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Bought RAS today. Commercial real estate. Provides 11% yield to the common stock.


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Yale economics professor Robert Shiller won the Nobel prize for his work on bubbles. He wrote a seminal book on speculative manias, Irrational Exuberance, a deep analysis of the dramas over the centuries when otherwise sane people drove prices for tulips, stocks, and houses to inexplicable heights.

Shiller developed some of the tools that are considered vital for taking a sober look at markets. He helped create indexes for measuring real estate prices and his stock market valuation indicator, the cyclically adjusted price-earnings ratio, or CAPE ratio, is seen as one of the best forecasting models for stock returns.

As Shiller sees it, “big things happen if someone invents the right story and promulgates it.” Quartz spoke with him about some of the frothiest assets today, from bitcoin to tech stocks. The conversation was edited and condensed for clarity.

Quartz: What are the best examples now of irrational exuberance or speculative bubbles?

Shiller: The best example right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story. And I’ve seen it in my students at Yale. You start talking about bitcoin and they’re excited! And I think, what’s so exciting? You have to think like humanities people. What is this bitcoin story?

It starts with Satoshi Nakamoto—remember him? The mysterious figure who may or may not be real. He’s never been found. That has a nice mystery quality to it. And then he has this clever idea about encryption and blockchain and public ledgers, and somehow the idea is so powerful that governments can’t even stop it. You can’t regulate this. It kind of fits in with the angst of this time in history.

If you look at the third edition of Irrational Exuberance, I’m arguing that there’s a fundamental deep angst of our digitization and computers, that people wonder what their place is in this new world. What’s it going to be like in 10, 20, or 30 years, and will I have a job? Will I have anything?

Somehow bitcoin fits into that and it gives a sense of empowerment: I understand what’s happening! I can speculate and I can be rich from understanding this! That kind of is a solution to the fundamental angst.

So I’m trying to deconstruct the bitcoin story. Big things happen if someone invents the right story and promulgates it.

So is bitcoin a bubble, or the biggest bubble?

I don’t know how to quantify that. But I have a sense that something is exciting to you. Another thing that is exciting to people now is Donald J. Trump. You may have heard of this guy.

It’s just amazing how he dominates and I think he has a genius at recognizing stories and listening to his audience and understanding what drives them.

He too is related to this fundamental angst that we have about where are we in this digitized society—international and digitized. And it’s that angst that he spoke to, and he presented a story that involves you, the voter, as a success in this new world, and that’s why the Trump story was so popular.

There really are idea epidemics.

Something you’ve written about is the role of media in speculative bubbles. In the past, you didn’t seem convinced that the internet has boosted the media’s ability to do that. Has that changed?

The big thing that happened wasn’t the internet. It was the printing press, Gutenberg in the 1400s. It didn’t really get going until the 1600s. It was then that we started seeing bubbles.

The problem with things going viral is that there has to be some transmission that’s adequate to the job. You can still go viral without newspapers, but it’s harder. There were celebrities and international stars, like Homer, who wrote the Iliad and the Odyssey. He did that by traveling from town and town and reciting his books. And it worked! He’s still going, long after he died.

Things have always gone viral, it’s the nature of civilization, but it got stronger with the printing press, much stronger. And then around the 1600s they invented the idea of weekly newspapers that told you what happened this week. And that really went like wildfire. People loved newspapers.

The internet takes it to another dimension. But I have a sense it’s not as important as the printing press.

Hasn’t the internet democratized information? Someone can promote their views widely without getting buy-in from editors or other gatekeepers? That’s what Trump has done with Twitter.

One really important thing that’s happened is that reputations don’t seem to matter as much at this point in history. Maybe it will come back. You have news media that have developed their reputation for honesty and integrity. And something that’s gone viral is a conspiracy theory that the news media, the mainstream media, are in a conspiracy, and it’s embellished in crazy ways like the Rothschilds or George Soros, or somebody, are in a conspiracy to destroy America and have bought the media and are controlling them. Those are the extreme, crazy forms of the narrative.

