Quantum Financial Suicide, SBF, & FTX, &

BRIEFLY NOTED: For 2022-11-14 Mo

Brad DeLong

Nov 14, 2022

CONDITION: SBF & FTX

Two truly remarkable and bizarre things to read:

Adam Fisher: Sam Bankman-Fried Has a Savior Complex—And Maybe You Should Too…
Tracy Alloway & Joe Weisenthl: Transcript: Sam Bankman-Fried and Matt Levine on How to Make Money in Crypto…

And an important lesson is here in:

Tyler Cowen: A Simple Point About Existential Risk…

“Bahamas and Quantum Financial Suicide” by Stable Diffusion via NightCafe

Matt Levine’s Money Stuff Newsletter is 7450 words this morning, most on SBF but some on Twitter and other topics…

And Byrne Hobart writes what I was going to write, and writes it better:

Byrne Hobart: Money, Credit, Trust, and FTX: ‘The north star for intelligent risk management is the Kelly Criterion… maximize log(wealth); in other words, identifying the bet size that will produce the highest compounding returns without any risk of either a) losing everything, or b) equivalently, losing so much that there's no way to recover…. But for a utilitarian who plans to give away all of their money, the utility of wealth is roughly linear for all plausible sums…. Was the utilitarianism stuff just bluster to defend a sociopathic moneymaking scheme? Probably not. SBF was writing about utilitarianism for years before he started Alameda, and before he was even working in finance….
Continuously betting big, with nonzero odds of failure, will eventually lead to some kind of drawdown. Doing a full Kelly bet can lead to extreme drawdowns, even with perfect play; maximizing log(wealth) also means having a level of volatility that few people can reasonably tolerate…. SBF argued that you shouldn't bet based on expected(log(wealth)), but based on expected(wealth)…. Going past Kelly doesn't mean trading more risk for more return, it means taking on so much risk that there's no possibility of a good long-term return!
There are three plausible ways this overbetting strategy can be rescued from the curse of blowup risk. The first is that there's an overlap between the Effective Altruist community and belief in the Many-Worlds interpretation of, which can be interpreted to mean that when probabilities don't work out, there's a world in which they do, and you can't privilege this world over that one just because you happen to be stuck in the unlucky version of reality. It's quantum suicide but for finance….
A second option is that this kind of utilitarian risk-on behavior is happening in parallel…. When SBF looks at a bet with a 1% chance of paying off, he shouldn’t think of this as a one-time proposition, because other EAs will find similar bets, and take them. If other people’s utility matches your own and enough other people are running the same moral source code you are, then the Law of Large Numbers applies…. Full Kelly underbets because the bankroll is much bigger than it looks.
And a third possibility is that SBF was maximizing arithmetic returns rather than geometric returns because he saw the crypto boom as a one-time, and temporary, opportunity…. You don't care about compounding, because your bet won't compound….
Regardless of the exact justification, FTX/Alameda persistently bet big. And, at some point, they tapped the invisible line of credit ($), moved assets to where they shouldn't be, and eventually got caught…. Expected(Log(wealth)) is hard to escape, because linear extrapolation to arbitrary values will always produce absurdities. Nature abhors an oversimplified model, though the way nature deals with it is only obvious in retrospect…

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MUST-READ: Charles Dickens: Little Dorrit: Ch 21: Mr. Merdle’s Complaint:

Harley Street, Cavendish Square, was more than aware of Mr and Mrs Merdle. Intruders there were in Harley Street, of whom it was not aware; but Mr and Mrs Merdle it delighted to honour. Society was aware of Mr and Mrs Merdle. Society had said ‘Let us license them; let us know them.’

Mr Merdle was immensely rich; a man of prodigious enterprise; a Midas without the ears, who turned all he touched to gold. He was in everything good, from banking to building. He was in Parliament, of course. He was in the City, necessarily. He was Chairman of this, Trustee of that, President of the other. The weightiest of men had said to projectors, ‘Now, what name have you got? Have you got Merdle?’ And, the reply being in the negative, had said, ‘Then I won’t look at you.’…

There was a dinner giving in the Harley Street establishment, while Little Dorrit was stitching at her father’s new shirts by his side that night; and there were magnates from the Court and magnates from the City, magnates from the Commons and magnates from the Lords, magnates from the bench and magnates from the bar, Bishop magnates, Treasury magnates, Horse Guard magnates, Admiralty magnates,—all the magnates that keep us going, and sometimes trip us up.

