Wednesday, February 16, 2022

Juggling Sticks of Dynamite: Our Fatally Distorted Sense of Risk

So when the gambler ends up juggling lit sticks of dynamite, he's confident nothing bad can happen because nothing bad has ever happened, no matter how much risk he takes on.

The problem with constantly being saved from the consequences of our actions is this fatally distorts our sense of risk. The foundation of the ability to accurately assess risk is the experience of real-world consequences: hardship and losses.

If you are sloppy about positioning the ladder securely, the ladder falls and so do you. If you survive the fall, you've learned that risk is real and that precautions must be taken to minimize risk. Precaution requires thinking through all the components of risk and taking steps to remediate or avoid each specific source of risk.

If you've never really been pushed to your limit of endurance, you lack the experience needed to realize you're dehydrated and in danger of succumbing to heat stroke. So when you run out of water on a shadeless climb exposed to the blazing sun, you fall into magical thinking: if we just push on, push harder, power through this, then we'll be fine. But powering on is the worst possible choice, and so the inexperienced hiker passes out and expires.

The Federal Reserve and the rest of the Savior State has saved us from the financial consequences of rampant speculation for decades. As a result, few of those in the casino have the necessary experience of hardship and losses to accurately assess risk. The vast majority have only experienced being saved: the most profitable response to a losing bet is to double-down on the next bet because the house (the Fed) will amply reward every "buy the dip."

After decades of being rewarded for "buying the dip," all the gamblers in the casino believe they are "investors": magical thinking at its most dangerous. Gambling is not investing, and every dollar, yuan, yen and euro being plunked down on a table in the casino is a gamble, because the entire casino is on unstable quicksand.

The gambler who's constantly been saved naturally reckons they're an "investing" genius. Having only experienced winning, the delusional punter attributes this grand success to their own brilliance and trading moxie. They feel invulnerable because they have the winning strategy: but the dip, double-down and ride the next wave of gains.

This feeling of invulnerability is exquisitely dangerous because the punter believes the experience of winning is the consequence of his brilliance. Having never experienced any real losses or hardships, the punter doesn't understand that the winning was the result of the Fed saving all punters from the consequences of speculation.

Having been saved at every turn, the gambler has no real-world experience of risk. Lacking the ability to accurately assess risk, the gamble keeps upping the size of his bets because this has been rewarded.

So when the gambler ends up juggling lit sticks of dynamite, he's confident nothing bad can happen because nothing bad has ever happened, no matter how much risk he takes on. This is the plight of all the gamblers who see themselves as "investors" in the Everything Bubble. Their experience has been artificially limited by the suppression of risk, but they are unaware of this and so their invulnerability exposes them to catastrophic losses they don't even recognize as possible, much less inevitable.

As I often point out here, risk cannot be extinguished, it can only be transferred. Risk has been offloaded from speculators to the entire financial system itself, and so rather than a few speculators going down in flames, the entire casino will collapse.

Although we pride ourselves on being so smart, we only learn from hardship, loss and failure. The Fed and the Savior State have deprived the speculators of the means to learn how to accurately assess risk. Making matters even worse, they've encouraged the delusion that rampant, disconnected-from-reality speculation is actually "investing."

As I also point out here, systems have their own dynamics. The Fed and the Savior State are not omnipotent gods. They have constructed a flimsy facade of marketing, magical thinking and artifice, and this system of falsehoods is manifesting dynamics that have escaped their control.

Every gambler prays for every bet to be a winner. As Oscar Wilde observed: "When the gods wish to punish us they answer our prayers."




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