Backsolving Your Ride On Earth

Moontower #244

Friends,

We are in the midst of interviewing developers for moontower.ai (link to job description) to join our team of 3 on PT basis. While I’ve probably forgotten more about options than a healthy person should ever learn, I know nothing about company-building. Emi Gal, my co-founder, has built 2 companies. He founded a software biz in while still in college in the late 2000s. His hunch was “serving ads in internet videos” was going to be a big thing. Which sounds ridiculous today, but prescient when YouTube was only 2 years old, streaming was grainy, and smartphones were about to crown from Apple’s fallopian tube. He sold that first company after a decade and is currently the founder and CEO of Ezra where Yinh and I get our full-body MRIs (if you want a discount I know a guy).

When I wrote the Culture of 37signals, I mentioned how when I stumbled upon their manifesto and company handbook it reminded me so much of Emi and his business principles:

Emi’s a huge fan of them. He’s read all their books (and recommended Rework and Shape Up to me) but we also talked about how he came to many of the same conclusions while running his first company. I think that’s why reading the 37signals philosophy conjured Emi so strongly — the focused, can-do, undistracted spirit wrapped in a deep care for a holistic well-being which enables you to be excellent, rather than being at odds with professional commitment & performance.

Today, I’ll share another article we keep pinned in our shared digital workspace.

https://sahillavingia.com/work (8 min read)

Sahil is the founder of Gumroad. This article is an extremely candid look at how he arrived at his business approach. It echoes many of 37Signals’ values. It’s also up front about the drawbacks.

A few of the major points:

• Gumroad's "Freedom at all Costs" model prioritizing flexibility, autonomy, and work-life balance over traditional corporate structures and rapid growth.

  • Flexibility and compensation: Gumroad offers competitive hourly rates ranging from $50 to $250, depending on the role. Employees track their hours and invoice weekly. Daniel Vassallo is an entrepreneur who gave them 10 hours a week for $120k/year.

  • Minimum viable culture: Gumroad's culture is intentionally lean, lacking traditional perks and social events, focusing instead on providing flexibility and autonomy.

• Emphasis on written communication (37Signals and Amazon are famous for this)

  • "Instead of having meetings, people 'talk' to each other via GitHub, Notion, and (occasionally) Slack, expecting responses within 24 hours."

  • "Everyone writes well, and writes a lot."

• Potential drawbacks:

  • Limited growth opportunities: Gumroad's structure offers limited traditional career advancement paths.

  • Lack of traditional benefits: Gumroad does not offer benefits like healthcare or laptops

  • The remote-first, asynchronous nature of work is isolating for many.

The topic of remote vs in-person gets people riled up. People talk their own book. Maybe not as directly as say a Class A office building investor who desperately needs asses in seats tenants but there are just many businesses that rely on large workforces. If you need a large workforce, your hiring standards are going to reflect that. Which means reaching down into mediocrity. To people who need to be babysat in-person. This is not a matter of judging, it’s just reality. Many people aren’t intrinsically motivated. They feel alienated by work that means nothing more than a paycheck. Many, maybe even most, didn’t even have a chance.

[You are very fortunate in this world to become properly matched to how you make a living so I don’t want to sound harsh. The whole topic of matching is deeply important — I think it’s the thing all parents hope for — give your kids lots of exposure to stuff so they have the best chance of matching to what they are good at. It’s not a silver bullet, but the lack of satisfactory matching will be a ball-and-chain for life. It’s not a recipe for thriving.]

My view is so anodyne it’s a stretch to call it a view — every business lies on a spectrum of how critical it is to be in-person or not. For businesses that straddle the line, it’s a matter of trade-offs. If you make them explicit as Sahil does, then your team will be a self-selected group whose preference sliders are in agreement. With more choices on how we can work, individuals can better match to a cadence that fits their personal frontier just like some people prefer startups to big companies. Being well-matched to the cadence and culture of your work environment seems like a key ingredient for loyalty and productivity.

My spicier take is that folks who get triggered by the wider array of work options have hazing mentality. “I had to struggle through crappy options, you should too.” Weird. When I wanted a dishwasher it was a luxury, now that innovation has made it a commodity, I’m…annoyed?

