In Praise of Disorder

Although we humans have an inherent need to reconcile the world we live in so that we might ameliorate any measure of maddening dissonance between our beliefs, our aspirations, and the brutal realities thrust upon us, the truth is our world is a messy and chaotic place that progresses through random events.  Many of those events are originated by the few among us who engage in what Yale’s James C. Scott recently described as thoughtful disobedience.  Anarchism, he argues, is alive and well throughout both the developed and developing world and can be credited with much of the progress we herald as great.  At times, Scott illustrates, anarchism is expressed as acts of insubordination—both large and small—that alter our world.  Small, like students tromping a new path through the well-groomed grass of a university quadrangle that is later made ‘official’ by being paved with concrete once grounds crews realize that reseeding the preferred route is a fool’s task, and large like Rosa Parks act of defiance on a bus in Montgomery, Alabama in 1955 that gave rise to the civil rights movement, which resulted in the Civil Rights Act of 1964.  Official order, largely conjured to protect those in power, is no match for what Scott describes as “vernacular order” that is claimed, expressed, and maintained by the “petty bourgeoisie.”[1]

Disorder, in Scott’s interpretation, is the necessary condition of progress; without it we would be staking our future on official committees that at birth lack the necessary chromosomal attributes to produce anything at all that might be considered new or better.  For example, as we reflect on great accomplishments in education (KIPP Academies), technology (iPhone), and medicine (stem cell research), each were advanced by one or a few people working against official order including well-funded adversaries with access to seemingly overwhelming political power.  And yet, working in the ether of disorder, they have prevailed and created new models of success for others to follow.  Scott’s message is worth serious consideration while our politicians, corporate titans, central bankers, Davos elite, and the jester-pundits that dance in their vaporous wake fight over the microphone in a gratuitous attempt to persuade us that our future flows through them.  Disorder, not the order inferred by institutions, norms, and opinion polls is the incubator of greatness.  Although many of us, myself included, appreciate President Obama’s recent clarion call for togetherness in his second inaugural address, the quest for the benefits of common interest and collective action—rooted (as he argued) in the words of the Declaration of Independence—must be preceded by the inspirations of the few among us who find no trepidation in ignoring official order that is guarded by the vapid sentries of banality.[2]  Indeed, those who penned the Declaration itself rejected the order of the day.  The togetherness that followed and gave birth to a new nation was also courageous, but absent the impetus born of inspiration and insubordination in the oft-maligned chaos of disorder, the United States would have never come into being.

The benefits of disorder are further substantiated in the work of Nicholas Nassim Taleb.  His thesis, which has been developed in his books Fooled by Randomness (2001), The Black Swan (2007), and Antifragile (2012) argues that the world advances largely by events that no one – especially those who live in the trappings of official order – see coming, but which have profound effects on financial markets and the societies we call our own.  The strategic implications are, he argues, quite obvious: seek an antifragile state of being in order to gain from volatility and disorder, which is predominant (and always has been) in the world in which we live.  The great model, which both Scott and Taleb use as a referent for their monikers of anarchism and antifragility, is nature itself, which is the most antifragile system in the world, constantly adapting to, and benefiting from, volatility and disorder.  How to become antifragile starts with accepting that the world does not function according to the theories and models taught in most academic institutions that seek to provide their students with tools to fit the world inside of a box constructed from magical (and tenured!) thinking.  Then, structure an autonomous life disconnected from systemic risk by, for example, eliminating debt.  Seek not just resilience—the capacity to recover from the inevitable shocks that occur—but aim to benefit from the volatility and disorder that crushes the fragile.  In effect, win the game before others even realize it has begun.

The great work-arounds that I wrote about here in December 2011, and regaining personal sovereignty, which I wrote about in June 2012, are emblematic of disorder-friendly modalities.  One must simply ignore the silliness of those who claim that by virtue of their position or birthright they are worthy of our attention … that we ought to follow them without questioning first the very source of their presumed power.  If it originates from beyond their own personal intellect and character, we should turn our faces away and treat them as a nuisance of distraction while we pursue our own ambitions and dreams under the counsel of our own hard-won sensibilities.  There exist innumerable stories throughout history of how individuals changed the course of history while there are very few (if any) that can be credited to those who claim the mantle of official order.  It is in our power—as antifragile anarchists—to change our world.

