Fooled by Randomness

• Results from luck are more prone to be taken away by luck; results achieved with less luck are more resistant to randomness.
• Skewness issue: it does not matter how frequent a person succeeds if failure is too costly to bear.
• Retired Dentist Checking Portfolio Returns
• Difference between noise and meaning: all observations are at best a combination of return (meaning) and variance (noise); and on a short time increment, it is entirely variance.
• News is full of noise, where history is largely stripped of it; however, it does not mean that histories are good indicators of the future. Length and breadth of history considered matters.
• We do not react to positive and negative noise equally. Even if the distribution of noise is symmetrical, the emotional torture from short term negative noise is felt far greater than their positive counterparts. Paying attention to short term noise, on balance, lead to emotional deficit. Hence, stay away from noise.
• Importance to understand the mean and variance of any field: dentists and pianists face much less career randomness; the jungle where traders live, on the other hand, is ruled by randomness.
• Cross sectional problem or survivial of the least fit: at a given time in the market, the most profitable traders are likely ones best fit to the latest cycle (eg “dip buyers” of EM and HY bonds 1992 to 1998); if the latest cycle dynamics are random, these traders are also by definition most prone to a randomness reversal or regime change
• Traits of bad trader: married to position; switching narrative (become “investor” just to hold on to losing bets); no game plan for losing times as such periods are deemed too improbable
• Bull & Bear Zoology: bullish and bearish only suggests view on direction, but not magnitude... I can be bullish on a stock yet shorting it, because of asymmetry of payoffs. What informs a trading decision is a prob distribution table. TV commentators use these terms because they are rewarded only by the frequency of their correctness but not magnitude
• Separating risk taking and risk management decisions where risk taking is informed by past data but risk management is not ie prob of some events occuring are not derived from past data.
• Randomness does not mean patternless and most often it does not look random; purposefully creating randomness is a paradox and it never works
• Humans have evolved as a separate species for 130,000 year, majority of which is spent in the African savannah where field of probabilities is narrow – information transmission is limited by physical distance; limited number of people we meet over a lifetime etc. Later on, even when probabilitic fiend widened over history, religious suppression of any thought contrary to determinism has delayed the development of probability studies. Hence, our brains have never acquired the proper probabilistic depth to deal with the complexity of modern world. E.g. when only one of two outcomes will occur, we can not imagine an outcome that is the linear combination of the two – a vacation spend 50% Bahamas and 50% Paris, or a cancer patient 28% death and 72% survival. To the patient, he only sees himself dying or survive. This inability causes us to make irational choices.

