commonplace book redux

What capitalism is good at:

If I had to name the single epistemic feat at which modern human civilization is most adequate, the peak of all human power of estimation, I would unhesitatingly reply, “Short-term relative pricing of liquid financial assets, like the price of S&P 500 stocks relative to other S&P 500 stocks over the next three months.” This is something into which human civilization puts an actual effort. Millions of dollars are offered to smart, conscientious people with physics PhDs to induce them to enter the field. These people are then offered huge additional payouts conditional on actual performance—especially outperformance relative to a baseline.3 Large corporations form to specialize in narrow aspects of price-tuning. They have enormous computing clusters, vast historical datasets, and competent machine learning professionals. They receive repeated news of success or failure in a fast feedback loop.4 The knowledge aggregation mechanism—namely, prices that equilibrate supply and demand for the financial asset—has proven to work beautifully, and acts to sum up the wisdom of all those highly motivated actors. An actor that spots a 1% systematic error in the aggregate estimate is rewarded with a billion dollars—in a process that also corrects the estimate. Barriers to entry are not zero (you can’t get the loans to make a billion-dollar corrective trade), but there are thousands of diverse intelligent actors who are all individually allowed to spot errors, correct them, and be rewarded, with no central veto. This is certainly not perfect, but it is literally as good as it gets on modern-day Earth.[…]

In the thickly traded parts of the stock market, where the collective power of human civilization is truly at its strongest, I doff my hat, I put aside my pride and kneel in true humility to accept the market’s beliefs as though they were my own, knowing that any impulse I feel to second-guess and every independent thought I have to argue otherwise is nothing but my own folly. If my perceptions suggest an exploitable opportunity, then my perceptions are far more likely mistaken than the markets. That is what it feels like to look upon a civilization doing something adequately.[…]

Efficiency vs Inexploitavility vs Adequacy:

So the distinction is: Efficiency: “Microsoft’s stock price is neither too low nor too high, relative to anything you can possibly know about Microsoft’s stock price.” Inexploitability: “Some houses and housing markets are overpriced, but you can’t make a profit by short-selling them, and you’re unlikely to find any substantially underpriced houses—the market as a whole isn’t rational, but it contains participants who have money and understand housing markets as well as you do.” Adequacy: “Okay, the medical sector is a wildly crazy place where different interventions have orders-of-magnitude differences in cost-effectiveness, but at least there’s no well-known but unused way to save ten thousand lives for just ten dollars each, right? Somebody would have picked up on it! Right?!”[…]

Eliezer Yudkowsky, Inadequate Equilibria, 2017