Cherry Orchard Instability Hypothesis, Part II
What The Cherry Orchard can teach us about risk: Something Human, Scanning for Errors in Your Favor and D-fense, D-fense, D-fense
“You know, I get up at five every morning, I work from morning till evening, I am always dealing with money--my own and other people's--and I see what people are like. You've only got to begin to do anything to find out how few honest, honourable people there are. Sometimes, when I can't sleep, I think: "Oh Lord, you've given us huge forests, infinite fields, and endless horizons, and we, living here, ought really to be giants.”
― The Cherry Orchard, Anton Chekov
Risk Developments this letter:
Something Human
Scanning for Errors in Your Favor
D-fense, D-fense, D-fense
Fools for the Future
Written in 1903, just one generation after the emancipation of the serfs, the creation of the Russian central bank and the first railroads, The Cherry Orchard grapples with the massive social disorder these changes wrought. For a synopsis and major themes see Part I from last week on debt, time and technology. To draw your attention to this social change, Chekhov creates a few younger characters, namely Lubov’s dead son Grisha, her adopted daughter Varya, her birth daughter Anya, and the former tutor turned revolutionary, Peter Trofimov. One of the few characters with a future orientation, Peter has one of the play’s most powerful lines:
“they owned living souls; and now, doesn't something human look at you from every cherry in the orchard, every leaf and every stalk? Don't you hear voices . . . ? To own human beings has affected every one of you--those who lived before and those who live now. Your mother, your uncle, and you don't notice that you are living off the labours of others--in fact, the very people you won't even let in the front door."
In contrast to the handful of young characters, there is only one old character, Fiers the footman. If you recall from last week, his plan to ship preserved cherries to markets in Moscow and Kharkov was possible under serfdom, but now that the serfs are free and have abandoned the estates, nobody remembers how to preserve cherries. There is no going back, and furthermore Peter is right to point out the inhumanity of slavery. Peter’s idealistic and moral appeal wins Anya’s affection, who is not the first or last anti-capitalist child of privilege. Varya, on the other hand, devout, loyal to a fault and too poor to become a nun, hopes to marry the capitalist Lopakhin. Wealth and privilege pairing off with socialist revolution. Capitalism leaving religion at the altar. The reactionary servant and the feckless elites. There isn’t even a proper antihero to indulge in.
This leaves the audience in a conundrum. What or who exactly are we to root for? Should we side with the ruthless and alienating capitalist, Lopakhin? How about the arrogant and insensitive communist, Peter? The maudlin and helpless, Lubov? Fiers, the serf who wishes he were never freed? Or Leonid, the playboy, who always seems to fall upward? No, the play has a most unlikely and comical protagonist, Simeon. The accountant for a broke family. The bumbling idiot who has read various remarkable books. The exception that proves the rule of Chekhov’s gun by brandishing one in Act Two, but never firing it.
This interpretation, with Simeon as the hero of the play offers a few lessons about risk. First, when you are trapped in the late stages of Minsky’s hypothesis, the damage has already been done. The tragedy was the lost knowledge of preserving cherries, not the freeing of the serfs or the inability to cover debts. All one can do in this case is cut your losses and laugh at your misfortune. Second, don’t be governed by status, occupation, or even emotions. To properly manage risk, you must not be too concerned with appearances and exercise free will. Third, live in the now. Unlike the futurists, Lopakhin and Peter, or the nostalgics, Lubov, Fiers and Leonid, Simeon focuses on the present.
To truly know Simeon, one needs to understand two things, Russian tenses and Fools for Christ. Tenses are important in Russian grammar, particularly concerning verbs of motion. It is no accident that characters, time and seasons in the play “will come” or “will have arrived.” The determinism of past and future perfect aspect fit the rational characters in the play, but the romantics, Simeon included, speak more frequently using the imperfective. Simeon recognizes his unhappy fate too face a new misfortune every day, and in doing so, chooses to live in the present. As such, he continues the long tradition of wise fools, and in so doing avoids the effects of debt by being the only character in the play to maintain his role, status and position throughout. It is this relationship to time and faith that is the antidote to debt.
Just as the play opened with time and technology, it closes with characters rushing to meet a train. Lopakhin is leaving for business; Peter to join the revolution; Lubov to Paris and Leonid to Moscow. The only remaining characters are Fiers and Simeon. Fiers is sick and weary, while Simeon has been left in charge of affairs. With moral and financial debts settled technology can become magical again under protection of the careless caretaker.
