Epsilon Theory is Dr. Ben Hunt’s ongoing examination of the narrative machine driving human behavior, political policy and, ultimately, capital markets—an unconventional worldview best understood through the lenses of history, game theory and philosophy.
Ben’s originally from Alabama but now lives out in the wilds of Fairfield County, Connecticut, on a “farm” of 44 acres. While his pre-electrification, dairy farmer grandfather may’ve laughed at his calling his modest spread a farm, Ben’s learned a few things over the years from the farm and its animals, and they’ve helped him become a better investor. Here are his notes from the field in this regular Epsilon Theory feature.
From our A-Team of seasoned subject matter experts, the Narrative is an evolving stream of perspectives and insights on a broad range of financial subjects and asset classes. Please read, enjoy and share.
To understand the impact of catalytic narrative forces, we have to monitor the vital signs of the capital markets they affect. To analyze the big picture through the lenses of game theory and history, we must also examine the details through lenses like volatility, momentum, income, correlation and inflation. These are the indicators of systemic vitality and stress—the fine details we use to fine-tune our worldview. We hope they help you sharpen your understanding of the investable universe.
Dr. Ben Hunt hosts the Epsilon Theory podcast with co-hosts and special guests from financial services, the financial media *gasp* and beyond. The Epsilon Theory podcast is the quickest way to get all of the unconventional perspective, historical context and narrative analysis you’ve come to expect from Epsilon Theory pumped directly into your head.
We’re growing our family of Epsilon Theory contributors to include a broad range of voices on an evolving range of subject matter. If you listen to the podcast, you’ll recognize some of the names as colleagues, partners and friends of Ben from Salient, any number of past lives, and the growing circle of outspoken truth-seekers in financial services and beyond.
Epsilon Theory author Dr. Ben Hunt is frequently quoted in print, radio and TV appearances.
Salient Partners is the proud parent company of Epsilon Theory. Salient is a diversified asset management firm and leading provider of real asset and alternative investment strategies for institutional investors and investment advisors.
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Complex Systems, Multiscale Information and Strange Loops
As part of the ET 2.0 expanded sandbox, I’ve asked Neville Crawley to write a weekly-ish “Down the Rabbit Hole” column with his observations on what he calls Big Compute, I call non-human intelligences, and the rest of the world calls AI. This is the biggest revolution in markets and the world today.
Neville will be publishing under his own byline in the near future — his commentary continues below.
Neat and accessible primer on complex systems, multiscale information theory and universality by Yaneer Bar-Yan, and a related paper on the conceptual applications of the same topic: From Big Data To Important Information (suggest start reading from section VII if you read the primer, and from sub-section D on page 13 if you just want the markets application).
Lots of buzz about Google’s AutoML announcement at the Google Annual developer conference I/O 2017 last week. AutoML is machine learning software which takes over some of the work of creating machine learning software and, in some cases, came up with designs that rivals or beats the best work of human machine learning experts. MIT Technology Review article on AutoML.
Also lots of buzz around one-shot imitation using two neural nets, as demonstrated by OpenAI. Personally, one-shot imitation is the one AI-type concept which gives me the fear. But if Elon’s supporting it then it must be OK… right? One-shot imitation paper here but, more to the point, watch this video and tell me you are not at least a little bit afraid.
The power of the platform
And to the practical applications of technology, I really like the language of this recent press release by Two Sigma CEO, Nobel Gulati, and particularly the paragraph:
Moving forward, durable advantages will to accrue to those building a substantial platform based on massive amounts of data, along with the technology and institutional expertise to use it. Building such a platform requires significant and ongoing investment in R&D, and a fundamentally different culture and mindset to apply a scientific approach to the data-rich world of today.
Personally, I believe that the 2020s will be more defined by big compute than big data but this is, nonetheless, a powerful statement and language, and there’s a key implicit point buried in here on the cultural balance of ‘researchers’ (math and physics natural genii) and ‘production engineers’ (coders who, by nurture, have seen and solved many practical problems). Specifically, how the majority of quant funds have to-date been culturally focused too heavily on the math genius research folks to the detriment of hiring and rewarding the more workmanlike practical folks who can build and maintain a substantial platform which, I agree, is the new durable advantage.
I was reminded last week by China’s censorship of Google’s latest AlphaGo win against Ke Jie just how substantial a stance it was when Google shut down its Mainland search engine in 2010 and why these kind of bold moves (bets) are essential to developing a truly winning technology company (and also why I don’t live in China anymore!). As Rusty Guinn has written about: A man must have code.
Finally, to bring us back up to the level of self and consciousness, I finally got ‘round to reading Douglas R. Hofstadter’s 2007 bookI am a Strange Loop. A long, winding and compelling book summarized by the quote “In the end, we are self-perceiving, self-inventing, locked-in mirages that are little miracles of self-reference.” If you dip in and only read one section, read the section on simmballs in Chapter 3, which loops us back to where we started this column on multiscale information.