‘I am told,’ said Bishop magnate to Horse Guards, ‘that Mr Merdle has made another enormous hit. They say a hundred thousand pounds.’

Horse Guards had heard two.

Treasury had heard three.

Bar, handling his persuasive double eye-glass, was by no means clear but that it might be four. It was one of those happy strokes of calculation and combination, the result of which it was difficult to estimate. It was one of those instances of a comprehensive grasp, associated with habitual luck and characteristic boldness, of which an age presented us but few. But here was Brother Bellows, who had been in the great Bank case, and who could probably tell us more. What did Brother Bellows put this new success at?

Brother Bellows was on his way to make his bow to the bosom, and could only tell them in passing that he had heard it stated, with great appearance of truth, as being worth, from first to last, half-a-million of money.

Admiralty said Mr Merdle was a wonderful man, Treasury said he was a new power in the country, and would be able to buy up the whole House of Commons. Bishop said he was glad to think that this wealth flowed into the coffers of a gentleman who was always disposed to maintain the best interests of Society.

Mr Merdle himself was usually late on these occasions, as a man still detained in the clutch of giant enterprises when other men had shaken off their dwarfs for the day….

Bar fell into discussion with Horse Guards concerning courts-martial. Brothers Bellows and Bench struck in. Other magnates paired off. Mr Merdle sat silent, and looked at the table-cloth. Sometimes a magnate addressed him, to turn the stream of his own particular discussion towards him; but Mr Merdle seldom gave much attention to it, or did more than rouse himself from his calculations and pass the wine.

When they rose, so many of the magnates had something to say to Mr Merdleindividually that he held little levees by the sideboard, and checked them off as they went out at the door.

Treasury hoped he might venture to congratulate one of England’s world-famed capitalists and merchant-princes (he had turned that original sentiment in the house a few times, and it came easy to him) on a new achievement. To extend the triumphs of such men was to extend the triumphs and resources of the nation; and Treasury felt—he gave Mr Merdle to understand—patriotic on the subject.

‘Thank you, my lord,’ said Mr Merdle; ‘thank you. I accept your congratulations with pride, and I am glad you approve.’

‘Why, I don’t unreservedly approve, my dear Mr Merdle. Because,’ smiling Treasury turned him by the arm towards the sideboard and spoke banteringly, ‘it never can be worth your while to come among us and help us.’

Mr Merdle felt honoured by the—

‘No, no,’ said Treasury, ‘that is not the light in which one so distinguished for practical knowledge and great foresight, can be expected to regard it. If we should ever be happily enabled, by accidentally possessing the control over circumstances, to propose to one so eminent to—to come among us, and give us the weight of his influence, knowledge, and character, we could only propose it to him as a duty. In fact, as a duty that he owed to Society.’

Mr Merdle intimated that Society was the apple of his eye, and that its claims were paramount to every other consideration. Treasury moved on, and Bar came up.

Bar, with his little insinuating jury droop, and fingering his persuasive double eye-glass, hoped he might be excused if he mentioned to one of the greatest converters of the root of all evil into the root of all good, who had for a long time reflected a shining lustre on the annals even of our commercial country—if he mentioned, disinterestedly, and as, what we lawyers called in our pedantic way, amicus curiae, a fact that had come by accident within his knowledge. He had been required to look over the title of a very considerable estate in one of the eastern counties—lying, in fact, for Mr Merdle knew we lawyers loved to be particular, on the borders of two of the eastern counties. Now, the title was perfectly sound, and the estate was to be purchased by one who had the command of—Money (jury droop and persuasive eye-glass), on remarkably advantageous terms. This had come to Bar’s knowledge only that day, and it had occurred to him, ‘I shall have the honour of dining with my esteemed friend Mr Merdle this evening, and, strictly between ourselves, I will mention the opportunity.’ Such a purchase would involve not only a great legitimate political influence, but some half-dozen church presentations of considerable annual value. Now, that Mr Merdle was already at no loss to discover means of occupying even his capital, and of fully employing even his active and vigorous intellect, Bar well knew: but he would venture to suggest that the question arose in his mind, whether one who had deservedly gained so high a position and so European a reputation did not owe it—we would not say to himself, but we would say to Society, to possess himself of such influences as these; and to exercise them—we would not say for his own, or for his party’s, but we would say for Society’s—benefit.

