Inherent Vice
June 22, 2015·0 comments·game theory
The dominant strategic interactions governing markets and geopolitics today are fundamentally unpredictable. They're not games where the strongest player or the one with the best data wins. They're games where victory goes to whoever signals the strongest will to accept mutual destruction. Understanding this gap between what we're told drives outcomes and what actually does requires abandoning traditional analysis.
- Forecasting models treat major conflicts as solvable through analysis of facts and capabilities. But some strategic situations have no mathematically determined outcome, only two equally plausible catastrophes. Recognizing which situation you're in matters more than predicting the specific outcome.
- The Fed's market communication works not through economic data but through signals of changed intentions.When the Fed accelerates, decelerates, or changes course, markets move on the change itself, not on whether the underlying economic fundamentals warrant the move. Speed of change, not absolute speed.
- Institutions win these standoffs by appearing willing to lose everything. Placing troops in a war zone where they're certain to die in case of invasion, or a political leader signaling he has "no choice" but to take a hard line, are more powerful than any show of military or economic strength. The game rewards constructed desperation.
- What determines the outcome is invisible and unobservable. True willpower, true commitment, actual intentions can never be directly verified. Players communicate through narratives and behavioral signals, creating an environment where even the most sophisticated analysis can't peer through the fog.
- When both sides stop signaling and start claiming they have no choice, the game enters its death spiral phase.This is when unpredictability transforms from manageable to catastrophic. Watching for the shift from "we might" to "we must" is the only early warning system that exists.
The Why of Epsilon Theory
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
