Safety Not Guaranteed

In investing, and in life, safety is not guaranteed.

We are a fear-laden society obsessed with safety and risk avoidance. That might not be such a great idea, as this week’s TBL describes.

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Safety Not Guaranteed

It was one of the great classified advertisements ever – whimsical and ominous at the same time.

It ran in the survivalist magazine, Backwoods Home, in 1997. Thousands of letters were received in response, some curious, some forlorn, some desperate, and some just plain crazy. Eventually, the ad found its way to the internet, where it bounced around for years, giving rise to jokes, songs, parodies, memes and, finally, a surprising and unexpectedly endearing film that is as delightfully off-kilter as the words that inspired it.

The movie is Safety Not Guaranteed, and it’s a time travel rom-com. Its conceit is revealed by the ad itself. Here’s how the film’s director put it: “Six perfect sentences promising adventure, mystery, danger, and the risk of taking on a partner who might be a little bit crazy.”

It’s a wistful movie about attraction, love, the power of belief, and what’s most important in life. It travels from having no expectations whatsoever to a wide-eyed, optimistic leap of faith.

Aubrey Plaza plays Darius, a sullen and depressed recent college graduate who is interning for a magazine and looking to find herself and her place in the world: “I expect the worst and try not to get my hopes up.” She responds to the ad to try to get a story for her magazine.

Mark Duplass is Kenneth, a sweet, intense, isolated, paranoid, and perhaps delusional stock clerk at a grocery store, who is convinced he holds the secret to going back in time, where he hopes to rectify past mistakes. It’s unclear if this would-be time traveler is a genius, mentally unbalanced, or both.

Darius and Kenneth, it turns out, have sincere, heartrending reasons – relating to missed opportunities and lost dreams – to wish they could go back in time.

Kenneth’s fanatically detailed survivalist preparation and the intensity of his genuine belief in his “mission” touches something deep in Darius she can’t even admit to herself. In the end, the film is about the risk of falling in love.

The title of the movie is a pretty good metaphor for investing and for life in general in that it applies equally to the tedious everyday, total loss, and tentative love.

We know from behavioral research that we are risk-averse – we feel the sting of loss about two times as strongly as we feel comparable gain. We crave safety. But safety can never be completely guaranteed.

In the investment world, every piece of advertising must state that past performance is not indicative of future results. It’s the codification of the principle that correlation does not imply causation and, thus, safety is not guaranteed, irrespective of what has already happened. Causation always comes with correlation but it doesn’t necessarily work the other way around. Thus, ongoing correlation gives us a clue that the correlated things might be connected, but it ain’t necessarily so.

The higher the number of variables, the less likely it is that the connection is a causal one and one that will persist over time. The famous Latin expression of the fallacy we fall prey to in this area is post hoc ergo propter hoc, which means “after this, therefore because of this.”

We aren’t nearly as good at ferreting out causation as we like to think. The chart below demonstrates the difficulty as well as any.

To bring the issue home a bit in our information-rich age (as I often say): information is cheap while meaning is expensive. Some connections are pretty obvious. Cake-buying will likely correlate with ice cream-buying. A strong and growing economy will generally correlate with a healthy stock market. But often the supposed connections are simply random noise. Many a scam artist can backtest some data and come up with a “system” that will make a lot of money (sadly, for the scammer but not for you). 

Correlation isn’t causation. It’s a hint or a possibility, but no sure thing. Mere relationships do not establish causal links, yet correlation allows us to pirouette around causation, pretending that we’ve established it. As Hume posited, causation is not a fact. It is an interpretation or an inference – a simplified story – from facts. But, we are built to perceive causation as a fact. We are pattern-seeking creatures.

It’s easy to see that bad traffic can cause one’s commute to be longer than normal, but ascertaining causation where there are huge numbers of variables is a fool’s errand. Finding a causal chain in the hard sciences can be made easier by creating experiments that limit the variables or even eliminate all other possible variables. That’s simply not possible with the infinite numbers of variables impacting the markets.

There’s more to the story, too.

In today’s world, with the internet and artificial intelligence, correlations are essentially everywhere. Google is not necessarily your friend in this instance.

