Today’s note, “A Dogmatic Slumber”, examines the enormous challenge that the Common Knowledge game poses for the dominant ideas and Narratives of how markets work. All of modern microeconomic theory – ALL of it – is based on the assumption that individuals make independent investment decisions based on their self-interested evaluation of the world. The Common Knowledge game, however, forces you to ignore your own opinions about the world in favor of a crowd-generated reality. It creates a collectivist dynamic that makes all of our small-l liberal ideas about markets much less useful. If you think that the stock market highs aren’t justified by company fundamentals, but you feel compelled to go along for the ride, then you’re experiencing what I’m talking about.
Some investors will choose to get out of the market until a “normal” investing environment magically returns. Others will choose to embrace the party line and not only act as if the Emperor is wearing a beautiful set of clothes, but actually convince themselves that it’s true. I want to suggest a third path, where one maintains a healthy skepticism and independence of thought, but recognizes that social and technological inventions have created a permanently altered market where you must understand these collectivist dynamics to be successful. Recent game theoretic work in evolutionary biology and linguistics provides an excellent perspective for understanding these population dynamics, and it is the foundation of a concept I’m calling Adaptive Investing. I think it will tie together the various strands I’ve been writing about over the past 6 months, and I hope it will be useful to investors and allocators alike.
This note is the 5th long-form weekly note in a row, and the 8th in 9 weeks. I need some time to take a deep breath, and these notes need time to breathe, too. Also, the website needs a good scrubbing and reorganization. I’ll be back with at least one long-form note before the end of the year, where I’ll introduce the Adaptive Investing concept in more detail, but it will be towards the end of the month. In the meantime I’m sure I’ll send out a short email or two on current events (I can’t help myself).