More on Economics & Investing
Liam Vaughan
3 years ago
Investors can bet big on almost anything on a new prediction market.
Kalshi allows five-figure bets on the Grammys, the next Covid wave, and future SEC commissioners. Worst-case scenario
On Election Day 2020, two young entrepreneurs received a call from the CFTC chairman. Luana Lopes Lara and Tarek Mansour spent 18 months trying to start a new type of financial exchange. Instead of betting on stock prices or commodity futures, people could trade instruments tied to real-world events, such as legislation, the weather, or the Oscar winner.
Heath Tarbert, a Trump appointee, shouted "Congratulations." "You're competing with 1840s-era markets. I'm sure you'll become a powerhouse too."
Companies had tried to introduce similar event markets in the US for years, but Tarbert's agency, the CFTC, said no, arguing they were gambling and prone to cheating. Now the agency has reversed course, approving two 24-year-olds who will have first-mover advantage in what could become a huge new asset class. Kalshi Inc. raised $30 million from venture capitalists within weeks of Tarbert's call, his representative says. Mansour, 26, believes this will be bigger than crypto.
Anyone who's read The Wisdom of Crowds knows prediction markets' potential. Well-designed markets can help draw out knowledge from disparate groups, and research shows that when money is at stake, people make better predictions. Lopes Lara calls it a "bullshit tax." That's why Google, Microsoft, and even the US Department of Defense use prediction markets internally to guide decisions, and why university-linked political betting sites like PredictIt sometimes outperform polls.
Regulators feared Wall Street-scale trading would encourage investors to manipulate reality. If the stakes are high enough, traders could pressure congressional staffers to stall a bill or bet on whether Kanye West's new album will drop this week. When Lopes Lara and Mansour pitched the CFTC, senior regulators raised these issues. Politically appointed commissioners overruled their concerns, and one later joined Kalshi's board.
Will Kanye’s new album come out next week? Yes or no?
Kalshi's victory was due more to lobbying and legal wrangling than to Silicon Valley-style innovation. Lopes Lara and Mansour didn't invent anything; they changed a well-established concept's governance. The result could usher in a new era of market-based enlightenment or push Wall Street's destructive tendencies into the real world.
If Kalshi's founders lacked experience to bolster their CFTC application, they had comical youth success. Lopes Lara studied ballet at the Brazilian Bolshoi before coming to the US. Mansour won France's math Olympiad. They bonded over their work ethic in an MIT computer science class.
Lopes Lara had the idea for Kalshi while interning at a New York hedge fund. When the traders around her weren't working, she noticed they were betting on the news: Would Apple hit a trillion dollars? Kylie Jenner? "It was anything," she says.
Are mortgage rates going up? Yes or no?
Mansour saw the business potential when Lopes Lara suggested it. He interned at Goldman Sachs Group Inc., helping investors prepare for the UK leaving the EU. Goldman sold clients complex stock-and-derivative combinations. As he discussed it with Lopes Lara, they agreed that investors should hedge their risk by betting on Brexit itself rather than an imperfect proxy.
Lopes Lara and Mansour hypothesized how a marketplace might work. They settled on a "event contract," a binary-outcome instrument like "Will inflation hit 5% by the end of the month?" The contract would settle at $1 (if the event happened) or zero (if it didn't), but its price would fluctuate based on market sentiment. After a good debate, a politician's election odds may rise from 50 to 55. Kalshi would charge a commission on every trade and sell data to traders, political campaigns, businesses, and others.
In October 2018, five months after graduation, the pair flew to California to compete in a hackathon for wannabe tech founders organized by the Silicon Valley incubator Y Combinator. They built a website in a day and a night and presented it to entrepreneurs the next day. Their prototype barely worked, but they won a three-month mentorship program and $150,000. Michael Seibel, managing director of Y Combinator, said of their idea, "I had to take a chance!"
Will there be another moon landing by 2025?
Seibel's skepticism was rooted in America's historical wariness of gambling. Roulette, poker, and other online casino games are largely illegal, and sports betting was only legal in a few states until May 2018. Kalshi as a risk-hedging platform rather than a bookmaker seemed like a good idea, but convincing the CFTC wouldn't be easy. In 2012, the CFTC said trading on politics had no "economic purpose" and was "contrary to the public interest."