But there’s also a more general narrative that liberals are somehow soft and can’t handle reality. This is another narrative.

You’re asking about bubbles. These are the stories that drive the bubble. Trump speaks to these things, and he seems to be saying things that nobody else will say but maybe you’re thinking.

He also legitimizes wealth. It wasn’t that long ago that we held rich people in contempt. We have a billionaire president, and he’s kind of welcoming: You can be rich, too. The Trump story helps inflate all kinds of bubbles, not just bitcoin. I think there are aspects of a housing bubble, and a stock market bubble right now.

Are your feelings on the stock market based on the CAPE ratio?

The CAPE ratio is just one indicator I’m particularly known for. I have another indicator you can find on my website that not many people pay attention to. Since 1989 I’ve been doing questionnaire surveys of both individual and institutional investors. I’ve been doing this a long time without getting much notice for it. But I believe in it, somewhat, though I don’t think it answers everything.

I have something I call a valuation confidence index. I don’t have it really up to date because it’s only a six-month moving average based on small surveys. Maybe I should expand my size.

But valuation confidence is at the lowest it’s been since around 2000. In other words, people think the market is highly valued. They don’t have to look at CAPE. People think it. I know that. Both individual and institutional investors. We are in a time of mistrust of the market.

The only time mistrust of the market was lower since 1989 was in 2000. So around 2000, the peak of the dot-com bubble. It seems like the mindset is somewhat similar to the dot-com mindset. And that brings us to the FANGs [Facebook, Amazon, Netflix, and Google], as well. High-tech companies are probably more exciting, as they were in 2000.

The year 2000 was kind of like 1849. That was the gold rush. It really created a viral explosion of men going out west in 1849 looking for gold. Now is the time, you can’t wait until 1850! You have to do it now! It was the same thing in 1999 or thereabouts, when stories of some internet companies were coming out and people said, you know, this is the future, these guys are going to take over.

Usually these stories have an element of truth to them, but the question is how fast is it going to happen, and what’s a realistic view for investors. And they got ahead of themselves with the dot-com bubble.

We’re maybe doing that again with the FANGs.

Is low volatility a bubble, of sorts?

Well volatility is very low, both actual and projected in the VIX. So, why is that?

Some people say it’s because of central bank accommodation.

I tend to think of it as something that reflects the quality of the narrative, which is not encouraging a lot of trading activity now. I’m guessing—I can’t tell you why it’s low.

One thing I emphasized in my book Irrational Exuberance is attention is capricious. There’s a social basis for attention. We all focus our attention in the same way. Like we’re all watching Donald J. Trump. When Houston floods, well that’s got our attention. But part of the story has to be what Donald J. Trump said about it.

Somehow the attention is elsewhere than day-to-day motions of the stock market. It could suddenly change.

I remember in October 1987. That was the biggest one-day stock market drop ever. How did I hear about it? I was teaching my lecture in the morning. I noticed that one or two students were listening to transistor radios. Finally one of them raised his hand and said, “Do you know what’s going on? There’s a historic stock market crash.” That’s how you hear about it. It suddenly grabs people’s attention. And it’s just not there right now.

Monetary policy has entered a new regime. The only historical precedent for when interest rates were low for anything like this long was in the 1930s, the Great Depression, and how did that end? It ended with World War II.

It doesn’t tell you what’s going to happen now. Why are long-term interest rates so low? It’s a big thing. It’s been trending down since 1982. There’s been a downtrend around the world in long-term real interest rates.

And it’s nothing particularly to do with the financial crisis. News media like to tie things in with already popular narratives. The natural instinct of a newspaper reporter is to tie it back to that, but it’s been going on longer than that.

I don’t have any unique insight into why interest rates have gone down. But I know they’re vulnerable to changing narratives.

Have you by any chance looked at initial coin offerings?

No, what is an initial coin offering?

It’s like using a crypto token, not bitcoin itself but the blockchain architecture, and issuing these virtual encrypted tokens almost like shares, even though they say they’re not shares.

How is it different from bitcoin?

