the iron butterfly
Moontower Munchies #160
Friends,
I think about what Matthew Clifford said about technology when he was on Infinite Loops back in 2022 and before ChatGPT was a household name. Carved from my notes:
Matt Clifford: …modernity, however you want to define that…is about constant or apparently constant, apparently unstoppable motion towards the reduction of variance in our lives…for most of, let’s say, the second half of the 20th century post Second World War, anyone who lived in, for one of a better term, the west, had a life of far less variance than say 3, 4, 5, 10 generations before that. You could call that the triumph of modernity.
…if you look at what the 20th century was about from the perspective of work and ambition, it was really about having these more or less formalized tracks for ambitious people to climb.
And then something happened in the midst of these fantastic variance dampening institutions, we somewhat accidentally unleashed the mother of all variance amplifying institutions, and it’s called the Internet. And what the Internet does, is it selects the weird and amplifies it.
One slightly provocative framing would be that the rise of modernity, the rise of variance dampening institutions was really bad for ambitious people. It was really good for the average person…if you’re a super ambitious person today, you actually look back historically, I think, and look, well, actually it was possible to do more as an ambitious person. It was possible to find more leverage, to have fewer constrains in the past. It was then a period of about 50 years, like the great moderation, if you’d like, where a lot of that was constrained.
He lays out bull and bear cases for humanity, yet this is just a snippet:
We can imagine and creating world, whole worlds in which people can fulfill their ambitions and like the fullness of who they want to be in a way that is less damaging to others potentially. I mean, again, like you could say, that’s a very bullish case. There’s lots to critique in that, but there is something about the idea of virtualization as a way to enable many more people to achieve what they want to achieve, because we move from scarcity to abundance or potentially to abundance. Again, lots of footnotes on that, whether actually the metaverse as it is to actually emerging will permit that. I think the bear cases well, actually what the internet does is exposes us to, as you’ve already said, like a global competition where previously there was a local one, it sort of amplifies inequalities rather than dampening them.
The internet obviously accelerated learning for the motivated. I think it was on Smartless that Steph Curry admitted that Wemby can do that tennis ball dribbling drill as well as he can.
There’s this idea that the reason the 4-minute mile threshold was breached quickly and by many people once Roger Bannister finally broke the long elusive mark was psychology. The fact that someone proved it possible boosted other elite runners’ hope and motivation.
[It’s not something I’ve studied, but perhaps that’s one of those “just-so” causation stories that sounds plausible. In Ed Thorp’s autobiography, he says the reason he worked so hard to crunch the numbers in card-counting by hand was that he knew the pace of computing progress in the mid-60s meant many researchers would publish the calculations within a year or so of his frantic effort, and he wanted to be first. Maybe the 4-minute mile was already being seen less as an asymptote and more of an inevitability, and Bannister was the first of an already-oncoming pack.]
The internet feels like a variance pump because it turbo boosts Mendelian experimentation. The YouTube subculture of speedrunning looks like a Game Genie to someone raised on Metroid.
Reinforcement learning on all human knowledge and activity is the next turn of the crank. Recursion will mean later turns of the crank will not only come faster but possibly without our hand on it. We don’t really know where it goes in the long run (I don’t know if long-run means the next Haley’s comet, the next World Cup, or the Super Bowl), but in the meantime we can see that the range of ability is widening.
Now if leverage, a word embodying technology in the Archimedean sense, is accruing much faster to the top of the range, then Clifford will have spoken about variance when he should have been speaking about skew and kurtosis. To the initiated, it’s the strangle that’s interesting, not the straddle.
In options trading, there’s a structure called an Iron Butterfly. Like the band. It’s a long strangle (own the wings) and short straddle (the meat or body of the fly). It’s characterized as a short vol trade that has capped downside because you clip the losses in the tails. But if you ratio the legs of the trade to be long extra strangles, you could have a vega-neutral iron butterfly. This trade is long “vol gamma” (“volga”) or as some prefer to say, long vol of vol. It’s a second-order bet.
I’m not quite sure what the real-life activities are that would map to this idea. In investing, the mapping is probably more straightforward. You can literally own strangles and then continue to invest in all the forms of carry that have been documented to work. If you think the US stock market is TBTF, then you can just stick with the mother of all carry, equity risk premia, so instead of moaning about boomers’ influence, profit from it.
In a mature society, there’s an inertia, a calcification of the state’s administrative bones, protectionism, regulation and Nimbyism that spans across the right and left. The horseshoe is not a curious accident but unison decrepit impulses that reside in people who otherwise claim to only like chocolate or only like vanilla. The collision of variance suppression and variance amplification is a predictable human-paced response to technology’s scaling laws.
When it comes to real-life, we say things like “going out and meeting people is long vol”, but it’s harder to categorize activities as vol-neutral yet long vol-of-vol. Second-order Greeks are weird. Clifford’s a very smart guy, he may have been thinking in wings, but colloquially speaking in terms of variance. A commitment to TBTF, even if artificial, stabilizes variance. The artificial part has a lot of institutional cement holding it together and while the crack is a when, not if, the timing is uselessly Poisson.
You don’t want to be naked long or short vol. You want the vol of vol. We just gotta figure out what that means.
Provocation from the future
🔗 Vignettes from the Takeoff | 11 min read
Rohit wrote a future-history memoir from the other side of AI takeoff. The one-person unicorn becomes the four-minute mile and then a footnote within a month. Corporate secrets stop existing because anything can be reverse-engineered. Jobs compress to a few months because once you do a thing once the AI absorbs it and it’s done for all time. Companies shrink, contractors swell, capital still rules but undifferentiated capital chases the same bets and earns the same nothing.
But as yin-and-yang would have it, there’s a retro return to value. Once everything digital can be faked, physical presence becomes the only costly signal left which sounds humane in the most objective sense of the word. Maybe bars and drinking will rise again? It’s almost like that would make sense in a world of Waymos.
AP Scores
If you have any HSers in your life you may be aware that AP scores came out a few weeks ago. Crazy stuff from the Math Academy crew with middle school and even elementary-aged kids scoring 5s on Calc BC.
Motivated people breaking respective 4-minute barriers. I’m excited for advancements in pedagogy that are sure to accompany results. Like the speedrunning subculture breaking free into domains that have wider appeal than saving ungrateful princesses in pink dresses.
Updated Link
The recap for the Investment Beginnings Course Guide I shared Sunday expired. Sorry about that. This one is permanent: download
Stay groovy
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