You might think the GameStop saga has run its course, and it’s time for a something new to mildly divert us from the everyday horror of reality. $GME has gone from ~$35 to ~$350 to ~$65, the villains have turned out not so villainous (Robinhood wasn’t conspiring with hedge-fundies in some sort of capitalist class solidarity); the heroes not so heroic (with much more money and sophistication than most of us); the think pieces, maybe, have all been thunk.
But I think there’s still things to be learned from GameStop, and from the pandemic retail options trading phenomenon in general. The reason for this is simple and should be accepted across the political spectrum: money is a massively important determinant of our lives, and so by looking at weird money stuff we might learn about life. So here, I’ll suggest: we can learn things about that the nature of belief, desire, rationality, and so on, big picture things that philosophers as opposed to economists or pundits care about by focusing on certain features of contemporary economic reality. In order to do that, I want to read Dostoyevsky’s The Gambler alongside some intro material from economics textbooks. Taken together, one of the fathers of existentialism and the maths-heavy finance bro textbooks gives us an interesting picture of the world and we who live in it. We’ll start with Dostoyevsky.
Dostoyevsky’s Gambler (Игрок, which etymologically connotes gamer; I had hoped it was the word used for (video)gamer in contemporary Russian, but disappointingly that seems to be геймер) can be read as sort of a reductio of the homo economicus character econ 101 presents us with. That character acts rationally to maximise his utility, in a broadly consequentialist way, and while the book predates the flowering of neoclassical theory by a couple of decades, when Dostoyevsky was writing utilitarianism was the latest fad, and Gambler can be seen as developing the argument against the picture of the human that utilitarianism found in other works by Dostoyevsky (which I discuss at way-too-long length here).
Before getting into the details of that, a bit about the book. Inspired by Dostoyevsky’s own gambling addiction, it tells the fortunes of an extended family and some of its hangers on, creditors, and love interests, living and gambling (in one way or another) in a German spa-cum-casino hotel. The protagonist is a tutor for the family, in love, maybe, with the daughter. The father is broke and in debt, and urgently hoping for the death of his aunt, so that he can pay his debts off with his inheritance; he sends telegrams to St Petersburg each day asking if she’s dead yet, as the tutor tries to work out what the daughter feels for him.
The pivotal moment of the book is when the aunt turns up, unexpectedly and very not dead, at the hotel, destroying, with her presence, the hopes of the father to get out of debt. Quickly and senselessly, she becomes hopelessly addicted to roulette, losing the father’s inheritance in a matter of days, and making the family and para-family come unstuck. The tutor, too, is hopelessly addicted to gambling, quickly amassing a vast fortune before a jump cut finds him in debtor’s prison. There’s some romance intrigue but, at least to this reader, it’s not very good.
The merit of the book is in its descriptions of the personality of the gambler; to the extent that our contemporary r/wallstreetbets inhabitors are gamblers, the book might help us understand them, and thus the moment we’re living through.
Of course, that gambling and high (or, in this case, low) finance go together is hardly an original sentiment. A pretty common narrative of the 2008 crash is that the fancy derivatives traders gambled on the housing market, with as much rationality as the roulette player (but more maths), only, like a father helping his online-poker-addicted child, to be bailed out by the taxpayer when things went wrong. But that’s not the sense of gambling I’m interested in. Instead, the picture of the gambler from Dostoyevsky consists, I think, of three things:
- The Gambler will lose
- The Gambler’s means will be extremely volatile, zigzagging high and low before hitting 0
- The Gambler pretends there’s order to their wins and losses as opposed to mere chance
Plausibly, 1 doesn’t hold of the 2008 people betting others’ money on fancy derivative products: they’re probably most all doing fine (I don’t know about 2), and 3 probably does hold, of which more later.
Dostoyevsky presents a compelling picture of the gambler meeting all these conditions. On his first go at the casino, he goes from 1000 to 1600 gulden (I think that the exchange rate is very roughly 1 gulden to 10 euro, but am very unsure about this), with the ‘sort of sick feeling’ (the English text is here) that tends to accompany hyperstimulating things. Next time, having made 4,000 gulden in five minutes, rather than, as is logical, departing, he decides literally–and very on brand for a Dostoyevsky character–to irrationally tempt fate, and loses it all. Things are even worse for the aunt. In the space of a day or so she blows through vast amounts of her fortune, reshaping the lives of her nephew and herself, having initially won big by betting successfully on 0.