It’s somewhat like crowdfunding. Say you’ve started a bar, and you want to fund it by issuing these tokens. A token is worth one beer, but your bar will only ever serve a set number of beers. If people think it will be a really hot bar, the value of the tokens trades for up to $100 or $200. People are raising hundreds of millions of dollars this way, with pretty thin business plans.

Yeah, that’s a classic bubble. I’ll have to read about that. There are a lot of cryptocurrencies but they don’t have as good a story as bitcoin. Maybe there’s a new narrative. Maybe this is a more viral story.

You’re making me think about writing something about this. You have my thinking going.

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James Ledbetter, the editor of Inc. magazine, recently published a weird and wonderful book, One Nation Under Gold: How One Precious Metal Has Dominated the American Imagination For Four Centuries. The gold standard is one of my areas of persistent interest. I have published around a million words touching on it here at and elsewhere. So, I read it avidly and with great pleasure.

More to the point, two campaign-trail comments show that Donald Trump is, at least, a strong sympathizer with the gold standard. The gold standard may yet come to matter. If so, getting it right will be crucial. And One Nation Under Gold will be a real asset in getting it right.

Ledbetter’s book is, for the most part, extraordinarily good on the history, politics, and culture. On the policy side, not so much. He cannot be blamed for reporting the conventional wisdom and missing the real, mostly behind-the-scenes, policy tick-tock. That is a minor blemish on a great book. He also shows flashes of occasional brilliance on the policy side.

The book is wildly entertaining as well as informative. It consequently drew wide attention in the mass media, with significant exposure by the New YorkerNPRFortuneQuartz, the Wall Street Journal, and elsewhere. Deservedly so.

Why “weird and wonderful?” Mostly, Ledbetter is a first-rate reporter with a nose for unearthing great stories. He delivers great and often outré stories in abundance.

Steve Forbes, a great and eloquent gold standard champion, says half in jest and whole in earnest that if you get stuck between two chatty bores on a transcontinental flight just offer to explain monetary policy to them. They will promptly dive into their In Flight magazines. Ledbetter is never boring and also displays a comely ambivalence toward the gold standard, sometimes dismissing it as antiquated and fringe while more than occasionally throwing out hints of admiration or at least fascination.

You likely will be fascinated. I was.

One Nation Under Gold does not have the depth and granularity of Liaquat Ahamed’s Pulitzer Prize winning monetary history Lords of Finance: The Bankers Who Broke the WorldLords of Finance is the best extant history of the decline and fall of the gold standard. That said, Ledbetter has written a delightful book, one that succeeds in capturing, among other things, much of the loopiness that has undeservedly tarnished the reputation of the true gold standard.

One Nation Under Gold really commences with the early beginnings of America. (It is not quite clear to which “fourth” century its subtitle refers.) He commences with a complaint by one George Washington in 1779 as to how the issuance of paper money caused him great financial injury. Washington had more indictments of paper money than that, as did almost all of the other Founders.

Ledbetter: “It is almost impossible to overstate the dislike that most of the Founding Fathers, and indeed most of the American ruling class, had for paper money in the late eighteenth and early nineteenth century. The currencies issued by most states depreciated to the point of being worthless.” That depreciation left an indelible impression.

Madison devoted the second paragraph of Federalist 44 to indicting paper money:

The extension of the prohibition to bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.

In consequence, the writers of the Constitution explicitly, in Article 1 Section 10, stripped all monetary powers from the States. The reference therein to gold and silver Coin merely meant that the States were doubly-forbidden from printing paper money. (It worked.)

Later on in the book, Ledbetter archly observes that “[President Lyndon] Johnson’s desperate gold strategy proved once again that when America needs to choose between its wars, it’s sense of foreign supremacy, economic well-being, and gold-backed currency, it’s gold that always gives way.”  This is somewhat astute but not entirely correct.

The gold standard is part of the infrastructure of equitable prosperity (nationally and internationally). It is not a suicide pact and not designed to constrain economic growth. Rather the opposite. And yes, the gold standard, always, is an early casualty of war. If in the existential extremity of war the gold standard must be temporarily sacrificed for reasons of war finance … so be it.