Lopes Lara and Mansour cold-called 60 Googled lawyers during their time at Y Combinator. Everyone advised quitting. Mansour recalls the pain. Jeff Bandman, a former CFTC official, helped them navigate the agency and its characters.
When they weren’t busy trying to recruit lawyers, Lopes Lara and Mansour were meeting early-stage investors. Alfred Lin of Sequoia Capital Operations LLC backed Airbnb, DoorDash, and Uber Technologies. Lin told the founders their idea could capitalize on retail trading and challenge how the financial world manages risk. "Come back with regulatory approval," he said.
In the US, even small bets on most events were once illegal. Under the Commodity Exchange Act, the CFTC can stop exchanges from listing contracts relating to "terrorism, assassination, war" and "gaming" if they are "contrary to the public interest," which was often the case.
Will subway ridership return to normal? Yes or no?
In 1988, as academic interest in the field grew, the agency allowed the University of Iowa to set up a prediction market for research purposes, as long as it didn't make a profit or advertise and limited bets to $500. PredictIt, the biggest and best-known political betting platform in the US, also got an exemption thanks to an association with Victoria University of Wellington in New Zealand. Today, it's a sprawling marketplace with its own subculture and lingo. PredictIt users call it "Rules Cuck Panther" when they lose on a technicality. Major news outlets cite PredictIt's odds on Discord and the Star Spangled Gamblers podcast.
CFTC limits PredictIt bets to $850. To keep traders happy, PredictIt will often run multiple variations of the same question, listing separate contracts for two dozen Democratic primary candidates, for example. A trader could have more than $10,000 riding on a single outcome. Some of the site's traders are current or former campaign staffers who can answer questions like "How many tweets will Donald Trump post from Nov. 20 to 27?" and "When will Anthony Scaramucci's role as White House communications director end?"
According to PredictIt co-founder John Phillips, politicians help explain the site's accuracy. "Prediction markets work well and are accurate because they attract people with superior information," he said in a 2016 podcast. “In the financial stock market, it’s called inside information.”
Will Build Back Better pass? Yes or no?
Trading on nonpublic information is illegal outside of academia, which presented a dilemma for Lopes Lara and Mansour. Kalshi's forecasts needed to be accurate. Kalshi must eliminate insider trading as a regulated entity. Lopes Lara and Mansour wanted to build a high-stakes PredictIt without the anarchy or blurred legal lines—a "New York Stock Exchange for Events." First, they had to convince regulators event trading was safe.
When Lopes Lara and Mansour approached the CFTC in the spring of 2019, some officials in the Division of Market Oversight were skeptical, according to interviews with people involved in the process. For all Kalshi's talk of revolutionizing finance, this was just a turbocharged version of something that had been rejected before.
The DMO couldn't see the big picture. The staff review was supposed to ensure Kalshi could complete a checklist, "23 Core Principles of a Designated Contract Market," which included keeping good records and having enough money. The five commissioners decide. With Trump as president, three of them were ideologically pro-market.
Lopes Lara, Mansour, and their lawyer Bandman, an ex-CFTC official, answered the DMO's questions while lobbying the commissioners on Zoom about the potential of event markets to mitigate risks and make better decisions. Before each meeting, they would write a script and memorize it word for word.
Will student debt be forgiven? Yes or no?
Several prediction markets that hadn't sought regulatory approval bolstered Kalshi's case. Polymarket let customers bet hundreds of thousands of dollars anonymously using cryptocurrencies, making it hard to track. Augur, which facilitates private wagers between parties using blockchain, couldn't regulate bets and hadn't stopped users from betting on assassinations. Kalshi, by comparison, argued it was doing everything right. (The CFTC fined Polymarket $1.4 million for operating an unlicensed exchange in January 2022. Polymarket says it's now compliant and excited to pioneer smart contract-based financial solutions with regulators.
Kalshi was approved unanimously despite some DMO members' concerns about event contracts' riskiness. "Once they check all the boxes, they're in," says a CFTC insider.
Three months after CFTC approval, Kalshi announced funding from Sequoia, Charles Schwab, and Henry Kravis. Sequoia's Lin, who joined the board, said Tarek, Luana, and team created a new way to invest and engage with the world.