Risk Developments
Something Human
The age of user generated content is grappling with our own “living off other people’s labor.” Regulators, lacking understanding and enforcement ability, continue to pump out new laws and amendments like the recently passed California Privacy Rights Act, which broadens the already unworkable CCPA. In response, the communications storage and compliance business continues to grow apace with communications archiving company Smarsh acquiring natural language processing company Digital Reason. Another communications company, Zoom, has settled with the FTC over privacy and security allegations.
Settlements, increased monitoring capabilities and new regulations seems sufficient to keep the interest paid on our social debts, but speculative finance doesn’t pay down our principal, just the interest. If the user generated content bubble stops growing, the interest will pile up. Without a user generated content jubilee to wipe the slate clean, the only solution is outrunning our privacy concerns with yet more user generated content. Fortunately, or unfortunately, depending on your perspective, our ability to generate more data seems inexhaustible.
Scanning for Errors in Your Favor
Remember that card from Monopoly, “bank error in your favor?” It’s such a great joke because it never seems to happen. The incentives are all wrong for a bank to find an error that saves them money at your expense, but they sure do seem competent when it could cost them money. The insurance industry, no stranger to perverse incentives, has a similar problem.
A report by insurance industry credit agency, AM Best has found that impairments, were up in 2019. Impairments are regulatory warnings that state insurance regulators put out to notify insurance companies they believe may be unable to meet their obligations. Of the 13 newly impaired out of 388 total, three were captive insurance, so called risk retention groups (RRG). As subsidiaries these have especially perverse incentives to appropriately rate their risk, but the types of insurance is a more interesting way of segmenting the companies.
Personal direct insurance is larger than commercial so it’s not so surprising that it tops the list. What does stand out is that the number two line is specialty. Specialty is a bit of a catch all, including idiosyncratic risks that have to be underwritten on a case-by-case basis, but also directors and officers, environmental, terrorism and workplace harrassment insurace. Cyber often falls in this bucket as well.
And just like that, cyber is back on top, beating out covid and climate as the number one concern for businesses. So what is an impaired insurer to do if they took on too much cyber risk? One solution is to transfer it to a re/insurerer as Aon (not impaired) is doing. Another option, one being taken by the 314 year old insurance giant RSA (also not impaired), is to chop up the pieces and sell them off to the upwardly mobile, in this case a Canadian and a Scandinavian firm in a $9.5B deal. Insurance has bubbles too, and some are more painful to resolve than others, but so far big blow ups have been avoided.
One other space that has perverse incentives and a tendency towards bubbles is advertising. Here there are no regulators to impair companies with mismeasurement error. LinkedIn fund that it had been inflating video and ad metrics. Whoops. Fortunately the dollar amount is not terribly big and its parent company can step in to make customers whole. In some places the old familial relationships still hold.
D-fense, D-fense, D-fense
Some rather interesting defense and intelligence contracts have been awarded lately in the U.S. and Europe. Let’s take a moment to compare two infrastructure with two weapons platform contracts. The first infrastructure contract for a GPS interface receiver with integration work and the second, the CIA’s multi-party multi-cloud contract. These contracts are vastly different in size and scope, but they both speak to changes in warfare and intelligence. It is no longer enough to have hard assets. The social change brought about by the internet has distorted our relationship with reality. Just as in The Cherry Orchard, new freedoms and more information has not made us wiser or more capable, but more vulnerable. New, unexpected problems are created by the complex systems we design. Now defense and intelligence must spend hundreds of millions, and even billions just to stand still.
At the same time, progress on a more traditional front is costing even more. Major contracts, such as the U.S. Navy’s $9.5B contract modification for Columbia class submarine construction and the German Luftwaffe’s $6.5B price tag for 38 Eurofighter aircraft. It is telling, however, that even more traditional defense spending is disproportionately going towards air and submarine vehicles. In a post nuclear weapons age, covert, or at least plausibly deniable fighting is preferable.
The synthesis of “kinetic” and “non-kinetic” may end up looking something like the alleged Isreali remote controlled assasination of an Iranian scientist. First, it is cheaper on a marginal cost basis than the vehicle platforms, and second, it is louder deterrence. The Columbia class submarines are set to take over the job of running nuclear deterrent patrols in the 2030’s, but submarines are intentionally stealth, and the Cold War will have been over for 40 years. The Eurofighter, another Cold War hangover, is the last generation before the promised unmanned, distributed sensor, cyber tactical generation of planes. Expect increased degrees of freedom and more information at the expense of stealth and speed. In other words, the future of warfare is already here, it’s just not evenly distributed.
Gratitude
Big thank you to Vinit Shah and Roger Farley for help reading and editing. Thank you to Robert Louis Jackson, Daniel McAuley, Nathan Taylor, a reader who would like to remain anonymous and many others for your inspirational writings and ideas that helped me craft this piece.