The Founders were pragmatists. In the Constitutional Convention of 1787 the framers stripped the federal government of the explicit power to issue the hated paper money. (The language, and power, removed from Article I Section 8, clause 2 was “and emit bills,” which meant to issue scrip, currency not defined by and convertible to gold.) Yet in that debate George Mason, for example, “observed that the late war [of Independence] could not have been carried on, had such a prohibition existed.”

For this and other reasons no direct prohibition on the federal government’s issuing paper money was placed in the Constitution. The power was withheld but not forbidden, leaving a little wiggle room. To criticize the gold standard as vulnerable to the demands of war is myopic.

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In writing my latest Thoughts from the Frontline, I reached out to my contacts looking for an uber-bull—someone utterly convinced that the market is on solid ground, with good evidence for their view.

Fortunately, a good friend who must remain nameless shared with me an August 4 slide deck from Krishna Memani, Chief Investment Officer of Oppenheimer Funds.

The current bull market is the second longest and has the third-highest gain. It will be the longest stock bull market of the modern era if it can last another two years or so.

However, he thinks the present bull market will continue for another year.

Here’s Memani:

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing.

15 Events That Could Be a Catalyst for the Next Recession

He goes on to list 15 specific events he thinks would be necessary to make him abandon his bullish position. (Comments in parentheses and italics are mine.)

1. Global growth would have had to decelerate. It is not.

(European growth is actually picking up. Germany blinked on financing Italian bank debt, and the markets now have more confidence that Draghi can do whatever it takes.)

2. Wages and inflation would have had to rise. They are not.

3. The Fed would have planned to tighten monetary policy significantly. It is not.

(They should have been raising rates four years ago. It is too late in the cycle now. They may raise rates once more, but the paltry amount of “quantitative tightening” they are likely to do is not going to amount to much. In fact, if for some reason they decided to go further with rate hike and enter a tightening cycle, their monetary policy error would probably trigger a recession and a deep bear market. I think they realize that—or at least I hope they do.)

4. The ECB would have to tighten policy substantially. It will likely not.

(Draghi will go through the motions, though he knows he is limited in what he can actually do – unless for some unexpected reason Europe takes off to the upside. And while Eastern Europe is actually doing that, “Old Europe” is not.)

5. Credit growth would have had to be surging. It is not.

(Credit growth is generally picking up but not surging. And most of the credit growth is in government debt.)

6. Corporate animal spirits would have been taking off. They are not.

(That is basically true for most public corporations. There are a number of private companies and smaller businesses that are pretty optimistic.)

7. Equities would have had to be expensive relative to bonds. They are not.

8. FAANG stocks would have had to be at extreme valuations. They are not.

(I don’t think I buy this one.)

9. Investors would have had to be euphoric about equities. They are not.

10. The current cyclical rally within the secular bull would have had to be old and stretched. It is not.

(Not buying this one either.)

11. High-yield spreads would have to be widening. They are not.

(I pay attention to high-yield spreads, a classic warning sign of a turn in market behavior. Are they at dangerous levels? Damn, Skippy, I cannot believe some of the bonds that are being sold out in the marketplace. Not that I can’t believe the sellers are willing to take the money—you’d have to be an idiot not to take free money with no strings attached. I just don’t understand why major institutions are buying this nonsense.)

12. The classic signs of excess would have had to be evident. They are not.

(Kind of, sort of, but we are really beginning to stretch the point.)

13. China’s credit binge would have had to threaten the global financial system. It does not.

(Xi has somehow managed to push off the credit crisis, at least for the rest of this year, until after the five-year Congress. Rather amazing.)

14. Global trade would have had to be weakening. It is not.

15. The US dollar would have had to be strengthening. It is not.

That’s quite a list. Seeing it with the charts and Memani’s comments makes it even more compelling. To pick just one for closer scrutiny, let’s consider #7.

Are Equities Expensive Relative to Bonds?