[1] James C. Scott, Two Cheers for Anarchism (Princeton: Princeton University Press), pp. 30, 84.
[2] A transcript of Obama’s second Inaugural Address can be found at http://www.whitehouse.gov/the-press-office/2013/01/21/inaugural-address-president-barack-obama.
By |2017-05-27T17:42:13+00:00January 23rd, 2013|General|0 Comments
Read More

Steding’s Unverified Theory of Strategic Inversion

In August 2008, I made a presentation to a money management firm in Dallas to attempt an explanation at what I then saw as an impending upheaval in the financial markets that would bring to question the very models of investment strategy that had existed since (at least) the Great Depression.  One month later, Lehman Brothers collapsed, and by the end of October 2008 trillions of dollars in wealth had evaporated from the balance sheets of the world.  (If you want an entertaining telling of that calamity see HBO’s Too Big to Fail, based on Andrew Ross Sorkin’s book of the same title.)  What I saw, and what is now evident not only in financial systems, but in political systems around the world (particularly in the Middle East), is the danger of employing old thinking and models of risk management in a world where complexity compounds thereby exacerbating disequilibria created by fraud and oppression.

My argument was posed as Steding’s Unverified Theory of Strategic Inversion (SUTSI). SUTSI argues that as complexity compounds, enabled by technology and as manifested in globalism, the distribution of data points—of actual results—represented by the bell curve flattens. Rather than complexity validating regression toward the mean—the center axis of the bell—it produces a greater number of outliers; those events nearer the rim of the bell such that the principle of regression is moot. In the investment world, I argued further, old portfolio allocations and holding periods might be ineffective, and Federal tax policy may need to be flipped.  For example, investment strategies that target the 0 to 20% returns (‘long’ positions—the area immediately to the right of the center axis of the bell) or the 0 to -20% returns (‘short’ positions—the area immediately to the left of the center axis of the bell) actually accept greater risk due to a relatively smaller number of results within that range.  The better strategy is to play the edges, which now include a greater number of data points, taking both long and short positions, not so much as a hedge, but in pursuit of absolute gains.  Nassim Nicholas Taleb has most forcefully made this argument in his book, The Black Swan: the Impact of the Highly Improbable.

In this investment strategy scenario I suggested that perhaps a strategic inversion is warranted:

  •       Rather than a portfolio allocation of 50% equities, 30% bonds and 20% cash, maybe one should have 50% cash, 30% bonds, and 20% in equities.
  •       Rather than holding investments for the long term—the traditional investor strategy—one should look at short term investments, more of a guerrilla investment strategy.
  •       Rather than being highly diversified one should have fewer positions, mitigating risk by having only 20% of wealth ‘exposed’ in equities (and much less leverage but more due diligence).
  •       Rather than having a tax policy that penalizes short-term gains at high tax rates (35%) maybe we should swap them with long-term rates (15%) as a better way to support the creation of wealth?

These suggestions fell on polite but mostly deaf ears in August 2008.  Today, you can find many investment strategists arguing for variations of these suggestions.  Since 2008 we have witnessed a bumper crop of Taleb’s so-called black swans, not only in financial markets, but also in political systems.  (Although politicians are even slower slow to catch up than financial managers.)

In the May/June issue of Foreign Affairs, Taleb, together with Mark Blyth, Professor of International Political Economy at Brown University, apply these same notions of complexity and risk in “The Black Swan of Cairo: How Suppressing Volatility Makes the World Less Predictable and More Dangerous.”  Taleb and Blyth argue “both the recent financial crisis and the current political crisis in the Middle East are grounded in the rise of complexity, interdependence, and unpredictability” where linear models and a preference for stability—what I have called “staring at the mean”—may actually be the most, not least, risky (p. 34).  What may be called for in foreign policy may mirror the strategic inversion we have witnessed in investment strategy.  The “illusion of control and action bias” that are traditional hallmarks of US foreign policy, may in fact produce greater instability and reduced security (p. 39).  The US may be much better off playing less often, and at the margins, where the black swans live.

Three years after penning my theory and making my presentation about the prospect of strategic inversions to the investment world, it seems at least one thing is clear: compounding complexity requires new modalities of inquiry that reject the linear traps inherent in conventional thinking. While I am not ready to strip “unverified theory” from the title, changing it to Steding’s Rule of Strategic Inversion (SRSI), I am getting closer every day.

