This article is an exploration of the current market and valuation. In this article, I want to discuss how digitalization in our lives can expand the influence of this reflexivity and imitation.
The theory of reflexivity describes how "cognitive function" (world→thinking) and "manipulation" (thinking→world) influence each other (sometimes interfere with each other). In other words, the participant's viewpoint affects the course of the event, and the course of the event affects the participant's viewpoint.
Imitation is the intermediary of this process, and the market is the concentrated expression of desire. Regarding the market as a universal model that people can imitate, the reflexivity of assets is actually a side effect of imitation.
Imitation is a form of communication, and humans are born to imitate. As we mentioned in the previous article, imitation enables reflexivity to shape the world according to our will, and humans cannot exist without imitation.
The reflexive correction is driven by desire, and when satisfaction is limited, desire never ends. Durant once wrote:
"...Achievement can never be satisfied, nothing can be more deadly than the realization of an ideal."
These desire-driven pursuits make the world go round. When discussing desire, it is inevitable to mention money. The price signal that mediates human communication is expressed in money. Desire, imitation, reflection and money-they are all interrelated.
"Everything else can only satisfy one wish, only money is absolutely good... because it is the abstract satisfaction of every wish." (Schopenhauer)
Money regulates the information of the price system-the market. Hayek explained: "Describe the price system as a mechanism for recording changes, not just a metaphor." In a sense, the abstract Hayekian market may be the first example of two-way scalable information transmission.
The invention of computers and the Internet triggered the information revolution. We found ourselves in control of the actual mechanisms for registering and creating change.
What does "speculation" really mean?
The speculation discussed in this article refers to a practice in which money is not a means to a goal, but the goal itself. According to this definition, speculators do not directly want to participate in shaping the world, but try to guess how the world will shape themselves next.
For example, Bobby entered the market to buy a goat because he wanted to make goat cheese. (This is more as an investment, not speculation)
Mat bought all goats because he doubted that the market demand for Fisky goat cheese products would drive demand for goats. (This is more of speculation than investment)
Speculators focus on signals and act on the market interactions of others. Their main purpose is to increase money. In the example above, Fiskantes also wants to make money, but he intends to create a product.
Therefore, we can describe speculation as transactions that are not directly connected to the output/product. Let's look at a more tricky example:
Hamond wants to buy a house of moderate size, so he seeks an investment to make money. He decided to buy Bobby's goat cheese stocks and hold them.
Although people would think this is an investment, to a large extent it is just speculation. This shows that there is a wrong dichotomy between speculation and investment. Everyone engages in some degree of speculation in some form.
For the purpose of this article, I want to conceive speculation in terms of optionality. Therefore, when we say "speculation is eating the world", we mean that people prefer unlimited options, and money becomes more valuable than anything anyone could do with it.
People diversify by investing in stocks such as AMZN (Amazon), TSLA (Tesla), (BoobyGoatCheese) Booby goat cheese, etc., because the founders and employees of these companies have given up (part of) their options.
If Booby spends his time on making goat cheese, he will give up some options, but will create potential options for Su Zhu, Hasu and many others. The transactions between Mat and Hamond also create options for others, and so on.
I understand that "speculation is eating the world", just like optionality is eating the world. This is manifested in more and more people participating in the stock market and the encryption and excessive financialization of the economy.
There is a hypothesis that computers are a major enabler of optionality. In order to gain an understanding of today's market, we will explore the computer and digital world and the related options it creates.
Uncertainty breeds optionality. Then, optionality will bring more uncertainty to the result. Uncertainty makes optionality more valuable, and so on. The more uncertain we are, the more we will look for answers.
Infinite possibilities and infinite competition
Compared with the bit temptation to satisfy infinite imitation, the atoms of the physical world seem to be restricted. Computers and the Internet are the driving force of large-scale replication and large-scale competition.
In the digital world, copy is everywhere. This is reflected in two aspects: instant copying of files and code, and human copying of another behavior (and desire).