That’s a good question because it really matters to big, long-term investors like pension funds.

Pension fund managers need to meet certain return targets, and they want to put the odds on their side. Treasury bonds offer certainty—presuming the US government doesn’t default. (Ask me about that again in October.)

Stocks may offer higher returns but more variation.

Memani explains this relationship by looking at earnings yield. That’s the inverse of the P/E ratio.

Essentially, it’s the percentage of each dollar invested in a stock that comes back as profits. Some gets distributed via dividends, buybacks, etc., and some is retained.

If you think there’s a stock mania today akin to the euphoria of the late 1990s, you’ll find no support in this ratio. Back then, bonds were dirt cheap compared to stock market earnings yield.

Now we have the reverse: stocks are cheap compared to bonds.

This is one of the most convincing bullish arguments I see now.

I remember the late ’90s very well. I called the top about three years early, never dreaming we could see a year like 1999. That will always be my mania benchmark—and today we are not even remotely near it. I don’t remember thinking much about bonds back then. No one else was, either.

But buying them would have turned out much better than buying stocks in 1997–99.


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This rather misses the point: gold is protection against government induced inflation etc. If the dollar or whatever implodes, gold/silver are money.

Having waited patiently for the “any-minute-now” moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions. Yet the responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models — and for understandable reasons. The precious metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of markets for cryptocurrencies.

Gold prices rose almost 1 percent on Tuesday morning as part of the risk aversion triggered by yet another brazen North Korean missile launch over Japan, together with uncertainty as to how the U.S. may respond. But trading below $1,330, the overall response of gold prices to the last few months of heightened geopolitical risks has been relatively muted, particularly as the 10-year Treasury bond, another traditional haven, saw its yield trade down to below 2.10 percent that same morning.

Two immediate reasons come to mind, one related to several assets and the other more specifically to gold.

First, and as I have discussed in several Bloomberg View articles, the prolonged pursuit of unconventional measures by central banks has helped meaningfully decouple asset prices from underlying fundamentals. In such circumstances, historically based models will tend to overestimate the reaction of asset prices to heightened geopolitical tensions — including the fall in risk assets such as equities, or the rise in gold.

Second, a portion of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand. As such, the returns to investors there have been significantly greater, sucking in even more funds.

The message for investors in both gold and multi-asset-class portfolios is clear.

While continuing to play a role in diversified market exposures, gold is less of a risk mitigator and asset-class diversifier, for now. Luckily for investors, the need has also been less pronounced, given that ample market liquidity has boosted returns, repressed volatility, and distorted correlations in their favor. But this is not to say that gold’s traditional role will not be re-established down the road. After all, central banks are in the later stages of reliance on unconventional monetary measures and, given this year’s spectacular price appreciation, cryptocurrencies are more vulnerable to unsettling air pockets.

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Well the big fight came and went and Mayweather won. I was hoping for an upset of sorts with McGregor winning.

Sort of went with the ‘experts’ assessment, McGregor needed to win fast, in the early rounds, or, and as eventuated, Mayweather would exert his superior [pure] boxing skills and carry the fight.

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Rory Sutherland claims that the real function for swimming pools is allowing the middle class to sit around in bathing suits without looking ridiculous. Same with New York restaurants: you think their mission is to feed people, but that’s not what they do. They are in the business of selling you overpriced liquor or Great Tuscan wines by the glass, yet get you into the door by serving you your low-carb (or low-something) dishes at breakeven cost. (This business model, of course, fails to work in Saudi Arabia).

So when we look at religion and, to some extent ancestral superstitions, we should consider what purpose they serve, rather than focusing on the notion of “belief”, epistemic belief in its strict scientific definition. In science, belief is literal belief; it is right or wrong, never metaphorical. In real life, belief is an instrument to do things, not the end product. This is similar to vision: the purpose of your eyes is to orient you in the best possible way, and get you out of trouble when needed, or help you find a prey at distance. Your eyes are not sensors aimed at getting the electromagnetic spectrum of reality. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.