So: the book portrays, up to its end with the protagonist broke and alone, 1 and 2: the gambler loses, eventually, but will win big before doing so. In a later section, I want to ask the question: what does it do to a person’s sense of identity to be now rich and now poor? But let’s continue with the book.
As for 3, the hero thinks sees the other gamblers idly believing there be an order in the chance:
It seemed to me that calculation was superfluous, and by no means possessed of the importance which certain other players attached to it, even though they sat with ruled papers in their hands, whereupon they set down the coups, calculated the chances, reckoned, staked, and–lost exactly as we more simple mortals did without any reckoning at all
This theme recurs: the aunt sees order where there is disorder and randomness: the 0 must come up; when it doesn’t, the croupier is to blame.
The important point is that for Dostoyevsky, life is gambling. Human nature is such that out lives are to a large extent unintelligible, wildly susceptible to post-hoc rationalizations. This is one of the compelling themes of Dostoyevsky’s fiction, that human activity isn’t subject to an order, but that we are prone to impute one to it.
This is perhaps best seen when looked at in conjunction with his Notes From Underground from around the same period. That book is an extended diatribe against the idea that there are laws of human nature following which will lead inevitably to one’s advantage, the sort of laws of moral arithmetic the utilitarians put forward (you know, divert the trolley to hit the five instead of the one). He thinks that the notion makes no sense, because we’ll always prize the sheer arbitrariness of free action above any set of rules:
one’s own free unfettered volition, one’s own caprice, however wild it may be, one’s own fancy worked up at times to madness — is that very “most advantageous advantage” which comes under no classification and against which all systems and theories are continually being shattered…what man wants is only independent volition, whatever that independence may cost and wherever it may lead
For Dostoyevsky, at the heart of life is this arbitrariness, this unlawlikeness, and it’s for this reason that gambling is so attractive for him (both as a novelist and a person, as he was addicted to gambling and indeed wrote the novel to repay a gambling debt).
That’s all very well, you might think, but what does it have to do with GameStop? In order to answer that, let’s move from 19th century existentialist literature to economics, because the interesting thing is that we can see played out in the contemporary economy the same clash between order and randomness.
At the heart of the ideology and theory of stock-picking are two prima facie inconsistent, and only with great mental cortortion ultima facie consistent, principles: the efficient market hypothesis, and the viability of so-called technical and fundamental analysis. The efficient market hypothesis has it that in markets for goods that meet certain standards (such as being well traded-in), the prices determined by collective actions of individual buyers and sellers comes to reflect all the available knowledge about the good bought or sold.
A consequence of this is that future prices are unguessable. If they were guessable, then there would be a disconnection: a putative future price that takes into account the guess that diverges from the current price. If that were so, then current price+guess=future price. But current price includes all knowledge, so includes the knowledge of the guess, so current price+guess must = current price, and so no edge can be got.
Of course, people don’t seem to take this seriously, thinking that they can come upon that magical piece of knowledge somehow not already impounded in prices. And, just because it’s funny, I want to present an example.
According to the idea of Fibonacci retracement, the path in the short term that a stock can take, up or down, sometimes follows the golden ratio. This is a particular relationship that pairs of numbers a and b can stand in when the sum of the two, divided by the larger of the two, is equal to the ratio of the two, which equation can rearranged and solved for the value 1.618 (ish).
This number, bizarrely (and allegedly), is present in nature: the arrangement of pettles on same plants, for example, are in accordance with the ratio, and it’s also pleasing to us aesthetically, which has led famous architects to use it when designing buildings.
