Addiction by Obsession — A Theory

Malt Liquidity 100, Century edition!

The delusion is in the idea that it ever ends.

Imagine, if you will, someone seated at a slot machine for hours on end. We all know the type steadfastly feeding bill after bill into the machine without any physical indication of choice in their actions. Purportedly, the goal is to play until the jackpot is won, but when it does hit — oh yes, it does eventually come — it's self-evident that the real purpose is simply to keep playing, to endlessly watch the reels spin and the flickering pictures collide. The only way to win when playing slots is to not play at all. Quixotically, the more individuals try and ram up against the law of large numbers, the stronger that wall gets. Thus, the cure is that of removing the prior. Similar to how you can't harm yourself with a gun if you don't have access to one, you can't get addicted to playing slots if you're not around the machine at all. Addiction is a function of conditional probability — there must be a precursor to being captured.

Speculation is an innate attribute of humans derivative of curiosity. The simple question we asked ceaselessly to our parents as a child — "Why?" — brings forth a highly similar query — "what happens?" Some of these questions are easily testable

>what happens if I touch this hot plate?

>well, I'll probably burn myself

>*touch the hot plate*

>*burns hand*

while others function as an indication of a general intelligence level

>what would I have felt like had I not eaten breakfast yesterday?

>well, I ate breakfast yesterday, so why ask the question?

As our exposure to the world increases and our information base widens, our speculations become more complex and indeterminable.

>What would have happened if Ross Perot won in 1992?

These questions, while interesting, are mostly futile. They can be used to exemplify points one is trying to emphasize, but they cannot be concretely resolved in any manner, much like a sports bar "greatest of all time" debate. This futility of complex speculation is known, after all. "Not my problem" is one of the most powerful methods of asserting control over one's life and sorting out one's mind. Yet as the world develops, the urge to speculate is so strong such that the financial system that envelops the world not only encourages it, but relies on it. Speculation cannot be eradicated because it is a reflection of the ultimate human struggle — the contradiction between the desire to impose one's will on the entropic functioning of the world. The larger the scale of an action or a sum of actions, the more subject to variance it becomes due to the n=1 nature of a singular, forward-moving timeline. When I push my 'h' key, I will almost assuredly produce an 'h' on my screen, but when I cast a vote, the outcome is certainly less ordained. Bizarrely, the less my individual action matters as part of a whole, the stronger the force of the whole — this is the inherent paradox of compensating individuals for their entry in a "big data"-set, where, by nature, the more useful the dataset is, the more worthless each individual entry is.

In the smartphone-driven instantaneous information access age, there's virtually no ability to remove the prior of access. One imagines Dostoevsky's Gambler would be much less interesting to read about if he existed in a nation that had no roulette. Beyond the sports betting ads shoved ad nauseam in every broadcast, nook, and cranny of ordinary society, it's never been more impossible to *avoid* it all. The securitization of everything was not made to withstand seamless speculation. The endless operation of markets, and markets on those markets, and markets on *those* markets, means that no matter where you are in the world, as long as there is internet access available, you can place a trade, having done so myself 35,000 feet above the Pacific Ocean on my way to Singapore. This seamlessness has corrupted the speculative flywheel. At least the speculation on securitization used to be tethered to reality in some technical sense — crude oil prices do fluctuate on supply and demand, and there is a functional utility to enable hedgers and the insulation of risk by allowing the trading game to proliferate. And, of course, speculation by investing was always tethered to creation of future value — by definition, this cannot result in a zero-sum state as long as the world functions on the growth assumption.

Deep at the heart of this entire system lies an institution whose job is essentially to set a number. The revolution of the financial world grinds to a halt until this number is moved up, down, or remains static. This number can be philosophically thought of as a barometer for the baseline risk level of existing in the financially attached world — after all, an interest rate is compensation for risk taken. A rising rate indicates a heightening risk attached to capital's existence in and of itself, while a falling rate contains the opposite connotation. Therein lies the problem with an artificially subsidized cost of capital — the "risk transferral externality" is the lack of proper indication of the true level of risk of speculation. A runaway rate indicates that the concept of capital itself is breaking (as exemplified by hyperinflation), but a zero rate indicates a breaking of the mentality attached to capital itself. Put simply, we don't understand risk as a society anymore.

When cost of capital is artificially subsidized, risk-taking is no longer adventurous, but rather optimal. The action itself is nothing to be celebrated, much like hearing yet another bad beat poker story — it's just the way the game is set up, get over it. Rather, the outcome of the speculation is what puts you in rarefied air (including enormous losses!), in a post-hoc rationalization that "if you made money, it validates what you thought." With too much speculative mania, the concepts of "correctness" and "profitability" become uncorrelated — the logic of "being profitable isn't necessarily being correct" mutates to "being profitable in and of itself is correct." Speculative venues created for the sake of speculation serve no other purpose than creating a self-fulfilling prophecy so long as you are first to the jump, followers be damned — every trade needs "exit liquidity", and "yoinking" others is considered equivalent "alpha" as genuinely innovative risk management and edge capture. The more money that is "created" by this kind of trading, the more the speculative flywheel reinforces itself — what, exactly, are we doing when we trade dispersion between DogeCoin and PepeCoin, or a long/short trade on Fanta and Canto? Does anyone believe this is an actual use of capital, or is it a sign that we can't stop feeding bills into the machine? Society has always been terrible at rolling back what has been set forth, hence the idea that systems should be overly resistant to the winds of change. It's hard to see how the mindset of low rates and a collective mis-pricing of risk ever unfurls. Already we see the effects of a society unable to realize that depositors are stakeholders, that losses can occur through no direct fault of your own. The prior is now irremovable because nobody has the wherewithal or the authoritarian power to actually undo it — "the lender of last resorts" has become "The lender at last resort." To get off these machines, it's going to take a lot more than just moving out of Las Vegas.

On that maudlin note, I can't believe it's been 100 Malt Liquidity posts — over the past few years, there must be 200k plus words of rambling posted to this blog. Thanks to all the people who encouraged me, who provided fantastic conversation fuel for me to explore in more depth, and who continue to read and share these posts to this day — you have no idea the innate joy it brings me to write and learn through people's responses.