Ocular Deception

Our perceptional apparatus makes mistakes –distortions — in order to lead to more precise actions on our parts: ocular deception, it turns out, is a necessary thing. Greek and Roman architects misrepresent the columns of the temples, by tilting them inward, in order to give us the impression that the columns are straight. As Vitruvius explains, the aim is to “counteract the visual deception by an change of proportions”[i]. A distortion is meant to bring about an enhancement of your aesthetic experience. The floor of the Parthenon is curved in reality so we can see it straight. The columns are in truth unevenly spaced, so we can see them lined up like a marching Russian division in a parade.

Should one go lodge a complain with the Greek Tourism Office claiming that the columns are not vertical and someone is taking advantage of our visual weaknesses?

Temple of Bacchus, Baalbeck, Lebanon

Ergodicity First

The same applies to distortions of beliefs. Is this visual deceit any different from leading someone to believe in Santa Claus, if it enhances his or her holiday aesthetic experience? No, unless the person engages in actions that ends up harming him or her.

In that sense harboring superstitions is not irrational by any metric: nobody has managed to reinvent a metric for rationality based on process. Actions that harm you are observable.

I have shown that, unless one has an overblown and (as with Greek columns), a very unrealistic representation of some tail risks, one cannot survive –all it takes is a single event for the irreversible exit from among us. Is selective paranoia “irrational” if those individuals and populations who don’t have it end up dying or extinct, respectively?

A statements that will orient us for the rest of the book

Survival comes first, truth, understanding, and science later

In other words, you do not need science to survive (we’ve done it for several hundred million years) , but you need to survive to do science. As your grandmother would have said, better safe than sorry. This precedence is well understood by traders and people in the real world, as per Warren Buffet expression “to make money you must first survive” –skin in the game again; those of us who take risks have their priorities firmer than vague textbook notions such as “truth”. More technically, this brings us again to the ergodic property (I keep my promise to explain it in detail, but we are not ready yet): for the world to be “ergodic”, there needs to be no absorbing barrier, no substantial irreversibilities.

And what do we mean by “survival”? Survival of whom? Of you? Your family? Your tribe? Humanity? We will get into the details later but note for now that I have a finite shelf life; my survival is not as important as that of things that do not have a limited life expectancy, such as mankind or planet earth. Hence the more “systemic”, the more important such a survival becomes.

An illustration of the Bias-Variance tradeoff. Assume two people (sober) shooting at a target in, say, Texas. The top shooter has a bias, a systematic “error”, but on balance gets closer to target than the bottom shooter who has no systematic bias but a high variance. Typically, you cannot reduce one without increasing the other. When fragile, the strategy at the top is the best: maintain a distance from ruin, that is, hitting a point in the periphery should it be dangerous. This schema explains why if you want to minimize the probability of the plane crashing, you may make mistakes with impunity provided you lower your dispersion.


Three rigorous thinkers will orient my thinking on the matter: the cognitive scientist and polymath Herb Simon, pioneer of Artificial Intelligence, and the derived school of thought led by Gerd Gigerenzer, on one hand, and the mathematician, logician and decision theorist Ken Binmore who spent his life formulating the logical foundations of rationality.

From Simon to Gigerenzer

Simon formulated the notion now known as bounded rationality: we cannot possibly measure and assess everything as if we were a computer; we therefore produce, under evolutionary pressures, some shortcuts and distortions. Our knowledge of the world is fundamentally incomplete, so we need to avoid getting in unanticipated trouble. Even if our knowledge of the world were complete, it would still be computationally near-impossible to produce precise, unbiased understanding of reality. A fertile research program on ecological rationality came out of it, mostly organized and led by Gerd Gigerenzer, mapping how many things we do that appear, on the surface, illogical have deeper reasons.

Ken Binmore

As to Ken Binmore, he showed that the concept casually dubbed “rational” is ill-defined, in fact so ill-defined that much of the uses of the term are just gibberish. There is nothing particularly irrational in beliefs per se (given that they can be shortcuts and instrumental to something else): to him everything lies in the notion of “revealed preferences”, which we explain next.

