“A lot of people in our industry talk about pattern recognition as a positive attribute. We actually talk about pattern recognition as a negative attribute. It actually prevents you from seeing the world differently. It prevents you from seeing what the world can be.”
“Rules are things that we learn as adults. And in reality, when you’re younger, you’re completely unconstrained with regards to the ways in which you see the world. And I actually think naivety is such a powerful thing.”
“Rick Rubin has this incredible line in his book, which is pay attention to what you notice that no one else sees. Rules are limitations. Rules, artists learn, are assumptions. They’re not absolutes.”
The moment risk is put on in a trade, we are tempted to think about it differently. This shift in thinking is not emotional, based on how well or poorly the trade is going; it is about how we become less receptive to new ideas, even though we feel like we are consuming every piece of information about the market.
This shift in thinking is similar to reading a book. You can read for twenty minutes, taking in the words without listening to what they are saying, and realize you have to go back and read it properly. You can also read a book looking for one specific piece of information, and read so intently for it that you begin ignoring everything that is not that piece of information, which leaves you less receptive to any of the other ideas in the book.
When a view of the world is expressed with actual risk-taking, there is a dramatic pull to become less receptive to new ideas and tunnel vision on only the information that is relevant to the specific place we feel the most pain or reward.
If you trade in markets, you will always recognize patterns, but that doesn’t mean you’re being receptive to experiencing clarity and differentiation that comes with new ideas. I shared the quote above from Josh Kushner on this idea, where pattern recognition has become the defining characteristic of the “reverse-engineered principles” we are fed every day for “success.”
The podcast Josh did was one of the best I have listened to in a while (and truthfully, I don’t listen to many these days). One of the ideas that I have been thinking about is realizing how people (myself included) will shape how they interpret the world around their own rules of risk tolerance and risk management, instead of being part of the process of how the market and economy are evolving and creating the best work possible in that process.
It sounds counterintuitive because it is.
Examples of pattern recognition limiting you from your best work:
Reverse-engineering the social media algorithm: Studying what the feed rewards and reshaping the creative focus around it. The algorithm can only reward what has already been seen and is efficient at doing it. Social media as a medium is incapable of rewarding you for focusing on the unseen and what could be. It might reward you for creating your best work but won’t give you guidance into WHAT that work is or WHERE to start.
Following reverse-engineered principles: Identifying patterns and reverse-engineering principles from someone else's success in an effort to imitate them. Following them means someone else is your starting point for thinking when true art and monopolies are impossible to reverse-engineer despite their output appearing simple.
Building products around a pattern: Financial products are created around what has already been recognized. Leveraged wrappers, single-strategy hedge funds, concentrated retail volume, social media attention fixed on a few assets. None of them create anything new. They only amplify, and only when the move aligns with the rules they already follow. A product engineered from what the world was cannot express what the world can be.
Hedging the last regime’s risk: The risks expressed in 2008 and 2020 were deflationary credit events, so the hedges built afterward were built for that. Overhedging a risk pulls positioning away from it, which lowers the odds of the risk being expressed there at all. Then 2022 arrived with inflation, and stocks and bonds sold off together. The same error is running forward now. The 1970s have become the parallel for oil shocks, despite global trade, geopolitics, and the weight of oil in GDP being so different that a comparable transmission mechanism cannot exist.
So what are the things that no one sees right now? I want to cover three that I have been thinking about.