"Hexapodia" Is the Key Insight: by Noah Smith & Brad DeLong

PODCAST: "Hexapodia" is þe Key Insight! XLIII: Crypto Fraud! Edition

Nov 17, 2022

53:48

Pre-Note:

One thing we did not get into was the relationship between the claps of FTX and the associated fraud and “Effective Altruism”—Effective Altruism not so much as a philosophy, but rather as a doctrine preached by a life-coach.

If you want to have the highest chance of becoming rich, you make your bets as if you had a logarithmic utility function: if the downside to a bet cuts your wealth in half, you will not accept the bet unless the upside more than doubles your wealth. Accepting bets more risky than those that satisfy this Kelly Criterion, even though the gain exceeds the loss, will ultimately make you bankrupt and out of the game with very high probability and absolutely, filthy rich with very low probability.

Effective Altruism tells you not only that you can but that you are under the strongest moral obligation to make such riskier-than-Kelly positive expected-value bets. The question, then, is what you do when the overwhelmingly likely bankruptcy takes place. And then the answer is often: the customers money was just sitting there, so we can borrow it to successfully gamble for resurrection, and then pay it back soon.

Noah, however, is more cynical than I. He thinks there is a moderate chance that SBF, CE, and company are still very rich dudes indeed…

Key Insights:

* Future hypothetical Web3 good, perhaps, if there ever is a use case…

* Web3 as currently existing not good—a fraud opportunity and a strongly negative-sum arena for grifters and loosely-wrapped gamblers…

* Being a greater fool and buying crypto—not good…

* SBF & CE & company may well still be very rich dudes…

* Trust Vitalik Buterin, probably—but perhaps Noah is himself subject to affinity fraud…

* Hexapodia!

References:

(Best to read these in order!)

* Tracy Alloway & al.: Transcript: Sam Bankman-Fried and Matt Levine on How to Make Money in Crypto…

* Sam Trabucco (from April 2021): ‘Two years ago, Alameda maintained pretty strict delta neutrality…