A popular counter-narrative says that we reduce technology to information technology and describe the obsession with screens as an inward retreat. Software devours the world has become a famous saying.
Software transcends physical properties. It can create new worlds. It also connects distant locations in the physical world. Therefore, the signal propagation speed in the network is faster, and the imitation and reflexivity are also faster.
People imitating each other will lead to competition. Competition is a form of verification that can ensure that a person's desire objects are truly worthy of his attention. Peer verification will mediate self verification. When people do the same thing, we feel at ease.
This competition has been upgraded in the bit world. This competition has always existed, but it is basically not lethal (for now).
"...Digital networks are powerful amplifiers of existing reality... They allow endless conversations, they are also amplifiers of intense competition between individuals... This includes the permanent pursuit of attention, because everyone tries to pass " The number of "likes" or "followers" becomes a role model for others. "(Antonio Machuco Rosa)
Through the interface of social media, we entered a global talent show where strangers and acquaintances compete. As software penetrates into our daily lives, we begin to gradually turn to introversion. Staring at the screen that turned into a mirror.
Before people turned computers into our (almost) entire world, they had been using computers to inform people about the world. As far as the market is concerned, software started as an interface to the market. Software must become the market, and the market must become the software.
Introducing financial markets to social media is an imitation trap. We are recognized not only by increasing money, but also by liking. Money is like, like is money.
If Schopenhauer was still alive today, he might have said on Twitter:
"The digital world...is always ready to turn themselves into any object of their wandering wishes or various wishes." and "Everything else can only satisfy one wish, and only computers are absolutely good...because it is The abstract satisfaction of every wish."
By achieving out-of-control imitation, reflexivity, and ensuing competition, computers have also enhanced our ability to create and maintain financial bubbles.
Charlie Munger once cited the famous "Lollapalooza effect", which is another name for the transformation of reflexive behavior into financial fanaticism. Imitation is the cause of the Lollapalooza effect:
"... Munger uses the open outcry auction as an example of the Lollapalooza effect. Participants are reciprocal ("I should buy because I was invited to participate in the auction"), consistent ("I keep saying on the record that I like this, so I It must be bought"), commitment tendency ("I have already bid, so I must continue") and social proof ("I know buying is good because my partner is doing it") and forced to participate in the bidding.
Sometimes the Lollapalooza effect can produce positive results, which is when the madness of the masses manages to turn themselves into the wisdom of the masses. In fact, the frenzy of the Internet bubble promoted the development of the Internet.
As the market begins to exist in the digital realm and we can actually enter the market through the screen, our ability to create the Lollapalozas effect has doubled. The digital age allows unlimited competition and unlimited possibilities.
Plenty of options and lack of directionality are the hallmarks of the digital age. This means that "probability and statistics are the main ways to understand the world...Random walk defines what the future looks like." In such a world, it is almost impossible to copy or imitate.
The ultimate run game
The competition in the digital field is different. The games we play in the bit world seem to be unlimited. Just like a video game with unlimited life, the purpose of this game is to keep playing, not to win.
The modern world is more plastic (and probabilistic) than ever before. In other words, our interpretation of the world is more plastic than the world itself has undergone great changes.
So we return to the concept of reflexivity, where information flows from one thought to the world and interferes with the flow of information in another way. The barrier between price and narrative is becoming less and less obvious.
The preference function is no longer correctly notified by the belief function, but is melting an unformed mass. "Pumpamentals" have become fundamentals, price is news, and then fundamentals (maybe) follow prices.
We are engrossed in the numbers on the screen. For those who are in favor of optionality, other things are basically not important.
Universa's Mark Spitznagel uses a well-known tail hedging strategy, which has nothing to do with actual positions, but with meta-positioning. He called this a roundabout approach, focusing on indirect means rather than evaluating the end itself.
In such an uncertain world, we can only entertain ourselves. We confuse our own preferences with the preferences of others. The world has become a Keynesian beauty pageant. We try to guess what others are guessing, and then we try to guess what others are guessing...