Binmore also saw that criticism of the “rational” man as posited by economic theory is often a strawman argument distorting the theory in order to bring it down. He recounts that economic theory, as posited in the original texts, is not as strict in its definition of “utility”, that is, the satisfaction a consumer and a decision-maker derive from a certain outcome. Satisfaction does not necessarily have to be monetary. There is nothing irrational, according to economic theory, in giving your money to a stranger, if that’s what makes you tick. And don’t try to invoke Adam Smith: he was a philosopher not an accountant; he never equated human interests and aims to narrow accounting book entries.

Revelation of Preferences

Next let us develop the following three points:

Judging people on their beliefs is not scientific

There is no such thing as “rationality” of a belief, there is rationality of action

The rationality of an action can only be judged by evolutionary considerations

The axiom of revelation of preferences states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them –they themselves don’t know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or what are the reasons they give you or themselves for that. (Think about it: revelation of preferences is skin in the game). Even psychologists get it; in their experiments, their procedures require that actual dollars be spent for the test to be “scientific”. The subjects are given a monetary amount, and they watch how he or she formulates choices by spending them. However, a large share of psychologists fughedabout the point when they start bloviating about rationality. They revert to judging beliefs rather than action.

For beliefs are … cheap talk. A foundational principle of decision theory (and one that is at the basis of neoclassical economics, rational choice, and similar disciplines) is that what goes on in the head of people isn’t the business of science. First, what they think may not be measurable enough to lend itself to some scientific investigation. Second, it is not testable. Finally, there may be some type of a translation mechanism too hard for us to understand, with distortions at the level of the process that are actually necessary for think to work.

Actually, by a mechanism (more technically called the bias-variance tradeoff), you often get better results making some type of “errors”, as when you aim slightly away from the target when shooting. I have shown in Antifragile that making some types of errors is the most rational thing to do, as, when the errors are of little costs, it leads to gains and discoveries.

This is why I have been against the State dictating to us what we “should” be doing: only evolution knows if the “wrong” thing is really wrong, provided there is skin in the game for that.

he classical “large world vs small world” problem. Science is currently too incomplete to provide all answers –and says it itself. We have been so much under assault by vendors using “science” to sell products that many people, in their mind, confuse science and scientism. Science is mainly rigor.

What is Religion About ?

It is therefore my opinion that religion is here to enforce tail risk management across generations, as its binary and unconditional rules are easy to teach and enforce. We have survived in spite of tail risks; our survival cannot be that random.

Recall that skin in the game means that you do not pay attention to what people say, only to what they do, and how much of their neck they are putting on the line. Let survival work its wonders.

Superstitions can be vectors for risk management rules. We have as potent information that people that have them have survived; to repeat never discount anything that allows you to survive. For instance Jared Diamond discusses the “constructive paranoia” of residents of Papua New Guinea, whose superstitions prevent them from sleeping under dead trees. [1]Whether it is superstition or something else, some deep scientific understanding of probability that is stopping you, it doesn’t matter, so long as you don’t sleep under dead trees. And if you dream of making people use probability in order to make decisions, I have some news: close to ninety percent of psychologists dealing with decision-making (which includes such regulators as Cass Sunstein) have no clue about probability, and try to disrupt our organic paranoid mechanism.

Further, I find it incoherent to criticize someone’s superstitions if these are meant to bring some benefits, yet not do so with the optical illusions in Greek temples.

The notion of “rational” bandied about by all manner of promoters of scientism isn’t defined well enough to be used for beliefs. To repeat, we do not have enough grounds to discuss “irrational beliefs”. We do with irrational actions.

Now what people say may have a purpose –it is not just what they think it means. Let us extend the idea outside of buying and selling to the risk domain: opinions in are cheap unless people take risks for them.

Extending such logic, we can show that much of what we call “belief” is some kind of background furniture for the human mind, more metaphorical than real. It may work as therapy.

“Tawk” and Cheap “Tawk”

The first principle we make:

There is a difference between beliefs that are decorative and a different sort of beliefs, those that map to action.