Have you ever sensed that some people get offended that someone else might choose to work less or remotely at the cost of more money or advancement? As if this is a form of entitlement even though this “lazy” person’s preferences still come with a cost. I call it learned helplessness on the part of the triggered. They grinded through a bunch of regretful choices and want to inflict the cruelty on others. To be charitable, I think in their heart, they are mad at their own narrow desire. They feel trapped maybe even duped by them, but they’re so pot-committed that they rationalize that this is the only way.

The greatest freedom is to be easy to please. You know someone who is high maintenance. But then it must follow than you know someone lower maintenance. It follows that there must always be someone less burdened than you by their desires.

There is someone out there who thinks they are outscoring you while you are blissfully unaware of the sport they’re playing. Jordan invented fake rivals tactically. Consciously. Some people create them to protect their egos and choices unconsciously.

The lyrics to this song have always been goated:

When you get down to it, the labor market is just that — a market. Price, inclusive of concessions in how one can work, comes down to scarcity and bargaining position. Sometimes the rockstar costs a ton of money. Sometimes they’d work for less if they can come and go as they please. When bosses whine about employees, it just sounds like they’re bidding below the market and frustrated they aren’t getting filled.

It’s like moaning about stocks being overpriced so you can’t get a better risk-adjusted passive return. I get it, you want things to be easier. Get in line.

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On a related note, Paul Millerd just released his new book: Good Work.

I’ve known Paul for years now. I’ve written quite a bit about his first book Pathless Path which is deeply insightful and personal.

There’s a bit of a backstory to the new book’s subtitle: “reclaiming your inner ambition”. If you follow Paul, you’ll know he pushes back against life scripts in a major way. If you aren’t paying attention, you think he sounds like a slacker urging people not to work. In the book he recounts the call we had back in 2021 (we actually threw the video camera on which I believe was the first time I ever “recorded” for podcast. It was totally off-the-cuff.) I told him what I saw — that he was deeply ambitious. Stopped him in his tracks. He had not thought of himself that way.

I saw someone who was very deliberate about his choices. It takes a lot of nerve to do that. Nerve is ambition. The gall to believe you can get what you want from your time here.

(A lot of what is coded as “ambition” is actually a retreat from ambition. Paper-clip maximization as path of least resistance. Until it hits the ultimate ceiling — finding out its weights have been tuned to a local maxima.

There’s a time to be a hammer and time to navel-gaze. It’s the diabolical explore/exploit trade-off, the one-armed bandit problem, whatever you want to call it. I wish I had the wisdom to toggle between them well. It’s hard to judge even in hindsight nevermind real-time. One of these life-is-indifferent-to-your-desire-for-a-precise-recipe truths. If you are aware that you lean too much towards navel-gazing like I do, or being a hammer then you can likely benefit by consciously compensating.)

Paul went through a health scare in his 20s.

Those have a way of focusing you.

You realize time is limited and everyone is too concerned with themselves to actually care about you. I mean this in a good way — like nobody notices your bad hair day. As Morgan Housel learned as a valet, nobody cares about the person driving a Lambo. All they do is imagine themselves in a Lambo. At best we are props in the stories other people tell.

Once you figure this out, you can get on with the actual business of designing your life. Choosing your priorities instead of compiling the default program loaded by your upbringing or what society has put in front of your face which is neither random nor timeless — they’re just the messages that had enough financial ROI to justify their transmission.

Paul was on a traditional route. The MIT —> consultant —> grad school pipeline. There’s no problem with that unless you equate that with getting an A in life and find yourself disappointed when you discover there’s no grades, there’s no teacher, there’s no gold star. Or worse, that a gold star is BMW that you serve instead of it serving you.

And that’s the point. Is your time on earth serving the stuff you want to serve or serving an appearance in a world where nobody’s paying attention anyway?

Paul just backsolved. He loves travel. Having a family. And control over his compromises. It’s just an equation. Do the work that is valuable enough to sustain what you want that also aligns with your talent.

[Again, the importance of matching — Paul is very smart and can do lots of work that pays super well, but because he focused this ability into designing exactly the life he wants instead of choosing the money-is-pure-optionality-except-I’ll-never-exercise-any-of-the-options-because-I’m-hostage-to-collecting-options trap, he deployed his ability surgically to customize his experience on this grand ride called earth. Health scares remind you that options have expiry dates.]