The CFTC hadn't asked what markets the exchange planned to run since. After approval, Lopes Lara and Mansour had the momentum. Kalshi's March list of 30 proposed contracts caused chaos at the DMO. The division handles exchanges that create two or three new markets a year. Kalshi’s business model called for new ones practically every day.
Uncontroversial proposals included weather and GDP questions. Others, on the initial list and later, were concerning. DMO officials feared Covid-19 contracts amounted to gambling on human suffering, which is why war and terrorism markets are banned. (Similar logic doomed ex-admiral John Poindexter's Policy Analysis Market, a Bush-era plan to uncover intelligence by having security analysts bet on Middle East events.) Regulators didn't see how predicting the Grammy winners was different from betting on the Patriots to win the Super Bowl. Who, other than John Legend, would need to hedge the best R&B album winner?
Event contracts raised new questions for the DMO's product review team. Regulators could block gaming contracts that weren't in the public interest under the Commodity Exchange Act, but no one had defined gaming. It was unclear whether the CFTC had a right or an obligation to consider whether a contract was in the public interest. How was it to determine public interest? Another person familiar with the CFTC review says, "It was a mess." The agency didn't comment.
CFTC staff feared some event contracts could be cheated. Kalshi wanted to run a bee-endangerment market. The DMO pushed back, saying it saw two problems symptomatic of the asset class: traders could press government officials for information, and officials could delay adding the insects to the list to cash in.
The idea that traders might manipulate prediction markets wasn't paranoid. In 2013, academics David Rothschild and Rajiv Sethi found that an unidentified party lost $7 million buying Mitt Romney contracts on Intrade, a now-defunct, unlicensed Irish platform, in the runup to the 2012 election. The authors speculated that the trader, whom they dubbed the “Romney Whale,” may have been looking to boost morale and keep donations coming in.
Kalshi said manipulation and insider trading are risks for any market. It built a surveillance system and said it would hire a team to monitor it. "People trade on events all the time—they just use options and other instruments. This brings everything into the open, Mansour says. Kalshi didn't include election contracts, a red line for CFTC Democrats.
Lopes Lara and Mansour were ready to launch kalshi.com that summer, but the DMO blocked them. Product reviewers were frustrated by spending half their time on an exchange that represented a tiny portion of the derivatives market. Lopes Lara and Mansour pressed politically appointed commissioners during the impasse.
Tarbert, the chairman, had moved on, but Kalshi found a new supporter in Republican Brian Quintenz, a crypto-loving former hedge fund manager. He was unmoved by the DMO's concerns, arguing that speculation on Kalshi's proposed events was desirable and the agency had no legal standing to prevent it. He supported a failed bid to allow NFL futures earlier this year. Others on the commission were cautious but supportive. Given the law's ambiguity, they worried they'd be on shaky ground if Kalshi sued if they blocked a contract. Without a permanent chairman, the agency lacked leadership.
To block a contract, DMO staff needed a majority of commissioners' support, which they didn't have in all but a few cases. "We didn't have the votes," a reviewer says, paraphrasing Hamilton. By the second half of 2021, new contract requests were arriving almost daily at the DMO, and the demoralized and overrun division eventually accepted defeat and stopped fighting back. By the end of the year, three senior DMO officials had left the agency, making it easier for Kalshi to list its contracts unimpeded.
Today, Kalshi is growing. 32 employees work in a SoHo office with big windows and exposed brick. Quintenz, who left the CFTC 10 months after Kalshi was approved, is on its board. He joined because he was interested in the market's hedging and risk management opportunities.
Mid-May, the company's website had 75 markets, such as "Will Q4 GDP be negative?" Will NASA land on the moon by 2025? The exchange recently reached 2 million weekly contracts, a jump from where it started but still a small number compared to other futures exchanges. Early adopters are PredictIt and Polymarket fans. Bets on the site are currently capped at $25,000, but Kalshi hopes to increase that to $100,000 and beyond.
With the regulatory drawbridge down, Lopes Lara and Mansour must move quickly. Chicago's CME Group Inc. plans to offer index-linked event contracts. Kalshi will release a smartphone app to attract customers. After that, it hopes to partner with a big brokerage. Sequoia is a major investor in Robinhood Markets Inc. Robinhood users could have access to Kalshi so that after buying GameStop Corp. shares, they'd be prompted to bet on the Oscars or the next Fed commissioner.
