August 2017

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Volatility is on the rise, thanks in no small part to N. Korea and Trumpster exchanging threats of plunging into nuclear war.

Who knows what will happen.


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Long volatility. That is the trade that I like.

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You who caught the turtles better eat them goes the ancient adage: Ipsi testudines edite, qui cepistis [i]

The origin of the expression is as follows. It was said that a group of fishermen caught a large number of turtles. After cooking them, they found out at the communal meal that these sea animals were much less edible that they thought: not many members of the group were willing to eat them. But Mercury happened to be passing by –Mercury was the most multitasking, sort of put-together god, as he was the boss of commerce, abundance, messengers, the underworld, as well as the patron of thieves and brigands and, not surprisingly, luck. The group invited him to join them and offered him the turtles to eat. Detecting that he was only invited to relieve them of the unwanted food, he forced them all to eat the turtles, thus establishing the principle that you need to eat what you feed others.

A Customer is Born Every Day

I have learned a lesson from my own naive experiences,

Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.

Of course such advice is usually unsolicited. The asymmetry is when the said advice applies to you but not to him –he may be selling you something, trying to get you to marry his daughter or hire his son-in-law.

Years ago I received a letter from a lecture agent. His letter was clear; it had about ten questions of the type “do you have the time to field requests?”, “can you handle the organization of the trip”, the gist of it being that a lecture agent would make my life better and allow me the pursuit of knowledge or whatever else I was about (a deeper understanding of gardening, stamp collections, or Lebanese wine) while the burden of the gritty falls on someone else. And it wasn’t any lecture agent: only he could do all these things; he reads books and can get in the mind of intellectuals (at the time I didn’t feel insulted by being called an intellectual). As is typical with people who volunteer unsolicited advice, I smelled a rat: at no phase in the discussion did he refrain from directly apprising me or hinting that it was “good for me”.

As a sucker, while I didn’t buy into the argument, I ended up doing business with him, letting him handle a booking in the foreign country where he was based. Things went fine until, six years later I received a letter from the tax authorities of that country. I immediately contacted him to wonder if similar U.S. citizens he had hired incurred such tax conflict, or if he had heard of similar situations. His reply was immediate and curt: “I am not your tax attorney” –volunteering no information as to whether other U.S. customers who hired him because it was “good for them” encountered such a problem.

Indeed, in the dozen or so cases I can pull from memory, it always turns out that what is presented as good for you is not really good for you but certainly good for the other party. As a trader, you learn to identify and deal with upright people, those who inform you that they have something to sell, by explaining that the transaction arises for their own benefit, with such question as “do you have an axe?” (meaning an inquiry whether you have a certain interest). Avoid at all costs those who call you to tout a certain product disguised with advice –trying to dump inventory on you. In fact the story of the turtle is the archetype of the history of transactions between mortals.

I worked once for a U.S. investment bank, one of the prestigious variety, called “white shoe” because the partners were members of hard-to-join golf clubs where they played the game wearing white footwear. As with all such firms, an image of ethics and professionalism was cultivated, emphasized, and protected. But the job of the salespeople (actually, salesmen) on days when they wore black shoes was to “unload” inventory with which traders were “stuffed”, that is, securities they had in plethora in their books and needed to get rid of them to lower their risk profile. Selling to other traders was out of the question as professional traders, typically non golfers, would smell excess inventory and cause the price to drop. Some traders paid the sales force with (percentage) “points”, a variable compensation that increased with our eagerness to part with securities. Salesmen took clients out to dinner, bought them expensive wine (often, ostensibly the highest on the menu), and got a huge return on the thousands of dollars of restaurant bills by unloading the unwanted stuff on them. One expert salesman candidly explained to me: “If I buy the client, working for the finance department of a municipality, who buys his suits at some department store in New Jersey, a bottle of $2,000 wine, I own him for the next few months. I can get at least $100,000 profits out of him. Nothing in the mahket gives you such return”. Given that the said customer’s employment was for managing some public employee pension fund, is the New Jersey currently and to-be retired person that was in fact paying more than $100,000 for a $2,000 bottle of wine.