Paul doesn’t pretend its easy. You must be ruthless about unlearning unexamined desires that come from our greatest but also overrated fear — social rejection. But anything worth something is not easy. You’re gonna bust your ass either way. You shouldn’t question if it’s worth it. If you do, you might be living someone else’s life.

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I’ve been messing with Google’s NotebookLM this week.

☕Aside: This NotebookLM thing is pretty cool. You can upload up to 50 links/books/papers/video/documents and it will synthesize briefings and study guides from all the material. You can spar with it. Ask it questions. I fed it a book and asked it to surface all the paradoxes and ironies in the authors’ arguments and it pointed out several thoughtful contradictions. I gave it my Q3 review post from Wednesday and had it turn it into a conversational podcast. It even did a solid job of pronouncing my name. You can just give it Wikipedia articles and have it materialize the content into an audio interview. Andrej did this and uploaded the episodes to Spotify.

https://x.com/karpathy/status/1841594123381571863

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Money Angle

My friend Taylor sent me this terrific paper:

Investing In The Unknown and Unknowable (2006)
Richard Zeckhauser

It opens with the story of David Ricardo made a fortune buying British government bonds just four days before the Battle of Waterloo, even though he had no special military insight. His success wasn't based on analyzing the military odds but on understanding market inefficiencies:

• Competition was thin

• The seller was eager

• He bet on the fact that his windfall, if Napoleon lost, would be much greater than what he stood to lose if Napoleon won.

I talked about this idea in my own way on Corey’s podcast. It’s counterintuitive but you can actually have more confidence in your judgement when you are evaluating a hairy situation when you realize it’s unlikely that your counterparty knows more than you do.

The Ricardo example is pretty good analog for why I bought teeny oil puts in early 2020 before the Covid shutdowns. If I’m wrong, it costs a minuscule bid-ask spread, and the put seller doesn’t know anything more than I do about the risk of a pandemic.

If a situation lends itself to analyzing reams of data I’m likely to stay away. I’ll know my effort is substandard to the effort the other side would make in taking the bet. When oil went negative, historical data is not a useful guide. The playing field is more level. It’s my reasoning against someone else. It’s not that I know something, it’s that the disparity about what I can know compared to the counterparty is small and in fact I might have the edge. So if the risk reward is favorable and the logic at worse is a toss-up, then my confidence is higher relative to a typical situation where someone else might have crunched all the permutations. My relative advantage (disadvantage) is higher (lower) in the low-info world.

The paper’s meta-lesson is how important the concept of adverse selection is. If you recall A Jane Street Alum Teaches Trading, Ricki Heicklen makes the case that understanding adverse selection is the most important part of trading. It is the thing that Jane, SIG, etc are obessed with — what is my edge conditional on getting filled? It might still be positive but it’s always less, in mathematical expectation, than a world in which you don’t get filled.

She has a great post with lots of day-to-day examples too:

Toward a Broader Conception of Adverse Selection (10 min read)

The Zeckhauser paper is terrific. I’ll just share this one excerpt with my emphasis:

Let us posit that you are 100% sure that an asset is worth more to you than to the person who holds it, indeed 50% more. But assume that she knows the true value to her, and that it is uniformly distributed on [0,100], that is, her value is equally likely to be 0, 1, 2, … 100. In a famous game due to Bazerman and Samuelson (1983), hereafter BS, you are to make a single bid. She will accept if she gets more than her own value. What should you bid?

When asked in the classroom, typical bids will be 50 or 60, and few will bid as low as 20. Students reason that the item will be worth 50 on average to her, hence 75 to them. They bid to get a tidy profit. The flaw in the reasoning is that the seller will only accept if she will make a profit. Let’s make you the bidder. If you offer 60, she will not sell if her value exceeds 60. This implies that her average value conditional on selling will be 30, which is the value of the average number from 0 to 60. Your expected value will be 1.5 times this amount, or 45. You will lose 15 on average, namely 60-45, when your bid is accepted. It is easy to show that any positive bid loses money in expectation.