Some, like Illinois Democrat Sean Casten, accuse Robinhood and its competitors of gamifying trading to encourage addiction, but Kalshi doesn't seem worried. Mansour says Kalshi's customers can't bet more than they've deposited, making debt difficult. Eventually, he may introduce leveraged bets.
Tension over event contracts recalls another CFTC episode. Brooksley Born proposed regulating the financial derivatives market in 1994. Alan Greenspan and others in the government opposed her, saying it would stifle innovation and push capital overseas. Unrestrained, derivatives grew into a trillion-dollar industry until 2008, when they sparked the financial crisis.
Today, with a midterm election looming, it seems reasonable to ask whether Kalshi plans to get involved. Elections have historically been the biggest draw in prediction markets, with 125 million shares traded on PredictIt for 2020. “We can’t discuss specifics,” Mansour says. “All I can say is, you know, we’re always working on expanding the universe of things that people can trade on.”
Any election contracts would need CFTC approval, which may be difficult with three Democratic commissioners. A Republican president would change the equation.
Theresa W. Carey
3 years ago
How Payment for Order Flow (PFOF) Works
What is PFOF?
PFOF is a brokerage firm's compensation for directing orders to different parties for trade execution. The brokerage firm receives fractions of a penny per share for directing the order to a market maker.
Each optionable stock could have thousands of contracts, so market makers dominate options trades. Order flow payments average less than $0.50 per option contract.
Order Flow Payments (PFOF) Explained
The proliferation of exchanges and electronic communication networks has complicated equity and options trading (ECNs) Ironically, Bernard Madoff, the Ponzi schemer, pioneered pay-for-order-flow.
In a December 2000 study on PFOF, the SEC said, "Payment for order flow is a method of transferring trading profits from market making to brokers who route customer orders to specialists for execution."
Given the complexity of trading thousands of stocks on multiple exchanges, market making has grown. Market makers are large firms that specialize in a set of stocks and options, maintaining an inventory of shares and contracts for buyers and sellers. Market makers are paid the bid-ask spread. Spreads have narrowed since 2001, when exchanges switched to decimals. A market maker's ability to play both sides of trades is key to profitability.
Benefits, requirements
A broker receives fees from a third party for order flow, sometimes without a client's knowledge. This invites conflicts of interest and criticism. Regulation NMS from 2005 requires brokers to disclose their policies and financial relationships with market makers.
Your broker must tell you if it's paid to send your orders to specific parties. This must be done at account opening and annually. The firm must disclose whether it participates in payment-for-order-flow and, upon request, every paid order. Brokerage clients can request payment data on specific transactions, but the response takes weeks.
Order flow payments save money. Smaller brokerage firms can benefit from routing orders through market makers and getting paid. This allows brokerage firms to send their orders to another firm to be executed with other orders, reducing costs. The market maker or exchange benefits from additional share volume, so it pays brokerage firms to direct traffic.
Retail investors, who lack bargaining power, may benefit from order-filling competition. Arrangements to steer the business in one direction invite wrongdoing, which can erode investor confidence in financial markets and their players.
Pay-for-order-flow criticism
It has always been controversial. Several firms offering zero-commission trades in the late 1990s routed orders to untrustworthy market makers. During the end of fractional pricing, the smallest stock spread was $0.125. Options spreads widened. Traders found that some of their "free" trades cost them a lot because they weren't getting the best price.
The SEC then studied the issue, focusing on options trades, and nearly decided to ban PFOF. The proliferation of options exchanges narrowed spreads because there was more competition for executing orders. Options market makers said their services provided liquidity. In its conclusion, the report said, "While increased multiple-listing produced immediate economic benefits to investors in the form of narrower quotes and effective spreads, these improvements have been muted with the spread of payment for order flow and internalization."
The SEC allowed payment for order flow to continue to prevent exchanges from gaining monopoly power. What would happen to trades if the practice was outlawed was also unclear. SEC requires brokers to disclose financial arrangements with market makers. Since then, the SEC has watched closely.
2020 Order Flow Payment
Rule 605 and Rule 606 show execution quality and order flow payment statistics on a broker's website. Despite being required by the SEC, these reports can be hard to find. The SEC mandated these reports in 2005, but the format and reporting requirements have changed over the years, most recently in 2018.
