Dragon Kings, Principles, US vs China....

Jun 4, 2020

"New Beginnings are often disguised as painful endings.”

― Lao Tzu

“Rules were made for fools to follow and wise men to be guided by.”

- Winston Churchill

"The greatest risk one must minimize is not something that has already been imagined - a recession, Euro crisis, a trade war, or a bear market. No, the greatest risk is a failure of imagination in understanding how the game might fundamentally change."

- Ben Hunt

A. Dragon Kings vs Black Swans

I’m a big fan of Niall Ferguson and have read most of his books. A few days ago, I was on a call where he was sharing his views on COVID - specifically around how we got here, what’s happening and where we could go.

I won’t share details, it was meant for a small group, but he did reference a concept that is worth thinking about.

The concept of Dragon Kings, which was coined by Didier Sornette.

Dragon king (DK) is a double metaphor for an event that is both extremely large in size or impact (a "king") and born of unique origins (a "dragon").

DK events are created by mechanisms involving: positive feedback, tipping points, and occur in nonlinear, complex systems that are interconnected. These feedback loops serve to amplify the effects of the event further. By understanding and monitoring the systems, we can work to predict and better understand these events.

Niall’s point was that you cannot understand any kind of contagion by studying just the virus itself. You also have to understand the structure of the social network (systems) that it is attacking (he referenced work by Nicholas Christakis who wrote a great book called Connected).

Niall’s view on network thinking was that it can help us understand:

Where contagion will attack first - think more connected, well travelled places.
That populations are not homogenous. COVID-19 seems to be particularly differentiated, not only in whom it attacks, but also by whom it's spread. So each node on the network is very different in how it passes things on.

Which all sounds pretty pedestrian, but is worth remembering that while discovering a vaccine is hard, and manufacturing tests time consuming, having a contact tracing system across society is easy (and something our phones are already doing behind the scenes).

So why haven’t we tried to better understand the network architecture of how the virus propagates ? Why don’t all have us have a simple contact tracing app on our phones ? Is the lost civil liberty / privacy better than being locked at home ?

Going back to the idea of DK’s, Didier Sornette’s hypothesized that many of the crises that we face are in fact DK rather than black swans—which makes them more predictable.

Nassim Taleb would say that a black swan is an event that is surprising (to the observer), has a major effect, and, after being observed, is rationalized in hindsight.

He would also claim that black swan events are not predictable, and one should prepare rather than try to predict these events.

But what if so much of what happens in our world could be better understood by understanding systems and networks better.

A good place to start on Systems Thinking.

B. Principles

I often go back and re-read books. Sometimes the books that have the most impact are those that you re-visit from time to time and always get something new.

One of those books has been Principles by Ray Dalio….Of course it didn’t need to be ~600 pages, and yes some of the things they do at Bridgewater are strange, but out of all the recent biographies: Steve Schwarzman, Phil Knight, Bob Iger……. I think this is the most useful.

Here are the pieces of advice I picked up that I try to apply to my life.

Design Your Own Machine

I realized that I had gone through life being a passive recipient of what the world has to offer.

A casual bystander or a simple worker in the machine that is the world.

Ray’s advice is to not be person in the machine, instead be the designer of your machine. This applies to your job, your relationship, your life.

Design the machine, design your life for the purpose you want it to have.

If the machine isn’t producing the results you want, figure out how to fix it, to get the output (the life) you want.

Quoting Ray:

Think for yourself to decide 1) what you want 2) what is true and 3) what you should do to achieve #1 in light of #2

This can be broken down into the following five ideas:

Don’t confuse what you wish were true with what is really true.
Don’t worry about looking good — worry instead about achieving your goals.
Don’t overweight first-order consequences relative to second and third-order ones.
Don’t let pain stand in the way of progress.
Don’t blame bad outcomes on anyone but yourself.

Understanding Yourself

What are the rules and principles by which you want to live your life ?

What’s important to you and what you are solving for ?

Who are you and how are you constructed ? He’s a big fan of Myers-Briggs and other such tests. I am too. (I am an ISTJ incidentally). You ?

Decision Making

Principles is really a book about good decision making.

Life is just a series of decisions, so making better decisions leads to a better life.

Some example:

Simplify — Can you simplify this seemingly complex problem in to just another one of those. Have you seen this before ? Sometimes you need to step back and see the machine from a higher level.

Be radically open minded — Don’t let the fears of what others think stand in your way. Seek truth and diagnose problems to their root causes. You are looking for the best answer, not the best idea you came up with.

Focus on expected value — All decisions should focus on increasing expected value. Can you increase probability of being right ? What can you do to increase certainty ?

Seek people with experience who can help you triangulate to truth — Who’s done this before and is more likely to be right ? Who has success here ? Beware of people who have little experiences and lots of opinions.

Making mistakes is ok — It’s ok to be wrong. It’s not ok to not learn from them. What are the biggest mistakes you make. When do you make those mistakes? Are there particular types of mistakes you make often?

My Favorite Idea:

If you aren’t thinking back to who you were a year ago and grimacing you aren’t growing fast enough.

Have you been grimacing lately ?

Now you can skip the 600 pages.

Any (auto)biographies you recommend ?

C. A Few Things Worth Checking Out:

1. The US - China game is changing. I do not believe this is just an election issue which will go away after November 3. Worth checking out: The United States Approach to The People’s Republic of China published May 20, 2020.

This is the latest in a series of US government reports re-defining America’s national defense strategy. Remarkably, in the introduction of the report the US government admits it underestimated the intentions of the CCP over the past forty years. This signals a change in approach, the first in four decades of how the US will interact with China.

How do you think this plays out ?

2. The amazing Ben Thompson (author of the blog Stratechery) was on the Invest Like The Best podcast discussing a number of foundational ideas if you are a tech investor or observer. For example the different between and an “aggregator” and a “platform”.

3. I did another short tweet storm about a short book I often re-read: “The Education of a Value Investor” by Guy Spier. Great book. Or if you missed the last one: The Luxury Strategy.

4. What I’m reading now: Life 3.0 by Max Tegmark. You ?

"What an astonishing thing a book is. It's a flat object made from a tree with flexible parts on which are imprinted lots of funny dark squiggles. But one glance at it and you're inside the mind of another person, maybe somebody dead for thousands of years. Across the millennia, an author is speaking clearly and silently inside your head, directly to you.
Writing is perhaps the greatest of human inventions, binding together people who never knew each other, citizens of distant epochs.
Books break the shackles of time. A book is proof that humans are capable of working magic."

- The scientist, astronomer, and author, Carl Sagan, on the magic of books

A Few Things....