“Sam, where you going, bro?” – a youtube clip that captures it all.
Skew View is a new series that will cover all aspects of our markets, and prediction risks in general, with a skeptic's eye.
When did you last feel sorry for Tom Brady? Handsome, talented, rich and we don’t even hate him for it. He’s a good man. Women love him, tough guys love him. Smart people fight to advise him.
He still made a disastrous risk assessment error that is going to be plenty ouchy. Can we learn anything from it?
Brady and his former wife, Gisele Bundchen, were far from the only people who came to regret their trust in Sam Bankman-Fried. But Brady’s case seems to be, well, almost pitiful. According to a report in the New York Times:
Brady and Bundchen accepted their fees for endorsing SBF’s FTX crypto exchange mostly in FTX shares, now worthless. (Accounting: minus $30m for Tom, minus $18m for Gisele, not a train smash in their world.)
Will still have to pay some tax on the valueless shares they received as part payment (cost basis determination not clear, but ouch.)
Are being sued by FTX customers because they encouraged investment in a product which turned out to be less than was advertised. (Just defending the case will hurt, losing could be terrifyingly costly)
… But what may hurt them most is the lost potential future endorsement income, as their influencer status is now surely damaged for some time to come.
Where did Tom’s risk assessment go wrong?
Investors try to separate risk from uncertainty and understand which is which. Risk we accept every day, it’s the bulk ore that carries the precious metal of opportunity. Uncertainty is something we try to research down to a minimum before accepting the risk.
So what failure of uncertainty research did Tom make? What error of cognitive bias underlies his imperfect judgment?
Let’s have a hypothetical discussion with him:
Q: Tom, why did you agree to endorse a crypto exchange?
TOM: Everyone was doing it! Matt Damon, Snoop, Shaq, Yachty, everybody? It was just a routine income stream for my crew.
Q: Why did you accept FTX shares as payment for your endorsement, instead of cash?
TOM: That’s what startups do, and that’s how you make money out of them — you take a share of a coming hit-show. Again, everyone does it.
Q: Do you believe that crypto is a real, real thing — investment, store of value, medium of exchange?
TOM: Everyone did! Bitcoin $60k, hello! Let me put it this way: if I got together with some guys, you were the idiot if you weren’t trading crypto on the exchanges.
The crypto mania arose from an almost perfect set of pre-conditions (see endnote for historical comps):
A period of rapid technological innovation
World wide political transition (Trump, Brexit, populism)
Zero interest rates
Rising inequality
Pandemic upheaval
Alongside crypto you had a full range of attendant hysterias. You had SPAC-mania… you had David Roaring Kitty slinging it to Goliath Gabe Plotkin… Ryan Cohen, AMC, GME yolo-ers… It felt like every component of our financial infrastructure was up for revolution and the kids were in charge of the guillotine.
Into this fevered arena strode Sam Bankman-Fried. I don’t want to kid about him too much, because I think what might be unfolding here is less a case of Madoff-type cunning than a tragic case of failed parenting, isolation, and a bizarre collision of delusion and opportunity. But you have to agree that SBF fits the bill.
When we are ripe for religious conversion, we don’t expect the messiah to look like a sensible bank clerk. We are completely open to the idea that she will be astonishing in appearance and method. She will toss aside the ten commandments, she will tell the Roman senators they’re full of shit.
The more she does it, the more plausible she is.
Humans who feel under-valued have a powerful emotional need for mavericks to disrupt the system.
In a time of stark income inequality, ordinary people feel under-valued and have a powerful emotional need for mavericks to disrupt the system. Nobody expects to make it via an ordinary job, there’s just not enough time for that. You have to be a game-changer, or ride with one. The latter is easier. So you look for them: you look for a “crazy genius”, the outlaw who has the map with the X on it, two guys in a garage in San Jose, Daniel Day Lewis drenched in the black gold.
In this state of mind we are willfully nourishing a lethal set of cognitive biases, selecting for outliers, treating warning signs as opportunity indicators, betting the farm.
The recurring word in our hypothetical interview with Brady above is “everyone”. If you hung out in Instagramville in the several years or so, and in the hot clubs, the top sports venues, all the cool kids were doing crypto. Also the uncool kids, like that rug salesman on Shark Tank and the guy who replaced your windshield. Everybody. There was a sense of security in the sheer number and diversity of people who trusted it.
Since Brady signed his FTX contract in 2021, SBF is just one of a parade of crypto promoters who have been reined in by regulators, fined by regulators, charged with criminal behavior, filed for bankruptcy, or are skulking behind a wall of proxy servers and intermediaries.
And people are still trading on crypto exchanges.
So I think the instructive point here is that Brady did not even think this was a risk – or an uncertainty – to be evaluated.
Due diligence? This is not a failure to do due diligence. This is a failure to recognize it as a situation that needed due diligence in the first place.
It may feel strange to us, but a person like Brady can suffer status anxiety. When you become a multi-centi-millionaire, you can still feel inadequate – in the company of multi-billionaires, who you’re now mostly hanging out with. Close the gap! When SBF came knocking, I’m guessing it was much more a case of fomo than fear of loss.
I’m sure there’s plenty of folks who will read this and conclude that Brady was an idiot. I am not among them. During the tulip mania in the early 1600s, sensible people bought a single perishable bud for the price of a house; a century later France effectively gave control of its entire economy to a gambler, John Law, who was not a member of the government, not even French, and was on the run from a murder rap in England. That turned out badly for France.*
Sometimes everyone in your world goes a bit crazy. At such times, crazy is normal for you.
What can you learn from Tom Brady’s experience? Well, that old Mark Twain (disputed attribution) thing for starters:
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Check your priors.
Notes:
* John Law overreached himself in that episode and had to flee France, but he is regarded by many as a financial genius on par with Milton Friedman. Jim Chanos also argued that he should be regarded as the founding father of New Orleans.
An excellent source on past manias and bubbles is Devil Take The Hindmost by financial historian Edward Chancellor.
Disclaimer: The opinions and perspectives presented in this article belong solely to the author(s). Kalshi does not provide investment or trading advice or make any other claim to the veracity of the contents described herein and provides this article solely for the convenience of its members.