Feedback Loops and the Rise of the Low Wit Fraudster
SBF, Billy McFarland, Jho Low, Adam Neumann, and Elizabeth Holmes are just normies who got caught in virtuous feedback loops.
Émile Borel postulated that an infinite number of monkeys hitting keys at random on a typewriter keyboard for an infinite amount of time will eventually type the complete works of William Shakespeare.
I am now wondering whether an infinite number of trying different ways to get rich will eventually raise and lose all the dollars available for investment in our entire economy.
People raising money on fraudulent terms and frivolously blowing it isn’t new, but what seems somewhat new is how many idiots are doing it.
I’m not saying like idiots because they are engineering-types who misjudge the market by thinking people need a juicer with a monthly subscription fee, but idiots like dummies who have no idea what they’re doing. Slow learners who are incapable of complex abstract reasoning but have found themselves in a virtuous feedback loop where the more they pattern a behavior the more they are rewarded.
Some perspective on Fraud
Madoff ran across a high wire a thousand feet in the air, and kept it all in balance nearly perfectly for *decades* until there was no money left. He put an insane amount of effort into appearing legitimate even to all of those within his firm, constructing the black box of the 17th floor which ended being up nearly as complex as managing a successful hedge fund would have been.
The Enron team invented a unified natural gas distribution and trading system and digitized a newly-deregulated commodity. Then they were intelligent enough about the markets to realize the opportunity with electricity markets to make a killing. They made so much money trading and making trading commissions because they were really smart (and had very few scruples). Then they focused on pumping up their stock and faking their accounting and it all blew up.
The principals at Long Term Capital Management THOUGHT they had discovered alchemy. They weren’t trying to trick people into thinking they had discovered alchemy. If you gave me a few years to examine their math I don’t think I’d find anything alarming about it, it would all be above my head. Still, they were overconfident and it all got destroyed.
Nobody thought Bernie Ebbers was a nobel laureate but he founded Worldcom and grew it to a massive and profitable business before the dot com bust and he chose fraud.
Where all the Children are Below Average
Now we are seeing a new brand of fraudster. It’s just, people getting money one way or another, but the method of them acquiring this money creates in them a learning that, when followed, further increases their chances of raising money but, importantly, does not increase their chances of success.
Sam Bankman-Fried was hailed as a genius before he crashed and burned (The next Warren Buffett?).
I believe there’s enough evidence now to show that he’s not a smart person but was caught in a feedback loop where his fringe behavior, like “playing league of legends during an investor presentation while talking about FTX being the future of buying a banana” was seen as a reason to invest in FTX rather than run away from it.
So the next time that investors asked him about his margins he just talked to them about stopping pandemics, or the point of life, or altruism, and they gave him more money.
SBF acted like an autistic altruistic genius and the more he did the more money he was given. He was not autistic, altruistic, or a genius,
The most revealing part is that SBF played this video game, League of Legends, all the time, and was in the bottom quartile of players. He was really bad at the game, which (apparently, I’ll take Delian’s word for this) requires strategic thinking in order to be successful!
The entire Sam Bankman Fried episode is reminiscent of Elizabeth Holmes, who also built a reputation for being an off-the-charts genius before it was revealed she had no idea what she was talking about.
Everything Elizabeth Holmes did or said was inflated. She said she had a test that would disrupt an industry, she had a worthless patent and a dangerous machine that provided people with false negatives. She said she “picked up” Mandarin when the reality was that her parents paid for some Mandarin classes at Stanfurd.
Like SBF, she was an under-achiever until she got stuck in her positive-feedback loop. She was the worst long-distance runner on her high school team. A healthier habit than League of Legends, to be sure.
But then Elizabeth met the right sponsors and lowered her voice and dressed like Steve Jobs and was rewarded. So she acted more eccentric and lowered her voice further and raised more money.
Billy McFarland was a loquacious climber who didn’t know much about running a business. After a few failures he fell in with some people who rewarded the way he talked and his confidence, so he became more confident and dreamed bigger and kept raising money and raising his confidence.
Adam Neumann doesn’t seem like an idiot, but he was growing WeWork at a decent startup clip with Benchmark’s funding when he met Masa Son, who said he wasn’t crazy enough and needed to think bigger. Then the millions turned into billions as long as Adam kept coming up with crazier ideas. The incentive loop was almost guaranteed to blow up his company.
Jho Low, the thief from 1MDB, didn’t execute an Enron-style pump and dump based on a long track record of success, and he didn’t run a complex multi-year Madoff ponzi that allowed him to live the life of luxury.
The 1MDB scandal essentially boils down to him raising a billion dollars from a sovereign wealth fund and wiring himself a few hundred million dollars of it, then using that money to surround himself with celebrities and wealth for a few years, raising more money based on the prestige he was accruing.
The whole thing lasted 3-4 years and Low made almost no effort to keep it afloat near the end.
My point in all of this - we shouldn’t look too much at SBF, Elizabeth Holmes, Jho Low, Adam Neumann, or Billy McFarland as a way to interpret much about frauds.
All of these people are representative of the millions of people who are hustling to make it and willing to cut corners to do so. The only difference is that these individuals got stuck in a positive feedback loop that led them to blow up in a spectacular fashion. Studying them too much is a form of survivorship bias.
One Lesson We Can Learn
The lesson from all of this should be that we need to destroy the “prestige as a service” business whereby entrepreneurs can pay a million bucks to sit on a stage with Bill Clinton or Janet Yellen.
They can then trade on this prestige and legitimacy to raise more money, secure more coveted speaking engagements, and the loop continues.
The best way to end this cycle would be for those with prestige like Bill Clinton and Janet Yellen to stop selling their prestige to others. HA! Okay we won’t hold our breath.
The actual way this will stop is for the rest of the world to ignore when people pay for others credibility. Unless someone is a corporate officer or a fiduciary at a company, discount what that person says about a founder or a company to 0.
Tom Brady may have won a lot of super bowls, but he’s not a financial advisor. You may love Bill Clinton’s crime bill, but that doesn’t mean you should transfer that adulation to anyone who pays him to show up to an event.