Keeping the game is more important than winning. In the world of instant copy and unlimited copy, the Lollapalooza effect is magnified, and it is important not to be the last person in it.
When one realizes the outcome of the game, timing becomes very important. The world has become an ultimate run game. Earlier means right.
People don't care much about the actual meaning of the signal, but instead focus on receiving the signal before others. It is as if we are trying to explain our own signal, changing it when we propose a new explanation, and then changing it again.
The biggest deal in trading history (perhaps ever)
Another explanation may be that selectivity is just an illusion, all bets are just macro bets, because the world shrinks because of interconnectedness. In 2008, Thiel wrote:
"The recent extreme valuation may be an indirect measure of the narrowness of the road before us."
Thiel pointed out that the vision of a globalized world can only bring about two endings: utopia or dystopia. Crazy valuations are either a sign of complete despair, or blind hope due to the lack of alternatives. The investment meta-theory of our time is the rise in numbers. The less cynical argument is that fundamentals follow price.
Thiel predicts that after the coming crisis, globalization will either intensify or regress. Separating the political agenda of globalization from globalization, the actual globalization has not reversed.
Globalization can be understood as homogenization and replication. Although the political agenda seems to be shelved, the world has not stopped globalization or imitation.
On the contrary, imitation is intensified. To this day, the statement "the greatest investment of our time is still the most leveraged investment in true globalization" is still an effective and successful investment thesis.
The longer the boom lasted after 2008 (both TSLA and AMZN reached historical highs), the greater the urgency to abandon the old economy. The optimism of the market perpetuates in the two (contradictory) main beliefs of the new economy.
The first is the technical assistance brought by the talents of Musk, Bezos and other great entrepreneurs. The second is the huge redistribution spread through modern monetary theory (MMT) and unconditional basic income (UBI) meme.
Thiel predicts that the 2008 financial crisis will destroy the "ideological scaffolding" formed by the bubble. The irony is that we have actually doubled and it seems that we are heading in one direction stubbornly.
The money printing machine has become more cruel than ever. China is pushing forward with all its strength. Web 2 is being replaced by Web 3. We have abandoned hedge funds and adopted passive investment strategies.
The same bubble, new names, imitation and copying have no boundaries in the globalized world of bits, and all bets are a bet.
As the road in front of us narrowed, Wall Street was replaced by Twitter and Reddit. The fruits of the excessive financialization of our time are no longer reserved for bankers in Zegna suits.
"Those investors who limit themselves to the normal and reasonable range of human history are unprepared for the miracles and miracles they are now in. The 20th century is great and terrifying, and the 21st century will be even greater. And a terrible century. In a world where ordinary economic cycles are broken, classic investment strategies no longer work.” (Peter Thiel)
The traditional view does not help. Maybe this is true, we may live in a new paradigm in which bubbles are mathematically impossible. The world doesn't care what it is, it mainly cares what it might be. Under the condition that the force of revisionism continues to play a role, those things that can become something are more valuable than those that are originally something. Can anyone escape the flywheel?
This explains Thiel’s hypothesis that “the greater the valuation difference between the various rounds of financing of a startup, the greater the degree of underestimation”, and the fundamentals follow the price. In the digital age, the power of reflexivity has become unstoppable, and the Lollapalooza effect can indeed transform a car company into the world's largest sustainable energy and automation company.
With this interpretation, we run the simulation. The market exists in the digital structure that we run on our own computers. The computer, like money, has become an abstraction of every wish, because it is a proxy for what we desire in our hearts. Digital technology allows us more than ever to change reality according to our own wishes.
"For policymakers and investors, the challenge is how to find a way out between outdated wisdom and nihilism."
In a world where there are many options on the surface but few in reality, it is no wonder people prefer money and optionality. But some money is better than others, and some fantasies are more outrageous than others.
For us, if we want to understand what might happen in the future, we have to imagine that the Internet bubble actually occurs in a globally interconnected, massively imitated digital world. The most surprising plan will be the winning plan.
Since the market and the financial world cannot calculate the end times, it is not worth the opposite bet.