Brokers and market makers formed a working group with the Financial Information Forum (FIF) to standardize order execution quality reporting. Only one retail brokerage (Fidelity) and one market maker remain (Two Sigma Securities). FIF notes that the 605/606 reports "do not provide the level of information that allows a retail investor to gauge how well a broker-dealer fills a retail order compared to the NBBO (national best bid or offer’) at the time the order was received by the executing broker-dealer."
In the first quarter of 2020, Rule 606 reporting changed to require brokers to report net payments from market makers for S&P 500 and non-S&P 500 equity trades and options trades. Brokers must disclose payment rates per 100 shares by order type (market orders, marketable limit orders, non-marketable limit orders, and other orders).
Richard Repetto, Managing Director of New York-based Piper Sandler & Co., publishes a report on Rule 606 broker reports. Repetto focused on Charles Schwab, TD Ameritrade, E-TRADE, and Robinhood in Q2 2020. Repetto reported that payment for order flow was higher in the second quarter than the first due to increased trading activity, and that options paid more than equities.
Repetto says PFOF contributions rose overall. Schwab has the lowest options rates, while TD Ameritrade and Robinhood have the highest. Robinhood had the highest equity rating. Repetto assumes Robinhood's ability to charge higher PFOF reflects their order flow profitability and that they receive a fixed rate per spread (vs. a fixed rate per share by the other brokers).
Robinhood's PFOF in equities and options grew the most quarter-over-quarter of the four brokers Piper Sandler analyzed, as did their implied volumes. All four brokers saw higher PFOF rates.
TD Ameritrade took the biggest income hit when cutting trading commissions in fall 2019, and this report shows they're trying to make up the shortfall by routing orders for additional PFOF. Robinhood refuses to disclose trading statistics using the same metrics as the rest of the industry, offering only a vague explanation on their website.
Summary
Payment for order flow has become a major source of revenue as brokers offer no-commission equity (stock and ETF) orders. For retail investors, payment for order flow poses a problem because the brokerage may route orders to a market maker for its own benefit, not the investor's.
Infrequent or small-volume traders may not notice their broker's PFOF practices. Frequent traders and those who trade larger quantities should learn about their broker's order routing system to ensure they're not losing out on price improvement due to a broker prioritizing payment for order flow.
This post is a summary. Read full article here
Sam Hickmann
3 years ago
What is this Fed interest rate everybody is talking about that makes or breaks the stock market?
The Federal Funds Rate (FFR) is the target interest rate set by the Federal Reserve System (Fed)'s policy-making body (FOMC). This target is the rate at which the Fed suggests commercial banks borrow and lend their excess reserves overnight to each other.
The FOMC meets 8 times a year to set the target FFR. This is supposed to promote economic growth. The overnight lending market sets the actual rate based on commercial banks' short-term reserves. If the market strays too far, the Fed intervenes.
Banks must keep a certain percentage of their deposits in a Federal Reserve account. A bank's reserve requirement is a percentage of its total deposits. End-of-day bank account balances averaged over two-week reserve maintenance periods are used to determine reserve requirements.
If a bank expects to have end-of-day balances above what's needed, it can lend the excess to another institution.
The FOMC adjusts interest rates based on economic indicators that show inflation, recession, or other issues that affect economic growth. Core inflation and durable goods orders are indicators.
In response to economic conditions, the FFR target has changed over time. In the early 1980s, inflation pushed it to 20%. During the Great Recession of 2007-2009, the rate was slashed to 0.15 percent to encourage growth.
Inflation picked up in May 2022 despite earlier rate hikes, prompting today's 0.75 percent point increase. The largest increase since 1994. It might rise to around 3.375% this year and 3.1% by the end of 2024.
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Micah Daigle
3 years ago
Facebook is going away. Here are two explanations for why it hasn't been replaced yet.
And tips for anyone trying.
We see the same story every few years.
BREAKING NEWS: [Platform X] launched a social network. With Facebook's reputation down, the new startup bets millions will switch.
Despite the excitement surrounding each new platform (Diaspora, Ello, Path, MeWe, Minds, Vero, etc.), no major exodus occurred.
Snapchat and TikTok attracted teens with fresh experiences (ephemeral messaging and rapid-fire videos). These features aren't Facebook, even if Facebook replicated them.
Facebook's core is simple: you publish items (typically text/images) and your friends (generally people you know IRL) can discuss them.