There is no difference between them in words, except that the true difference reveals itself in risk taking, having something at stake, something one could lose in case one is wrong.

And the lesson, by rephrasing the principle:

How much you truly “believe” in something can only be manifested through what you are willing to risk for it.

But this merits continuation. The fact that there is this decorative component to belief, life, these strange rules followed outside the Gemelli clinics of the world merits a discussion. What are these for? Can we truly understand their function? Are we confused about their function? Do we mistake their rationality? Can we use them instead to define rationality?

What Does Lindy Say?

Let us see what Lindy has to say about “rationality”. While the notions of “reason” and “reasonable” were present in ancient thought, mostly embedded in the notion of precaution, or sophrosyne, this modern idea of “rationality” and “rational decision-making” was born in the aftermath of Max Weber, with the works of psychologists, philosophasters, and psychosophasters. The classical sophrosyne is precaution, self-control, and temperance, all in one. It was replaced with something a bit different. “Rationality” was forged in a post-enlightenment period[2], at the time when we thought that understanding the world was at the next corner. It assumes no randomness, or a simplified the random structure of our world. Also of course no interactions with the world.

The only definition of rationality that I found that is practically, empirically, and mathematically rigorous is that of survival –and indeed, unlike the modern theories by psychosophasters, it maps to the classics. Anything that hinders one’s survival at an individual, collective, tribal, or general level is deemed irrational.

Hence the precautionary principle and sound risk understanding.

It may be “irrational” for people to have two sinks in their kitchen, one for meat and the other for dairy, but as we saw, it led to the survival of the Jewish community as Kashrut laws forced them to eat and bind together.

It is also rational to see things differently from the “way they are”, for improved performance.

It is also difficult to map beliefs to reality. A decorative or instrumental belief, say believing in Santa Claus or the potential anger of Baal can be rational if it leads to an increased survival.

The Nondecorative in the Decorative

Now what we called decorative is not necessarily superfluous, often to the contrary. They may just have another function we do not know much about –and we can consult for that the grandmaster statistician, time, in a very technical tool called the survival function, known by both old people and very complex statistics –but we will resort here to the old people version.

The fact to consider is not that these beliefs have survived a long time –the Catholic church is an administration that is close to twenty-four centuries old (it is largely the continuation of the Roman Republic). The fact is not that . It is that people who have religion –a certain religion — have survived.

Another principle:

When you consider beliefs do not assess them in how they compete with other beliefs, but consider the survival of the populations that have them.

Consider a competitor to the Pope’s religion, Judaism. Jews have close to five hundred different dietary interdicts. They may seem irrational to an observer who sees purpose in things and defines rationality in terms of what he can explain. Actually they will most certainly seem so. The Jewish Kashrut prescribes keeping four sets of dishes, two sinks, the avoidance of mixing meat with dairy products or merely letting the two be in contact with each other, in addition to interdicts on some animals: shrimp, pork, etc. The good stuff.

These laws might have had an ex ante purpose. One can blame insalubrious behavior of pigs, exacerbated by the heat in the Levant (though heat in the Levant was not markedly different from that in pig-eating areas further West). Or perhaps an ecological reason: kids compete with humans in eating the same vegetables while cows eat what we don’t eat.

But it remains that whatever the purpose, the Kashrut survived approximately three millennia not because of its “rationality” but because the populations that followed it survived. It most certainly brought cohesion: people who eat together hang together. Simply it aided those that survived because it is a convex heuristic. Such group cohesion might be also responsible for trust in commercial transactions with remote members of the community.

This allows us to summarize

Rationality is not what has conscious verbalistic explanatory factors; it is only what aids survival, avoids ruin.

Rationality is risk management, period.

[1] “Consider: If you’re a New Guinean living in the forest, and if you adopt the bad habit of sleeping under dead trees whose odds of falling on you that particular night are only 1 in 1,000, you’ll be dead within a few years. In fact, my wife was nearly killed by a falling tree last year, and I’ve survived numerous nearly fatal situations in New Guinea.”