Salesmen hawked how a given security will be perfect for the client’s portfolio, how they were certain it would rise in price and how the client would suffer great regret if he missed “such an opportunity”, that type of discourse. Salespeople were experts in the art of psychological manipulation, making the client trade, often against his own interest, all the while being happy about it and loving them and their company. One of the top salesman of the firm, a man of huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn’t get upset when they got the short end of the stick. “Rip them off don’t tick them off” was his answer. He also added “remember that every day a new customer is born”.

As the Romans were fully aware, one lauds merrily the merchandise to get rid of it. (Plenius aequo I /audat vena/is qui vult extrudere merces[1])

The Price of Corn in Rhodes

So, “giving advice” as a sales pitch is fundamentally unethical –selling cannot be deemed advice. We can safely settle on that. You can give advice, you can sell (by advertising the quality of the product) and the two need to be kept separate.

But there is an associated problem in the course of the transactions: how much should the seller reveal to the buyer?

The question “is it ethical to sell something to someone knowing the price will eventually drop” is an ancient one –but its solution is no less straightforward. The debate goes back to a disagreement between two stoic philosophers, Diogenes of Babylon and his student Antipater of Tarsus, who took the higher moral grounds on asymmetric information and seems to match current ethics endorsed by this author. Not a piece from both authors is extant, but we know quite a bit from secondary sources, or, in the case of Cicero, tertiary. The question was presented as follows, retailed by Cicero in De Officiis. Assume a man brought a large shipment of corn from Alexandria to Rhodes, at a time when corn was expensive in Rhodes because of shortage and famine. Suppose that he also knew that many boats had set sail from Alexandria on their way to Rhodes with similar merchandise. Does he have to inform the Rhodians? How can one act honorably or dishonorably in these circumstances?[ii]

We traders had a straightforward answer. We called this “stuffing” –selling quantities to people without informing them that there are large inventories waiting to be sold. An upright trader will not do that to other professional traders; it was a no-no. The penalty was ostracism. But it was sort of permissible to do it to the anonymous market and the faceless nontraders, or those we called “the Swiss”, or some sucker far away. There were people with whom we have a relational rapport, others with whom we had a transactional one. The two were separated by an ethical wall, much like the case with domestic animals that could not be harmed, while rules on cruelty were lifted when it came to cockroaches.

Diogenes held that the seller ought to disclose as much as civil law would allow. As to Antipater, he believed that everything ought to be disclosed –beyond the law –so that there was nothing that the seller knew that the buyer didn’t know.

Clearly Antipater’s position is more robust –robust being invariant to time, place, situation, and color of the eyes of the participants. Take for now that

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.


Laws come and go; the ethics stays.

For the notion of “law” is ambiguous and highly jurisdiction dependent: in the U.S., civil law thanks to consumer advocates and similar movements, integrates such disclosures while other countries have different laws. This is particularly visible with securities laws, as there are “front running” regulations and those concerning insider information that make such disclosure mandatory in the U.S. , though it wasn’t so for a long time in Europe.

Indeed much of the work of investment banks my days was to play on regulations, find loopholes in the laws. And, counterintuitively, the more regulations, the easier it was to make money.

Equality in Uncertainty

Which brings us to asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? The ancient Mediterranean and, to some extent the modern world, seems to be converging to Antipater’s position. While we have “buyer beware” (caveat emptor) in the Anglo-Saxon West, the idea is rather new, and never general, often mitigated by lemon laws. (A “lemon” was originally a chronically defective car, say my convertible Mini, in love with the garage, now generalized to apply to about anything that moves).

So to the question voiced by Cicero in the debate between the two ancient stoics , “If a man knowingly offers for sale wine that is spoiling, ought he to tell his customers?” , the world is getting closer to Diogenes position of transparency, not necessarily via regulations as much as thanks to tort laws, one’s ability to sue for harm in the event the seller deceived him or her. Recall that tort laws put some skin in the game back into the seller –which is why they are reviled, hated by corporations. But tort laws have side effects –they should only be used in a nonnaive way, that is, in a way they cannot be gamed. As we will see in the discussion of the visit to the doctor, they will be gamed.