Mr Merdle again expressed himself as wholly devoted to that object of his constant consideration, and Bar took his persuasive eye-glass up the grand staircase. Bishop then came undesignedly sidling in the direction of the sideboard.

Surely the goods of this world, it occurred in an accidental way to Bishop to remark, could scarcely be directed into happier channels than when they accumulated under the magic touch of the wise and sagacious, who, while they knew the just value of riches (Bishop tried here to look as if he were rather poor himself), were aware of their importance, judiciously governed and rightly distributed, to the welfare of our brethren at large.

Mr Merdle with humility expressed his conviction that Bishop couldn’t mean him, and with inconsistency expressed his high gratification in Bishop’s good opinion.

Bishop then—jauntily stepping out a little with his well-shaped right leg, as though he said to Mr Merdle ‘don’t mind the apron; a mere form!’ put this case to his good friend:

Whether it had occurred to his good friend, that Society might not unreasonably hope that one so blest in his undertakings, and whose example on his pedestal was so influential with it, would shed a little money in the direction of a mission or so to Africa?

Mr Merdle signifying that the idea should have his best attention, Bishop put another case:

Whether his good friend had at all interested himself in the proceedings of our Combined Additional Endowed Dignitaries Committee, and whether it had occurred to him that to shed a little money in that direction might be a great conception finely executed?

Mr Merdle made a similar reply, and Bishop explained his reason for inquiring.

Society looked to such men as his good friend to do such things. It was not that he looked to them, but that Society looked to them. Just as it was not Our Committee who wanted the Additional Endowed Dignitaries, but it was Society that was in a state of the most agonising uneasiness of mind until it got them. He begged to assure his good friend that he was extremely sensible of his good friend’s regard on all occasions for the best interests of Society; and he considered that he was at once consulting those interests and expressing the feeling of Society, when he wished him continued prosperity, continued increase of riches, and continued things in general.

Bishop then betook himself up-stairs, and the other magnates gradually floated up after him until there was no one left below but Mr Merdle. That gentleman, after looking at the table-cloth until the soul of the chief butler glowed with a noble resentment, went slowly up after the rest, and became of no account in the stream of people on the grand staircase. Mrs Merdle was at home, the best of the jewels were hung out to be seen, Society got what it came for, Mr Merdle drank twopennyworth of tea in a corner and got more than he wanted…

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Oþer Things Þt Went Whizzing by…

Very Briefly Noted:

Adam Fisher: Sam Bankman-Fried Has a Savior Complex—And Maybe You Should Too…
Sara Straw: ‘Did I fall for an affinity fraud? No, these were my kind of guys, the smart guys! I’d never fall for an affinity fraud! I’m a smart guy!…
Kerry Vaughan: ‘Will's outrage about the FTX situation is difficult to take seriously for three reasons:(1) SBF is not the first disgraced crypto billionaire that Will has vouched for: (2) Will was longtime friends with SBF; (3) Will was warned about SBF's unethical behavior as far back as 2018…
Satoshi Nakamoto: Bitcoin: A Peer-to-Peer Electronic Cash System <https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/r2DpjSejLL0M/v0>
Matthew Delmont: The WWII Veterans Murdered After Returning Home…
Robin Wigglersworth: ‘Jingle mail’ redux?: Goldman Sachs explores the risks of mortgage defaults…
Alan Beattie: America’s deep suspicion of globalisation makes it an outlier…
Kelsey Piper: Billionaires are a dual-use technology…
Kate Clark: FTX’s VC Backers That Lost the Most: ‘FTX… valuation… $32 billion in January…. Paradigm… Sequoia… SoftBank, Tiger Global, the Singapore government investment fund Temasek and the Ontario Teachers’ Pension Plan….
Josh Barro: Elon Won't Make Money By Making Twitter Less Pleasant to Read…
Liam Denning: Twitter Is Wrecking the Musk Aura That Fueled Tesla: ‘ The auto company’s value has plunged by $644 billion this year as its billionaire CEO tends to his newest distraction…