Flash Boys

• Flash Boys is a book about the different insidious ways financial intermediaries (brokers, banks, HFTs), which by definition the conduit supplying societal capital to productive enterprises, extract ilegitimate profits from investors order information.
• Electronic Trading: bank department in charge of programming and selling algorithms that execute buyside trades when they submit orders.
• Dark Pool: private exchanges ran by large brokerage banks where large buy and sell orders are matched first internally before broadcasted on public exchanges. Conflict of interest: banks prefer executing first in their dark pools rather than seeking out best price in the market. Banks can also sell access to their dark pools, and thus information of large orders, to HFTs.
• Payment for order flow (PFOF). Exchanges (NYSE, BATS) and market makers (Citadel Securities, Virtu Financial) pay brokers to send over their client orders. This revenue source has allowed brokers to slash commissions to zero, benefiting investors. However, conflict of interest: brokerages, instead of seeking for "best execution" in the interest of the investor, now maximizes kickbacks when making "routing" deicisions.
• Take and make liquidity. Company A is trading at $5.0 $5.5. A market order at $5.5 is said to take liquidity or cross the line; while a limit order of $5.4 is said to add liquidity and is rewarded when met with an opposing sell order.
• Spread Networks and CBSX exchange in Chicago. Spread networks build the straight fiber line connecting Chicago and New Jersey. The day when it went online, CBSX exchange flipped its fees and kickback structure – paying brokers for taking liquidity (market orders) and charging fees for adding liquidity (limit orders). Explanation: paying is to incentivize brokers to route market orders first to Chicago (to be frontrun by HFTs using the fiber line), and charging is to extract HFT firms fees for laying limit teaser orders (100 share lots) as exchange is now allowing them to profit.
• Latency Tables. HFTs can also decipher from which specific broker is an order made by identifying patterns in latency, i.e. the time it takes for an order to travel from a broker to all exchanges; and use the info to guess e.g. whether more of the same order is to follow.
• Reg NMS of 2007 updated the broker mandate from "best execution" to "best price" defined by NBBO (National Best Bid and Offer). "Best price" mandate caused orders to be routed to more exchanges (from most favourable price to next, regardless of volume) and therefore creating more HFT arbitrage opportunities. Less discretion for brokers also made their routing more predictable.
• NBBO is calculated inside SIP (Security Information Processor) where each exchange's prices are transmitted, compiled, and disseminated. Greater the number of exchanges, longer it takes for NBBO to be calculated. HFTs game this system by creating faster processers than the SIP technology to have a more "real time" view of the market, and therefore, frontrun investors who trade based on SIP prices. HFTs profit depends on 1) time gap between SIP and private prices; 2) volatility of stock during these milliseconds (or how many times the SIP price and private prices differed). This is why HFTs is incentivized for more market volatility, and more exchanges.
• HFT Strategies
1. Electronic Frontrunning: obtaining an investor's order information at one exchange and race him to next
2. Rebate Arbitrage: seize the kickbacks exchange offered without actually providing the liquidity that the kickback is meant to entice
3. Slow Market Arbitrage: seeing price changes at one exchange, and race to act on another exchange before its price can update
• HFT profits were made possible by fiduciary failures of banks and brokers. Banks, upon receiving an order to its dark pool, willingly ignores offers from rest of the marketplace so that can charge HFTs access to bridge the gap. This creates unnecessary layers of middleman and increases transaction costs.
• The chance of offsetting orders (200 shares buy and 200 shares sell at $80) coming to the same exchange at the same time is extremely low. Therefore HFTs are said to benefit investors by providing liquidity – being the buyer on one exchange and seller on another. However, this bridge is itself absurd as why was the order not brought to the right exchange in the first place? Becuase brokers respond to rebates.
• "The original false note struck by the big Wall Street bank – the act of avoiding making trades outside of its own dark pool – became the prelude to a symphony of scalping."

The Attention Merchants

• Premise. Our attention is the very experience of living. Reclaiming it – not parting it as cheaply and unthinkingly as we're used to, is to avoid a life of enslavement by propagandas and the pervasive consumer & celebrity culture.
• For majority of human history, organized religion had a monopoly on human attention – until its decline. With advent of Capitalism in late 1800s, commercial attention harvestors, especially the advertising industry, emerged to fill the vacuum. In fact many agency copywriters came from families with preaching / church backgrounds. Cooliage even called advertising "ministers to the spiritual side of trade."

Who were the attention merchants? What were their specialities or innovations?

• Benjamin Day and The New York Sun / Penny Papers. Selling newspaper with clickbaiting stories at price below production cost to cheaply amass large readership, and sell them en bloc to advertisers. Readers are no longer the customers but the product.

• Parisan posters. Harvesting attention requires appealing to our "reptilian core" part of the brain that are particularly susceptible to attention triggers: startling images and evocative words eg babies and monsters, sexualized bodies.

• Clark Stanley and The Snake Oil / Patent Medicine. Human face as branding (Aunt Jemima, Quaker Oats). Promises too good to be true. Secret ingredient that differentiates the product from rest. Direct mail advertising (spaming). For the first time advertising was thought to be standalone a method for "value creation"; and soon later, a subject of science. Eventually patent medicine was busted by journalism. Public outcry and pass of legislation to curb false advertising.
• "For our secular rationalism and technological advances, potential for surrender to the charms of magical thinking remains embedded in the human psyche, awaiting only the advertiser to awaken it."
• Patent medicine later inspired the advertising campaigns for cigarettes. Lucky Strike, sells to women, claimed to cure bad breathe, cause weight loss and be a symbol for female liberation. Same outcome – busted and public outcry.

• Pioneers of scientific advertising. Scale and accumulated expertise cemented a breed of established brokers for the new attention economy. Corporate advertising expense rose from $700m in 1914 to $30bn in 1929, or 3% of GDP. Also role of psychology, Freudian view of the unconscious, behavioural science.
• Claude Hopkins, demand engineering. Selling not new product to solve existing problems, but new problems where they did not exist before. Toothpaste and mouthwash. "Reason why" advertising.
• Theodore MacManus of General Motors, branding. Inspiring consumers to identify with their purchase. Projecting a character, e.g. an honest manufacturer and an honest product. Today Cadillac has become a general adjective for things premium / best in their kinds.
• Helen Landsdowne, target advertising. Capitalism awakes to women's control of household wallets. Selling of emotion, imagination, and women's rights movement. Women are in particular sensitive and tend to imitate the rich and famous – birth of paid endorsements.