Sharia, in particular the law regulating Islamic transactions and finance, is of interest to us insofar as preserves some of the lost Mediterranean and Babylonian methods and practices –not to prop up the ego of Saudi princes. It is at the intersection of Greco-Roman law (as reflected from their contact with the School of Law of Berytus), Phoenician trading rules, Babylonian legislations, and Arab tribal commercial customs and, as such, it provides a repository of all ancient Mediterranean and Semitic lore. I hence view Sharia as a museum of the history of ideas on symmetry in transactions. Sharia establishes the interdict of gharar, drastic enough to be totally banned in any form of transaction. It is an extremely sophisticated term in decision theory that does not exist in English; it means both uncertainty and deception –my personal take is that it means something beyond informational asymmetry between agents. It means inequality of uncertainty. Simply, as the aim is for both parties in a transaction to have the same uncertainty facing random outcomes, an asymmetry becomes equivalent to theft. Or more robustly:

No person in a transaction should have certainty about the outcome while the other one has uncertainty.

Gharar, like every legalistic term, will have its flaw; it remains weaker than the approach by Antipater. If only one party in a transaction has certainty all the way through, it is a violation of Sharia. But if there is a weak form of asymmetry, say someone has inside information which gives an edge in the markets, there is no gharar as there remains enough uncertainty for both parties, given that the price is in the future and only God knows the future. Selling a defective product (where there is certainty as to the defect) on the other hand is illegal. So the knowledge by the seller of corn in Rhodes in my first example does not fall under Gharar, while the second case, that of defective liquid, would[iii].[iv]

As we see, the problem of asymmetry is so complicated that different schools give different ethical solutions, so let us look at the Talmudic approach.

Rav Safra and the Swiss

Jewish ethics on the matter is closer to Diogenes than Antipater; in fact even more extreme than Diogenes in its aims at transparency. Not only there should be transparency concerning the merchandise, but perhaps there has to be one concerning what the seller has in mind, what he thinks deep down. The medieval Rabbi Shlomo Yitzhaki (a.k.a. Salomon Isaacides), known as “Rashi”, relates the following story. Rav Safra, a third century Babylonian scholar who was also an active trader, was offering some goods for sale. A buyer came as he was praying in silence, tried to purchase the merchandise at an initial price, and given that the Rabbi did not reply, raised the price. But Rav Safra had no intention of selling at a higher price than the initial offer, and felt that he had to honor the initial intention. Now the question: is Rav Safra obligated to sell at the initial price, or should he take the improved one?[v] [vi]

Such total transparency is not absurd and not uncommon in what seems to be a cut-throat world of transactions, my former world of trading. I have frequently faced that problem as a trader and will side in favor of Rav Safra’s action in the debate. Let us follow the logic. Recall the rapacity of salespeople earlier in the chapter. Sometimes I would offer something for sale for, say $5, but communicated with the client through a salesperson, and the salesperson would come back with an “improvement”, of $5.10. Something never felt right about the extra ten cents. It was, simply, not a sustainable way of doing business. What if the customer subsequently discovered that my initial offer was $5? No compensation is worth the feeling of shame. The overcharge falls in the same category as the act of “stuffing” people with bad merchandise. Now, to apply this to Rav Safra’s story, what if he sold to one client at the marked-up price, and to another one the exact same item for the initial price, and the two buyers happened to know one another? What if they were agents for the same end customer?

It may not be ethically required, but the most effective, shame-free policy is maximal transparency, even transparency of intentions.

However, the story doesn’t tell us whether the purchaser was a “Swiss”, those outsiders towards whom our ethical rules don’t apply. I suspect that there would be a species for which our ethical rules would be relaxed or possibly lifted. Otherwise, as Eleanor Ostrom has recently shown, the system cannot function properly.[2]

Members and Non Members

For the exclusion of the “Swiss” from our ethical is not trivial. Things don’t “scale” and generalize which is why I have trouble with intellectuals talking about abstract notions. A country is not a large city, a city is not a large family, and, sorry, the world is not a large village. There are scale transformations we will discuss here, and in a special more technical chapter at the end, in Section X.