By convention, we call a statistical effect “significant” if the chances of its being randomly derived – as opposed to some more genuine relationship – are less than 5 percent. However, because correlation does not imply causation, there is nothing special about that number and no reason to invest it with any additional level of certainty. Statistical significance does not imply substantive significance (p-hacking is a thing).

Because of our inherent tendency toward confirmation bias, we are built for false positives. And false positives push us towards thinking we can intervene in the world more successfully than is true. As I often say, we like to think we are like judges, carefully reviewing and analyzing the facts and evidence for the best available approximation of the truth. Instead, we are much more like lawyers, looking for any scrap of information we might exploit in order to support what we already think. Our brains don’t generally seek literal truth. We seek a plausible story – that doesn’t obviously contradict reality – to confirm and justify our priors.

We insist on pretending reality is always simple and, best of all, we’ve got it all figured out. There is an inherent mismatch between how the world works and how we think about the world.

How does this play out in the day-to-day?

Traders are always on the look-out for patterns that will persist and offer opportunities. Most never work. Some work for a time but are copied so much that the advantage is arbitraged away. A few (such as value and momentum) have worked and seem to continue to work – they persist (in statistical terms). But even then, they could stop working at any time. There’s no guaranty. And, even when they work, they don’t work as quickly, as clearly, or as cleanly as we’d like. Correlation does not imply causation. Past performance is not indicative of future results.

Safety not guaranteed.

Now let’s expand the scope of our inquiry. Our general risk aversion (“safety not guaranteed”), coupled with the velocity of information growth (technology supercharges liquidity), has hastened our adaptation of the “index mindset” throughout culture. Accordingly, we generally favor average results over extreme ones, a bird-in-hand over two in the bush, relative over particular truth, function over form, quantity over quality, mandate over merit, efficiency over exploration, passivity over action, predictability over tails, determinism over freedom of choice, mistake avoidance over smart decisions, evolution over revolution, adaptation over reformation, safety over risk, diversification over concentration, preservation over creation, velocity over due diligence, optionality over decisiveness, the general over the specific, growth over profit, and zero-sum over positive-sum, compound thinking.

It is about risk mitigation rather than ambition. It is about management and administration rather than opportunity. It is about the efficient frontier rather than the bleeding edge. It is about scale and cost efficiency rather than uniqueness and quality.

The index mindset plays it safe. It throws away a big shot for index returns. It is often the best approach.

However.

Broadly speaking, the index mindset ignores that long tails drive everything and that risk and reward tend to correlate. And it offers no framework for determining when we shouldn’t index … when we should “go for it.”

As Wayne Gretzky famously said, “You miss 100 percent of the shots you don’t take.”

For Nassim Taleb, the index mindset means being a tourist rather than a flâneur.

“Rational flâneur (or just flâneur): Someone who, unlike a tourist, makes a decision opportunistically at every step to revise his schedule (or his destination) so he can imbibe things based on new information obtained. In research and entrepreneurship, being a flâneur is called ‘looking for optionality.’”

The index mindset doesn’t look for optionality, doesn’t dare to dream, doesn’t run for president, doesn’t go for the gold, doesn’t take leaps of faith, doesn’t take the last shot, doesn’t go out on her own, doesn’t create the next big thing, doesn’t go all-in, doesn’t storm the beachhead, and doesn’t demand (or expect) true love.

Yet it has become the default mindset of our world. A recent paper analyzed 173,031 books printed in England between 1500 and 1900 to track how the frequency of different terms changed over time and used them as a proxy for the cultural themes of the day. The authors found a marked increase in the use of terms related to progress and innovation in England, starting in the early 17th century, before tailing off more recently, suggesting an interesting correlation to economic growth. This trend applies elsewhere, too. Meanwhile, caution, worry, and risk have, in recent decades, markedly increased in usage. Overall, the usage of terms related to future improvement has dropped by about 25 per cent since the 1960s, while those related to risk management have become several times more common.

Over the same period, our thinking has become increasingly zero-sum, rather than positive-sum, whereby success can multiply.

And it’s not just economics and markets.

In American culture, there has been a universal flight-to-safety. Seventy percent of U.S. adults say they feel anxious or extremely anxious about keeping themselves or their families safe.