The moral of this story is that people, even people in decision analysis and finance classrooms, where these experiments have been run many times, are very poor at taking account of the decisions of people on the other side of the table. There is also a strong tendency to draw the wrong inference from this example, once its details are explained. Many people conclude that you should never deal with someone else who knows the true value, when you know only the distribution. In fact, BS offer an extreme example, almost the equivalent of an optical illusion. You might conclude that when your information is very diffuse and the other side knows for sure, you should not trade even if you have a strong absolute advantage. That conclusion is wrong. For example, if the seller’s true value is uniform on [1,2] and you offer 2, you will buy the object for sure, and its expected value will be 1.5 times 1.5 = 2.25. The difference between this example and the one with the prior on [0,1] is that here the effective information discrepancy is much smaller. To see this, think of a uniform distribution from [100,101]; there is virtually no discrepancy. (In fact, bidding 2 is the optimal bid for the [1,2] example, but that the extreme bid is optimal also should not be generalized.)

The general lesson is that people are naturally very poor at drawing inferences from the fact that there is a willing seller on the other side of the market. Our instincts and early training lead us not to trust the other guy, because his interests so frequently diverge from ours. If someone is trying to convince you that his second-hand car is wondrous, skepticism and valuing your own information highly helps. However, in their study of the heuristics that individuals employ to help them make decisions, Tversky and Kahneman (1974) discovered that individuals tend to extrapolate heuristics from situations where they make sense to those where they do not.

On page 24, Zeckhauser has a more proactive spin reminding us that the problem is symmetrical — it’s rare for the other side to play an optimal strategy, which can offer opportunities for informed investors.

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Money Angle For Masochists

An answer to prior reader mailbag question:

❓What’s your take on this—SPX 1M implied correlation trading at the 2nd percentile vs the last three years, while NQ is in the 25th percentile? Meanwhile, SPX IV is in the 30th percentile and NQ is in the 40th. My initial thought is that the component implied vols (IV) are inflated, and we're seeing realized vol (RV) underperform IV this earnings cycle. Could short SPX vol could be getting hedged with NQ vol, potentially in anticipation of NVDA's earnings?

I’d back up and start with what you’re measuring. Are your implied correlation numbers stripped of earnings vols? SPX might have a larger proportion of earnings events in the coming month, which could be skewing the numbers. Correlation tends to look lower when earnings are approaching because single-stock vols rise, making it crucial to use base vols (vols stripped of earnings) to get a cleaner estimate.

In practice, models might not account for this as there’s a lot of upstream judgement in cleaning the implied corrs for earnings where traders might prefer to look at dirty metrics and just understand how they can be wrong. Dispersion traders will have a "memory" of high or low dirty correlations around historical earnings seasons and how they played out.

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Here’s a terrific interview with fellow vol trader bud Gary Selz that he recorded this summer with Jeff Malec at RCM.

Volatility Vultures: Hunting for Options Talent with Gary Selz of Zero Delta (YouTube)

In this episode of the Derivative we chat with Gary Selz, CIO and Co-Portfolio Manager of Zero Delta Funds. Gary shares his background growing up in Chicago and studying electrical engineering at Northwestern University. He discovered options trading through a financial engineering course and was introduced to a Chicago prop trading firm. Gary discusses his experience training as a new trader at the prop firm. He explains how traders are given time and support to learn before getting their own book to trade. Gary reflects on the diverse career paths that can lead traders to prop shops, from poker players to accountants. The conversation covers Gary's transition from trading to investing his own money in volatility strategies. This led him to co-found Zero Delta Funds and launch a fund seeking talented volatility traders from across the globe and not always where you’d expect. Gary highlights their process of finding under-the-radar traders internationally and evaluating their sophistication. Gary and Jeff discuss various aspects of options trading, including the evolution of the market landscape. They analyze single stock versus index volatility trading. Gary shares insights on the current opportunity set and speculates on potential future market catalysts. Come join us as we dig deeper into option and vol trading and into the mindset of successful volatility traders.

Stay Groovy

☮️

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Moontower Weekly Recap

• A Cockpit View of Q3

• Volatility term structure from multiple angles (part 2)

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