When Athenians treat all opinions equally and discuss “democracy”, they only apply it other citizens, not slaves or metics (the equivalent of green card or J1b visa holders). Effectively, Theodosius’ code deprived Roman citizens who marry “Barbarians” of their legal rights –hence ethical parity with others. They lost their club membership. Jewish ethics distinguishes between thick blood and thin blood: we are all brothers but some are more brothers than others[3].

Individuals have been traditionally part of clubs, with rules and member behavior similar to those in today’s country clubs, with inside and outside. As club members know, the very existence of a club is exclusion and size limitation. Spartan could hunt and kill helots, those noncitizens with a status of slaves for training, but were otherwise equal to other Spartans and expected to die for theirs and the sake of Sparta. The large cities in the pre-Christian ancient world, particularly in the Levant and Asia Minor, were full of fraternities and clubs, open and (often) secret societies –there were even such a thing as funeral clubs where members shared the costs of, and participated in the ceremonials, of the funerals.

Today’s Roma people (a.k.a. gypsies) have tons of strict rules of behavior towards gypsies and others towards the unclean non-gypsies called payos. And, as the anthropologist David Graeber has observed, even the investment bank Goldman Sachs, known for its aggressive cupidity, acts like a communist community from within, thanks to the partnership system of governance.

So we exercise our ethical rules, but there is a limit –from scaling –beyond which the rules cease to apply. It is unfortunate, but the general kills the particular. The question we will reexamine later, after deeper discussion of complexity theory: is it possible to be both ethical and universalist? In theory, but, sadly, not in practice. For whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest. The abstract is way too abstract for us. This is the main reason I advocate political systems that start with the municipality, and work their way up (ironically, as in Switzerland, those “Swiss”), rather than the reverse that has failed with larger states. Being somewhat tribal is not a bad thing –and we have to work in a fractal way in the organized harmonious relations between tribes, rather than merge all tribes in one large soup. Is that sense, an American style federalism is the ideal system.

This scale transformation from the particular to the general is behind my skepticism with unfettered globalization and large centralized multiethnic states. My collaborator, the physicist and complexity researcher Yaneer Bar-Yam showed that “better fences made better neighbors” –something both “policymakers” and local governments fail to get about the Near East. Scaling matters, I will keep repeating until I get hoarse. Putting Shiites, Christians and Sunnis in one pot and ask them to sing Kumbaya around the camp fire while holding hands in the name of unity and fraternity of mankind has failed (interventionistas aren’t yet aware that “should” is not a sufficiently empirically valid statement to “build nations”). Blaming people for being “sectarian” –instead of making the best of such a natural tendency –is one of the stupidities of interventionistas. Separate tribes administratively (as the Ottomans did), or just put some markers somewhere, and they suddenly become friendly to one another.

But we don’t have to go very far to get the importance of scaling. You know instinctively that people get along better as neighbors than roommates.

When you think about it, it is obvious, even trite, from the well known behavior of crowds in “the anonymity” of big cities compared to the groups in small villages. I spend some time in my ancestral village, where it feels like a family. People attend others funerals (funeral clubs were mostly in large cities), help out, care about the neighbor, even if they hate his dog. There is no way you can get the same cohesion in a larger city when the other person is a theoretical entity, and our behavior towards him or her governed by some general ethical rule, not someone in flesh and blood. We get it easily when seen that way, but fail to generalize that ethics is something fundamentally local.

All (Literally) in the Same Boat

Greek is a language of precision; it has a word describing the opposite of risk transfer: risk sharing. Synkyndineo means “taking risks together”, which was a requirement in maritime transactions.[4]

The Acts of the Apostles[5] describes a voyage of St Paul on a cargo ship from Sidon to Crete to Malta. As they hit a storm: “ When they had eaten what they wanted they lightened the ship by throwing the corn overboard into the sea.”

Now while they jettisoned particular goods, all owners were to be proportioned the costs of the lost merchandise, not just the specific owners. For it turned out that they were following a practice that dates to at least 800 B.C., codified in Lex Rhodia, Rhodian Law, after the mercantile Aegean island of Rhodes; the code is no longer extant but has been cited since antiquity. It stipulates that the risks and costs for contingencies are to incurred equally, with no concern of responsibility. Justinian’s code[6]summarizes it:

“It is provided by the Rhodian Law that where merchandise is thrown overboard for the purpose of lightening a ship, what has been lost for the benefit of all must be made up by the contribution of all.”