We express a preference for good news and insist the media is too focused on negative stories, but mostly share negative stories. And when we watch negative news, we grow significantly more anxious and sadder. Gen Z, especially, is profoundly anxious, depressed, and fearful.

“Risk management used to be a business practice,” Malcolm Harris showed, “now it’s our dominant child-rearing strategy.” When I was a kid, “helicopter parents” didn’t exist. Parenting wasn’t a verb. Unlike today, no parents were ”relentless.” No parents ran scams to get into Harvard. I ran around my whole town, on a bike with my friends, mostly unsupervised. Today’s kids have playdates. Pickup games have transformed into highly organized leagues that span the year. Unchanneled energy (diagnosed as hyperactivity) has become medicated and disciplined.

Safe spaces, designed to protect people from discomfiting, distressing, or merely different viewpoints (“the coddling of the American mind”), didn’t exist.

Nobody issued trigger warnings.

When risk aversion becomes the key cultural touchstone, opportunities for reward, advancement, and even love (as we circle back to the movie), necessarily diminish.

Marriage is vital to our culture and our future. A great marriage – “when every fairy tale comes real” – is the best indicator that you will see your life as successful, whatever definition of success you choose to employ. Overall, married men earn 10 to 50 percent more than unmarried men, depending on the study and how you slice the data. Research on twin men found that the twin who gets married earns 26 percent more than the twin who doesn’t.

Yet we live in a culture that increasingly delays and devalues marriage. Many discourage or denigrate it. We aren’t very good at it. We “drown in love’s debris.” 

Tinder and other dating apps allow people to diversify their relationship capital across an index of dozens of partners while avoiding a commitment to marriage and a family (or to time travel) – see here and here.

Diversification and risk avoidance for the win … something.

An extraordinary 75-year study followed Harvard graduates from 1939 to 1944, into their 90s, and considered all aspects of their health and well-being. The principal author, psychologist George Vaillant, summarized the findings as follows.

“Happiness is love. Full stop.”

People who have loving relationships with family and friends thrive; those who don’t, don’t. Yet, human connection comes with a high level of risk. Of rejection. Of bad choices. Of regret.

Safety not guaranteed.

When we come at things from a different angle, it’s easy to recognize that even if/when we have it, safety is not enough. We need more than a soulless life of safety and provision. We need meaning. As Steve Jobs pointed out in his famous Stanford commencement address: 

“Your time is limited, so don’t waste it living someone else’s life. …Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

So don’t be afraid to follow your heart. I can’t promise you won’t regret it. You might. Safety not guaranteed.

But it’s worth the risk.

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Totally Worth It

Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.

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Kevin made a grocery run in Home Alone (1990). He bought a half-gallon of milk, Wrappit! plastic wrap, a Stouffer’s frozen turkey dinner, Snuggle dryer sheets, Wonder bread, a four-pack of Quilted Northern toilet paper, Kraft macaroni and cheese, a baggie of plastic Army figurines, Tide liquid laundry detergent, and a half-gallon of Tropicana orange juice. These purchases totaled $19.83 (after accounting for the $1-off coupon Kevin redeems for the orange juice). There are not like-for-like options for all these items. However, using reasonable substitutes where necessary, this list would cost about $50 today. That roughly tracks. According to the inflation calculator provided by the U.S. Bureau of Labor Statistics, $19.83 in December 1990 had the same buying power as $45.46 through December 2023.

You may hit some paywalls below; most can be overcome here.

This is the best thing I read in the last week. The loveliest. The weirdest. The stupidest. The most horrific. The most important. The most incredible. The most interesting. Yuck. No fun. Crying fowl. Rats. NIL. Hmmm.

Please send me your nominations for this space to rpseawright [at] gmail [dot] com or via Twitter (@rpseawright).

The TBL Spotify playlist, made up of the songs featured here, now includes over 270 songs and about 19 hours of great music. I urge you to listen in, sing along, and turn up the volume.

My ongoing thread/music and meaning project: #SongsThatMove

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Benediction

We live on “a hurtling planet,” the poet Rod Jellema informed us, “swung from a thread of light and saved by nothing but grace.”

To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers grace and hope. And may love have the last word. Now and forever. Amen.

As always, thanks for reading.

Issue 163 (January 19, 2024)