• Radio: William Paley of CBS, David Sarnoff of NBC. Intrusion of sacred family space & time via the creation of "evening prime time" (and later "morning" and "late night" segments in TV) where the entire household across the nation tune in to a programme. Radio, previously conceived only for the public good (for occupying the public airwaves), became commercial. Paley's offer to provide CBS inhouse programmes for free on the condition of radio stations to also carry sponsored content – parallels the penny paper's approach earlier to acquire mass audience. Limit ads to 10% of airtime to walk the fine line between profit and stirring public rage.

• Emails and "Check In". B.F.Skinner, all behaviours are developed via operant conditioning (reward & punishments). Inconsistent and unpredictable rewards & punishments are more effective at reinforcing a behaviour e.g. gambling, fishing, shopping (variable reinforcement). World's first mass email blast – Thuerk of DEC annoucing a new product launch. Ran into trouble with Pentagon.

• Celebrity Industrial Complex. Human's craving to worship and be connected with the extraordinary (heroes, saints, royalties) is not new; what is new is the construction of entire industry based on such demands. Hence the talk shows, personal interviews – creation of artificial intimacy and illusion of accessibility. Celebrities also awakens to the power of their fame, not merely a byproduct of their professional activities but the very professional capital itself.
• "On whatever platform was to be invented, celebrity would become the attention merchant’s go-to bait, offering a lure infinitely more dependable than any more artfully developed content."

• Instagram, democratization of fame and the "celebrification" of everyday people. For most of human history, the prolifiration of individual likeness was preserved for the extraordinary e.g. the emperor. In the 20th century, Hollywood broadened this priviledge to a cohort of demigods. However, with smart phones, selfie sticks and Instagram, the power is now in the hands of every enterprising Narcissus. Tapping into our instinctual need for admiration from others and bringing it to the logical extreme, to millions of people we won't possibly know. 

The Tyranny of Merit

• Christian roots of meritocracy
• Paradox in Catholic Church. Can people earn salvation through religious observance and good works, or is God entirely free to decide whom to save? First option is just, but would bound God to recognize merit and therefore limiting His omnipotence.
• Luther, Calvin, and Puritans. Though began as observance to the glory of God, religious rituals inevitably prompts a sense of efficacy among participants as means to attain grace. Ethics of work and mastery of one's fate eventually wins out the ethics of gratitude and humility. 
• Connection with Adam Smith. Calvinist notion of providence and divine predestination ie "the calling" lends credibility to division of labor and the prevailing economic order. Christian asceticism "strode into the marketplace of life and slammed the door of monastery behind."

• Plato's idea of noble lie. Public beliefs that are untrue but nonetheless important to uphold to sustain civil harmony; eg the American dream, the nobility ruling class.

• Debunking Credentialism and Technocracy. 
• Governing well requires practical wisdom, character, civic virtue, political judgement, and ability to deliberate about the common good and pursue it effectively – none of which taught at universities nor correlates with high SAT scores.
• Technocratic rule disempowers ordinary citizens from participation.
• Technocracy, which characterizes decisions as smart and appears as value neutral, circumvents the project of moral persuasion.
• Technocracy in practice heavily replies on incentives. Incentivzing is a shortcut to achieve the same outcome without asking people to take responsibilities.
• The idea of "agreeing on the nonpolitical facts first then proceeds to debate opinions" simply does not work. People's perceptions are shaped by opinions. Whoever succeeds in framing the facts is already a long way in winning the argument.

• Economic standing says nothing about one's moral standing
• Talents are not only endowed, their subsequent market value produced are also subject to the vagaries of supply and demand (Hayek).
• Serving market demand is simply a matter of satisfying whatever wants and desires people happen to have. The ethical significance of such satisfaction depends on the ethical significance of the wants, which are often arbitrarily produced by the workings of the economic system itself (Frank Knight).

• Two conceptions of the common good
• Economic conception: sum of all consumer's preferences in an economy. Individuals are first and foremost consumers. Prevailing economic policies heavily biases this view. Distributive justice.
• Civic conception: deliberate purposes worthy of the political community and advance a just and good society. Individuals are recognized more by their role as producers. Contributive justice.