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¶s:

Gillian Tett: Crypto’s future may be divided, not dead: ‘This is the crypto version of the 2008 Lehman Brothers shock…. So does this mean that crypto will now die?… Opacity is costly…. Custody… practices have long been a dangerous mess…. In theory, these problems could be fixed if crypto were forced to adopt the same regulatory tenets around custody and transparency as fuddy-duddy fiat-based finance…. [But] there is still a large pool of players who use digital assets to evade government controls…. [And] central bank digital currency, or CBDC, experiments are heating up, not least because, as I was told last month, the government of China (and, to a lesser extent, Europe) want CBDCs to displace private digital assets… Either way, prepare for more twists…

Brad Stone: FTX Implodes, and a Top VC Backer Falls on Its Face: ‘In late September, the Sequoia Capital website published a long, meandering profile of Sam Bankman-Fried… an eye-glazing 14,000 words… flowery prose that looked especially ridiculous after FTX’s spectacular collapse. Sections of the story were turned into memes, labeled as god-tier comedy and generally subjected to widespread mockery…. Now, this is not to dunk on the story’s author, Adam Fischer, a longtime Silicon Valley journalist (and friend!). Journalism can be a humbling business, and anyone practicing the craft long enough is apt to become the victim of unfortunate timing…. What happened next…. The article disappeared entirely from the site. Visitors who followed old links to the piece were redirected to a note the venture capital firm had sent its investors, citing an uncertain future for FTX. At most mainstream news organizations, this is a journalistic taboo…. But Sequoia didn’t follow that script…. The firm declined to comment on the move…

Duncan Black: A Triumphant Victory For The Forces Of Wokeness: ‘I do want to restate that every political journalist had a pre-write sitting in the CMS about how, as usual, Democrats Were Out Of Touch With Real Americans, what with loving crime and having kids shit in litterboxes and treating trans people as human beings. No one really cares about democracy, why won't Joey shut about that? And then they just... couldn't run them. Their intended narrative wasn't based on polls, just vibes. "Dems keeping the Senate" was a perfectly reasonable prediction given polling and the House is always a bit of a guess. With redistricting there was reason for pessimism, but again that's just guessing. There are never enough good polls.Again, I am not claiming a victory for full communism, but all the stuff the Right spent screeching about for the last several months, which journalists always echo, didn't work for them. One thing I don't see remarked upon much is that despite the pretty undemocratic nature of the Senate - leaning heavily against the Democrats - they manage to keep it much of the time! Even now!

Steven Beschloss: Red Waving, Fox News and Sanity's Survival: ‘They hyped a GOP blow-out, but a desire to calm the extremism has largely won the day. Now we'll see if the loss only exacerbates the madness that is Trump and Trumpism…. Before looking ahead to the expected presidential announcement tomorrow by the leading purveyor of violent, sociopathic incitements to get and keep power, I thought it useful to look back at how many Republicans became convinced of their omnipotence and the inevitability of their overwhelming victory in the midterms. In short, look no further than the Fox News bubble and its chief propagandists determined to spread their narrative, reality be damned…. No matter what issue I was addressing online, I was getting bombarded by “red wave-ists,” possessed by certitude and hostility…. Laughably, Republican Louisiana Sen. Bill Cassidy said Sunday on NBC, “We’re not a cult. We’re not like, OK, there’s one person who leads our party…. We should be a party of ideas and principles”…. I remain convinced that it will take indictments and prosecutions of Trump—and the hard daily work of “doing democracy”—if we are ever going to have a chance to put this constant danger behind us…

Nicholas Gruen: ‘From Slouching Towards Utopia: Brad DeLong: “In 2003, the era in which the United States was the trusted leader of the global-north “Western alliance” came to an end. At the end of the 1980s, after the end of the Cold War, George H.W. Bush reassured the world that US military supremacy was benign because the US military would be deployed only in support of an overwhelming majority vote of a country’s people, or according to the will of the UN Security Council. The Clinton administration had changed this to “according to the will of the NATO alliance”; and then the George W. Bush administration had changed it to “more or less at random, according to false and misleadingly interpreted intelligence, against countries that do not possess nuclear weapons.” Countries took note…

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