So, you might think this number is somehow magical and special; and maybe it is. Where it gets funny is that people think they can find in the movements of a stock’s price the golden ratio. In particular, if a previously relatively range-bound stock price suddenly jumps to a new level, it will often go back to the intermediate zone it jumped over, and people think that one of the places it will go back to 61% of the higher level price. That is to say: people think that just as plants and pretty buildings follow the golden ratio, so do stock prices! The beauty and strangeness of the applicability of maths to the world, one of the greatest puzzles there is, holds just as well on Wall street as it does in nature.
Now, maybe this isn’t complete bullshit, at least for the reason that it could be a self-fulfilling prophecy, but hopefully at least at first glance it’s an indication of the existence today of the attempt to find order in randomness Dostoyevsky so clearly noticed in his gambling addicts.
Volatility and the Self
Let’s now consider the second feature of the gambler I mentioned: the zigzagging quality of their earnings. The first thing to note is that it is so wildly divorced from our experience as to almost seem fictional. Most of us are used to, at best, very slowly accruing money, at a standardish speed. We are not used to being rich one minute and poor the next. But a question is: what would a person be like who was rich one minute and poor the next?
And I think the answer is: incoherent. Here’s one way to think about it. It’s intuitively pretty obvious that our desires are shaped by what is available to us, and that in turn more or less means what is affordable to us. I can afford new books relatively often, new computers very seldom, a fancy house never and so even though I might get some enjoyment out of a new computer, and great great enjoyment out of a house, I don’t never consider the latter, and seldom the computer, as a possibility for me.
But it’s not just stuff. Whether we can start a family, attract a person we want to, help our loved ones–all of these facts, fundamental facts about who we are and what we value, are to a greater or lesser extent determined by how rich we are.
And so if the facts about how rich we are changes rapidly, then the fundamental facts about who we are will also change rapidly, and will lead, I think, to a sort of incoherence in our selves. We won’t have any abiding nature, any set of goals and plans, but our nature will change literally on the spin of a wheel or a tweet of Elon Musk. And if that happens, to a good extent, we cease to be what we understand as human beings. Whether or not you like it or hate it, money opens and closes possibilities, and so the gambler, so utterly unlike us with regards to money, is a different sort of human being. And if it’s true that many people are gamblers today, then among our midst are many aliens.
I will draw one final consequence for this in the section following the next one, but I want to take a brief detour. I have floated the possibility that our rank and file redditors are misled and alien beings, and are so owing to, to a large extent, the baneful influence of gambling. But I haven’t said what exactly their gambling consists in. It’s worth briefly looking at this, because it suggests another existentially significant aspect–this time a positive one–of contemporary financial life.
The uncertainty of the future is one of those fundamental features of human existence that we as philosophers or potheads (or both) get worked up about. It makes us think big thoughts, about fate and existence and blablabla. What I want to argue here is that the options redditors use for their bets are very different from spins of roulette wheels, and that anyone who cares about the future, even if completely disgusted by the financialisation of the economy, should attend to them, and take inspiration and maybe even hope from them.
The future is uncertain. Or rather, the future is sickness, old-age and death, but for many of us those are aways away, and most of us have a period in between today and sickness, old-age and death whose outcome we’re curious about. Maybe it’s whether the person will agree to go out with us, whether the job will continue, whether an editor will accept our writing or sit on it forever, whether they’ll bring back Last Man On Earth (which they really should given its pandemic prescience). These decisions take up a lot of mental space.
The options market provides a way, in theory, for mutually ambivalent people to come together to enable some people to make the future more certain and others to profit for letting them do so. I think that inherently making the future less uncertain for people is about as grand a goal for humankind as can be conceived, and that alone means we should pay serious attention to what options actually are.
To see this, let’s take an example. Imagine your livelihood depends on the price of some good–to make things nice, let’s say it’s something you use to make a product that you sell. It so happens that the good has kept on getting cheaper, making your profits better and better, but you’ve heard rumblings the price might shoot way up next year. That worries you: you’ve got a whole budget, employees, rent, and so on, to take care of next year, and this price rise threatens not only to remove all your profit, but even to keep paying people.