By |2017-05-23T20:08:14+00:00May 24th, 2011|General|0 Comments
Read More

The New Realities Part III: Ultrapreneurism

My father’s generation created wealth through their corporate citizenship; join one and remain there for many years while vesting in a retirement plan and/or buying large cap stocks and holding on to them for just as many years.  This was a very viable path to economic security.  In 1979, upon graduation from college, I took a step in that direction by joining the marketing department of Pacific Northwest Bell, an AT&T regional operating company.  But, to the unspoken vexation of my father, I left seven months later to strike out on my own in the media business.  At my father’s memorial service in 1995, one of his friends who eulogized him said that my father never really understood what I did, but acknowledged that I seemed to like it so “so be it.”  I was then thirty-eight years old and within two years would be retired (financially self-sustaining) myself.  I had become what was known as an entrepreneur, creating wealth outside of, and often in spite of, the corporate world.

As social economist George Gilder celebrated entrepreneurs in The Spirit of Enterprise (the bible of Reagan-era entrepreneurs), he described them as those who “know that genius is sweat and toil and sacrifice and that natural resources gain value only by the ingenuity and labor of man.” He argued entrepreneurs “create the wealth over which the politicians posture and struggle … they sustain the world.”[1] Gilder’s is an over-romanticized celebration, but he aptly captured the spirit and sentiments of my generation of wealth builders.  But we too are fast becoming obsolete, replaced by ultrapreneurs who are even less systemically connected and are quickly adapting to new market conditions marked by interdependence, complexity, and volatility; and who are producing new inverted strategies of wealth creation.

It is worth understanding the conditions that give rise to this new breed I call ultrapreneurs.  Globalism has many effects, driven principally by the liberalism of trade and geometric acceleration of enabling technologies.  As Nassim Nicholas Taleb successfully argues in The Black Swan the world today is best described as a “recursive environment” where an “increasing number of feedback loops … cause … snowballs and arbitrary and unpredictable planet-wide winner-take-all effects.”[2]  As complexity compounds, the improbable occurs with greater frequency, which brings to question a number of things, especially investment strategies.  In effect, the curve of distribution—the bell curve—flattens causing calculations of risk/reward to consider that the probability of outlier events (high positive and high negative returns) to be relatively more likely than they have been in the past.[3]  And, if complexity accelerates even faster—without contemporaneous codification of rules and consequences—the curve could become inverted.  Translation: playing within a standard deviation of the mean is no longer justified based on an assessment of relative risk and reward.  Add to this the emerging reality that systemic market risk increases in a complex financial system that has yet to develop command and control mechanisms, and that now also includes systemic fraud risk, the question becomes not whether one should be in or out of the market, but how one operates away from the market.  Furthermore, those who continue to chant the mantra of the long run are fools (or they simply don’t know how to interpret the short run).  In a complex interdependent market staring at either the mean or the horizon actually exposes one to more, not less, risk.  The better perspective is to view the landscape from a reasonable altitude, looking down, as events unfold, not out at the horizon.

There are a number of people who argue that the end is near—that social collapse is eminent (even secularists).[4]  However, I would argue that Gregg Easterbrook is closer to the mark in Sonic Boom: Globalization at Mach Speed. Easterbrook claims that “job instability, economic insecurity, a sense of turmoil, the unfocused fear that even when things seem good a hammer is about to fall … are part of a larger trend, and no rising tide will wash them away.”  But he also points out that globalization has positive aspects: “ease of communication, more freedom of speech, markets closely attuned to consumer demand, [and] rising education levels in the developing world.”[5]  Adapting to this world requires a high degree of intellectual flexibility—an embrace of ideological agnosticism that produces a transcendent state of mind allowing creative reinvention.  This is the mental mindset of the ultrapreneur.  He or she is the ultimate free agent who has the same work ethic as an entrepreneur, but who remains as disconnected as possible from systemic risk and who prefers anonymity to fame.  They are hyper-independent, stealth, and highly adaptive.  They do not recognize traditional boundaries or conventions and find leverage in intelligence, not natural resources—and never debt.  They prefer networks to formal enterprise and may even operate through multiple identities.  They are a product of the natural evolution of social order in a complex interdependent world.  Ultrapreneurs will be the winners in an increasingly risk-laden world.

[1] George Gilder, The Spirit of Enterprise (New York: Simon & Schuster, 1984), 18-19.
[2] Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007), xxii.
[3] Hedge funds are the early interpreters of this strategy.  What killed many hedge funds was not investment strategy, it was leverage.
[4] See Joseph Tainter’s 1988 The Collapse of Complex Societies, or Niall Ferguson’s more recent “Complexity and Collapse” in the March/April 2010 Foreign Affairs.
[5] Gregg Easterbrook, Sonic Boom; Globalization at Mach Speed (New York: Random House, 2009), xii-xiii.
By |2017-05-25T21:31:07+00:00May 4th, 2010|The New Realities|0 Comments
Read More
Go to Top