Thursday, April 18, 2013

The Hyena and the Wildebeest

Ray Dalio is a hedge fund manager with a ten figure salary. He wrote a personal manifesto, ‘Principles.’ In it he describes his philosophy, which he believes was the guiding light that helped him overcome adversity and become the 28th wealthiest person in America.  By ‘adversity,’ I am referring to the misfortune of being born into the middle class. As a boy he disliked school, because he couldn’t abide by being forced to remember what other people wanted him to. He didn’t do well in college. So this is why, when you casually Google the name, you may see Ray Dalio listed among the fabulously wealthy who “started with nothing.” And that is important to all of us who find comfort in rags to riches stories. But none of his early privations stood in the way of Mr. Dalio obtaining an MBA from Harvard Business School.
Mr. Dalio Offers his Advice

In his manifesto, Dalio writes, “When a pack of hyenas takes down a young wildebeest, is this good or bad? At face value, this seems terrible; the poor wildebeest suffers and die. Some people might even say that the hyenas are evil.” Then, he raises the rhetorical question, is the hyena truly evil? After all, “death ... is integral to the enormously complex and efficient system that has worked for as long as there has been life.” The hyenas’ behavior is “good for both the hyenas, who are operating in their self-interest, and in the interest of the great system, which includes the wildebeest, because killing and eating the wildebeest fosters evolution, i.e., the natural process of improvement.” 

So, in other words, it is in the hyena’s self-interest to eat wildebeests, and it is in the wildebeest’s best interest to be eaten. One could argue that the hyena is getting the better end of the bargain. 

Is it true that evolution is a “natural process of improvement,” and that what is “good” is that which brings improvement? Well, no. It was by the process of evolution that the Irish Elk acquired antlers that were up to 12’ across from tip to tip, which ultimately doomed the species to extinction because the Elk would inevitably become caught on trees. After sea turtles hatch, they instinctively move toward a bright light. Once, this light source was the moon. Today, it is just as likely to be the security lighting of a swank beach front home. So, evolution does not equate with improvement. This leads to the second part of Mr. Dalio’s argument: evolution does not incline toward what is good. It moves blindly in the dirt, sometimes leading to fortuitous outcomes such as homo sapiens’ large brain, and sometimes leading to ghastly situations, such as dead elk hanging from trees, or beaches strewn with the decaying remains of baby sea turtles. There is a lot of waste and inefficiency and pointless loss of life.    

As mentioned earlier, Mr. Dalio is a hedge fund manager. What, exactly, is a hedge fund manager? Ernest Hemingway described it as a “hermaphroditic self-eating devourer of the dead, trailer of calving cows, ham-stringer, potential biter-off of your face at night while you slept, sad yowler, camp-follower, stinking, foul, with jaws that crack the bones the lion leaves, belly dragging, loping away on the brown plain …” It communicates using feces. It will leave a white smear to communicate to others, “This territory belongs to my clan.” It will leave a black smear to communicate, “I’ve already eaten all the dead and wounded creatures around here, so don’t waste your time foraging here.” 

In more prosaic language, the hedge fund manager subsists on the “short position.” A hedge fund manager bets that a company will lose money. If he (or she) bets correctly, he earns a profit. Now, this is a fairly innocuous – although unseemly – practice. It is the hyena’s modus operandi. It bets on a particular wounded wildebeest that straggles behind the herd by staying close and waiting for an opportunity. But hedge fund managers don’t just wait for the outcome to play out naturally. The hedge fund manager starts a rumor that such-and-such a company is about to suffer losses, and as the rumor spreads, the stock price of said company goes down, and the hedge fund manager wins his bet.

Sometimes, a hedge fund manager will design financial products to fail, and then bet on their failure. "This was the game of choice before and during the housing bubble. We know for certain that hedge funds colluded with big banks to create mortgage-related securities that were designed to crash and burn, so hedge fund investors could bet against them. In fact, the hedge fund bettors designed the bets by assembling the worst mortgages they could find to place into the securities (source)."

Mr. Dalio teaches his protégés to be the hyena. To salve any pangs of conscience they might feel, he reminds them, “Like the hyenas attacking the wildebeest, successful people might not even know if or how their pursuit of self-interest helps evolution, but it typically does.” One need only trust in the fact that there will be a beneficent result of one’s self-serving behavior, and not presume to have the prescience to understand what that result might be. 

A Seeking of Wisdom
It is true, however, that wildebeests have adapted. Their instincts tell them to circle around their young, their weak, and their injured whenever the foul odor of a hyena is detected. The same is not true of the American people. We do little to protect one another. We do little to drive off the hyenas that prosper when the economy stumbles. Instead, we invite them to international economic forums, lionize them in financial publications, and listen raptly to their wisdom.

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