You can use options to mitigate that risk. If the current price of the good is n, you can buy the right, but not the obligation, to buy more of the good in six months for n (or for any price, but if you want to buy the right to buy it for like $1 or any other tiny amount, that right will be expensive). There are then two salient possibilities: the rumblings are right, the price shoots up, to n+B. If you had to buy at n+B, your business would go under, but you can then use your option to guarantee that the highest price you’ll need to pay is n, thus that, provided your bookkeeping is accurate, your business stays afloat.
By contrast, imagine that, as in the past, the price continues to fall, so that come six months it’s n-M (a medium amount). You can then buy it for n-M: you don’t bother to use your option to buy at the more expensive price n. The option proves useless, but you benefit from the typical price fall.
What this means is that you’ve took action to reduce the risk and thus made your future and that of your business and its employees more secure.
Now consider the other side. If you bought the option, you must have paid for it, and someone must have sold it. But why would someone do that? After all, imagine the bad scenario eventuates, whereby the price goes to n+B. It would seem as if the seller of the option would have to buy the good for n+B then immediately sell it to you for n. Buy high sell low–not great!
Of course, the option seller does indeed sell you the option: they get some money. But the risks should be obvious: at most the option will cost you a finite amount, but the price of the good, theoretically, could become n+∞, and so the option seller takes a finite reward for a potentially infinite risk. Why would they do that?
They do so because there are methods to hedge against this risk, and the mathematical theory of options is in part of a theory of how to neuter the risk of liabilities like options. I lack, alas, the mathematical competence to explain that theory to you (I had planned to use a toy binomial pricing example, but ran out of time. You can read about it here, and it doesn’t require mathematical sophistication), but the idea, roughly, is that the options seller, while selling you your option, can buy the underlying good at its current price. If the good’s price then massively rises, they profit from their holding of the underlying good, and can just return to you the good in six months, having lost no money. Moreover, an options seller will sell options professionally all day every day, and moreover they will sell you the option for slightly more than its fair value, and buy it back from you at slightly less than its fair value (the fair value being given by the mathematical theory). By selling dear and buying cheap all day every day, they can make a tidy profit while, provided they’ve hedged as above, managing to absorb your risk without taking risk themselves: the risk, as it were, has disappeared.
I think there’s something magical about that, and in any domain where we face risk, we should see if we can make that disappear (in my day job, I am an editor, which is essentially about allocating resources in an efficient way and have tried to think about how options theory could help here).
That said, I can imagine a reader not being impressed. I’ve just described, you might think, insurance, and if there’s one thing that insurance isn’t, it’s magical. But I disagree–insurance, if it works properly, is magical, and finding ways to insure ourselves is something that we should all care deeply about. The welfare state, after all, is insurance against the five giants of want, disease, ignorance, squalor, and idleness (to use the formulation from the Beveridge report). For my money, a workable welfare state is something we should all aspire to, and if it takes options theory to turn our heads towards it, so be it. Here again I think the world of finance opens our eyes to matters of existential–here political–significance.
There’s one final, kind of unserious, twist in what I want to say. I argued above that the gambler is incoherent: that because our fundamental nature is partly a function of our desire, and our desire a function of our money, if the money we have zigzags up and down, so does our nature. I want to zoom out from these speculations of personal psychology to end with the thought that generations exhibit a sort of inter-generational incoherence. Look at this:
Since at least William Strauss and Neil Howe’s 1991 book Generations, we’ve liked to talk about generations and their relations and conflicts: we readily speak of Gen Y and millennials and boomers and their respective bad qualities. This plots inflation against time in the last hundred of so years, which is to say throughout the lifespan of the above generations (and a couple more).
It is volatile. And inflation, I think, has a similar desire-shaping effect as the gambler’s zigzag: by obliterating savings, by making exports dear, it changes people’s wealth and with it their desire.
If this is so, then just as the earlier argument would suggest that for the gambler, there is no coherent self, so for the human species as a whole, buffeted by inflation across the century, there is no coherent nature, and that looking back, say, to our parents from the high inflation 70s we are looking back at a different sort of being than we are, because a sort of being with a different relationship to money, and so a different space of desires and possibilities, and that trying to speak in one voice of human nature is as misguided as Dostoyevsky thinks.
On that wildly speculative note I want to end with the lesson: money matters, and we should pay more attention to how it shapes us.