problem and say, "Capitalism doesn't solve that, so it's not a real problem."
Does it not seem plausible to you that perhaps one factor in the reduction of poaching was local people realizing there was more money to be made from tourists drawn to see elephants, rather than from poaching them? Government action helped too, no doubt.
I expect that the major positive impact of tourism was providing motivation for local governments and local citizens to crack down on poaching. I am skeptical that you can convince every single poacher to stop poaching and become tour guides. I am also skeptical that the person paying money for ground elephant tusk elixirs is going to view a vacation as a suitable substitute.
Reducing demand certainly helps, but tourism and poaching are not exclusive markets, you can have tourism and poaching happening at the same time -- and demand for one isn't necessarily going to reduce demand for the other. If 100 people are giving tours, and 20 people are deciding that they'd still rather just shoot elephants because they don't like dealing with tourists, then you still end up with zero elephants. Reducing demand is only going to be one part of the puzzle, a slight reduction isn't enough on its own to solve the problem.
And regardless, looking at market demand as a part of the solution is still kind of missing the point. Sure, we might be able to leverage some market forces to help with the overall problem, but it's still a problem regardless of what the market says about it. The market in this case is at best a tool, it doesn't define what the right outcome should be.
It doesn't matter if the vast minority of people rich enough to spend money on this prefer elephant tusks or tours. It should not be their choice to make. We don't want the market to decide whether or not we have mass extinctions. If we end up with zero elephants, saying, "well, the market just didn't create enticing tours, so we'll never have elephants again" is not a valid response.
What percentage of the population is rich enough to go on wildlife tours to another country? They don't have the right to choose for everyone else whether or not elephants go extinct.
In general there's no valid reason to fear our investments being randomly targeted. GME short sellers have only themselves to blame by pushing the total short interest to unsustainable levels and failing to hedge. That is a rare situation which hardly impacts any of us.