And the same mechanism for risk-sharing took place with caravans along desert routes. If merchandise was stolen or lost, all merchants had to split the costs, not just its owner.

Synkyndineo has been translated into Latin by maestro classicist Armand D’Angour as compericlitor henceif it ever makes it into English, should becompericlity, and its opposite, the Bob Rubin risk transfer will be incompericlity. But I guess risk sharing will do in the meanwhile.

How to Not Be a Doctor

Attempts at putting skin in the game in medicine, while important and needed, usually have a certain class of adverse effects, in shifting uncertainty from the doctor to the patient.

The legal system and the regulatory measures are likely to put the skin of the doctor in the wrong game.

How? The problem resides in the reliance on metrics. Every metric is gameable –the cholesterol lowering we mentioned in the Prologue is a metric gaming technique taken to its limit. More realistically, say a cancer doctor or hospital are judged by the five-year survival of patients and need to face a variety of modalities for a new patient: what choice of treatment would they elect to do? There is a tradeoff between laser surgery (a surgical procedure) and radiation therapy, which is toxic to both patient and cancer. Statistically, laser surgery may have worse five-year outcomes than radiation therapy, but the latter tends to create second tumors in the longer run and offers comparatively reduced twenty-year disease-specific survival. Given that the window used for the calculation of patient survival is five years, not twenty, the incentive is to shoot for the former.

So the doctor is likely to be in the process of shifting uncertainty away from him or her by electing the second best option.

A Doctor is pushed by the system to transfer risk from himself to you, and from the present into the future.

And in the case we saw earlier from future into more distant future.

You need to remember that, when you visit a medical office, you will be facing someone who, in spite of his authoritative demeanor, is in a fragile situation. He is not you, not a member of your family, so he has no direct emotional loss should your health experience a degradation. His objective is, naturally, to avoid a lawsuit, something that can prove disastrous to his career.

Some metrics can actually kill you. Now, say you happen to visit a cardiologist and turn out to be in the mild risk category, something that doesn’t really raise your risk of a cardiovascular event, but precedes the stage of a possibly worrisome condition. (There is a strong nonlinearity: a person classified as prediabetic or prehypertensive is 90% closer to a normal person than to one with the condition. ) But the doctor is pressured to treat you to protect himself. Should you drop dead immediately after the visit, a low probability event, the doctor can be sued for negligence, for not having prescribed the right medicine that is temporarily believed to be useful, say as in the case of statins, but that we now know has been backed up by suspicious or incomplete studies. Deep down, he may know that statin is harmful, as it will lead to long term effects. But the pharmaceutical companies have managed to convince everyone that these –unseen –consequences are harmless, when the right precautionary approach is to consider the unseen as potentially harmful. In fact for most people except those that are very ill, the risks outweigh the benefits. Except that the risks are hidden; they will play out in the long run whereas the legal risk is immediate. This is no different from the Bob Rubin risk transfer trade, of delaying risks and making them look invisible.

Now can one make medicine less asymmetric? Not directly; the solution, I have argued in Antifragile and more technically, elsewhere, is for the patient to avoid treatment when he or she is mildly ill, but use medicine for the “tail events”, that is, for rarely encountered severe conditions. The problem is that the “mildly” ill represents a much larger pool of people than the severely ill –and people who are expected to live longer and consume drugs for longer — hence pharmaceutical companies have an incentive to focus on these.

In sum, both the doctor and the patient have skin in the game, though not perfectly, but administrators don’t –and they seem to be the cause of the troubling malfunctioning of the system. Administrators everywhere on the planet and at all times in history have been the plague.


This chapter introduced us to the agency problem and risk sharing, seen from both a commercial and an ethical viewpoint. We also introduced the problem of scale. Next we will try to get deeper into the structure of things in life by switching our approach when we look at a collection of things –towns, countries, families, markets. Aggregates are strange animals.


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