Mistakes become mistakes only in hindsight. The mistake I made, for example, in believing in the transitory aspect of inflation stems largely from not anticipating the extended nature of the global supply issue, sure, not helped by the war in Ukraine. I also made a mistake not investing in crypto.

Did Fed forecasters really make the same mistake on inflation? I am not sure. Regardless of what they said in public, a big driver in their decision-making process must have been the recency bias: after more than a decade of unsuccessfully grappling with disinflation, the right risk-return strategy was ‘to give inflation a chance’. And now the Fed is onto a different ‘recency bias’: having gone through the painful experience of the 1970s, the right strategy for them is to kill inflation at all costs.

That’s how decisions are made in the policy world: not based on actual forecasting outcomes but on protecting awful tail events from ever happening again. To a certain extent that’s how we also make decisions about things which concern us personally, even though we employ more of a barbel strategy: long both tails of the distribution tree.

Take crypto and the recent developments as an example. See this story. I would say, no, the majority of the people who invested in crypto were not stupid. Most were actually quite rational but lazy. Others, though, were irresponsible.

Private investors who invested a small single digit % of their wealth in crypto were logically simply playing the lottery ticket odds. VCs, which also invested a small % of their assets in crypto entities, were also, but they were lazy to do the proper due diligence.

In both cases, the decision-making process was mostly driven by aiming to hit the right-hand side (positive) tail-risk outcome. The risk-return was skewed to do that. Strictly speaking for the former that was the right decision; the latter should have done the work though. Either way, there was no risk in this case of ever landing on the left side of the distribution tree.

And then there is the third group, the pension funds, and the likes, who were simply irresponsible – they had no business investing in crypto. I think that is where one should search for accountability.

But, sure, there were perhaps some people and entities who invested the majority of their net wealth/assets in crypto. I may be wrong, but I think that is a small % of the overall money pool in crypto. And yes, they were perhaps stupid because the left side of the distribution tree was wide exposed.

I never invested in crypto. For that matter I do not remember ever buying lottery tickets in real life (though I have been the proud owner of many deep out-of-the money options which expired worthless…and a few which hit the jackpot). But to go back to inflation, I did manage to lose money being long bonds in this late cycle. I was too ‘lazy’ to do the proper ‘due diligence’ on the fundamental drivers of inflation. But once the war hit in late February, and sanctions followed soon thereafter, it all became clearer.

It was largely because I had done extensive work on the nature of low rates that I knew their gig was over. To quote from the link above: “[We] must be cognizant that a switch to higher rates will most likely only happen after the economy has first gone through one or a combination of: social unrest, debt jubilee, large increase in the money supply or natural disaster.” It turns out that we kind of almost went through all of them: war in Ukraine, student debt forgiveness initiative, yes, massive increase of the money supply, and climate change worries.

What is the right decision to make when it comes to investing now? Well, if the above framework is right, one has to acknowledge the effect of a higher rate environment not just on asset valuations but also on the incentive structure which retail and professional investors are facing in this environment. At this point, it is the second and third order effect of higher interest rates which matter, i.e., staying short bonds is now a decently negative carry trade with low risk-return profile.

Oh, yes, also, always keep small change to buy lottery tickets: in Bulgaria, where I originally come from, the slogan of the National Lottery under communism was “evert week, with a small amount”.