It's cool. Sometimes I don't want to, but sh*t. I like it.
Because, well, I like many folks I've met. I enjoy keeping in touch with them and their banter.
I dislike Facebook's corporation. I've been cautiously optimistic whenever a Facebook-killer surfaced.
None succeeded.
Why? Two causes, I think:
People couldn't switch quickly enough, which is reason #1
Your buddies make a social network social.
Facebook started in self-contained communities (college campuses) then grew outward. But a new platform can't.
If we're expected to leave Facebook, we want to know that most of our friends will too.
Most Facebook-killers had bottlenecks. You have to waitlist or jump through hoops (e.g. setting up a server).
Same outcome. Upload. Chirp.
After a week or two of silence, individuals returned to Facebook.
Reason #2: The fundamental experience was different.
Even when many of our friends joined in the first few weeks, it wasn't the same.
There were missing features or a different UX.
Want to reply with a meme? No photos in comments yet. (Trying!)
Want to tag a friend? Nope, sorry. 2019!
Want your friends to see your post? You must post to all your friends' servers. Good luck!
It's difficult to introduce a platform with 100% of the same features as one that's been there for 20 years, yet customers want a core experience.
If you can't, they'll depart.
The causes that led to the causes
Having worked on software teams for 14+ years, I'm not surprised by these challenges. They are a natural development of a few tech sector meta-problems:
Lean startup methodology
Silicon Valley worships lean startup. It's a way of developing software that involves testing a stripped-down version with a limited number of people before selecting what to build.
Billion people use Facebook's functions. They aren't tested. It must work right away*
*This may seem weird to software people, but it's how non-software works! You can't sell a car without wheels.
2. Creativity
Startup entrepreneurs build new things, not copies. I understand. Reinventing the wheel is boring.
We know what works. Different experiences raise adoption friction. Once millions have transferred, more features (and a friendlier UX) can be implemented.
3. Cost scaling
True. Building a product that can sustain hundreds of millions of users in weeks is expensive and complex.
Your lifeboats must have the same capacity as the ship you're evacuating. It's required.
4. Pure ideologies
People who work on Facebook-alternatives are (understandably) critical of Facebook.
They build an open-source, fully-distributed, data-portable, interface-customizable, offline-capable, censorship-proof platform.
Prioritizing these aims can prevent replicating the straightforward experience users expect. Github, not Facebook, is for techies only.
What about the business plan, though?
Facebook-killer attempts have followed three models.
Utilize VC funding to increase your user base, then monetize them later. (If you do this, you won't kill Facebook; instead, Facebook will become you.)
Users must pay to utilize it. (This causes a huge bottleneck and slows the required quick expansion, preventing it from seeming like a true social network.)
Make it a volunteer-run, open-source endeavor that is free. (This typically denotes that something is cumbersome, difficult to operate, and is only for techies.)
Wikipedia is a fourth way.
Wikipedia is one of the most popular websites and a charity. No ads. Donations support them.
A Facebook-killer managed by a good team may gather millions (from affluent contributors and the crowd) for their initial phase of development. Then it might sustain on regular donations, ethical transactions (e.g. fees on commerce, business sites, etc.), and government grants/subsidies (since it would essentially be a public utility).
When you're not aiming to make investors rich, it's remarkable how little money you need.
If you want to build a Facebook competitor, follow these tips:
Drop the lean startup philosophy. Wait until you have a finished product before launching. Build it, thoroughly test it for bugs, and then release it.
Delay innovating. Wait till millions of people have switched before introducing your great new features. Make it nearly identical for now.
Spend money climbing. Make sure that guests can arrive as soon as they are invited. Never keep them waiting. Make things easy for them.
Make it accessible to all. Even if doing so renders it less philosophically pure, it shouldn't require technical expertise to utilize.
Constitute a nonprofit. Additionally, develop community ownership structures. Profit maximization is not the only strategy for preserving valued assets.
Last thoughts
Nobody has killed Facebook, but Facebook is killing itself.
The startup is burying the newsfeed to become a TikTok clone. Meta itself seems to be ditching the platform for the metaverse.
I wish I was happy, but I'm not. I miss (understandably) removed friends' postings and remarks. It could be a ghost town in a few years. My dance moves aren't TikTok-worthy.
Who will lead? It's time to develop a social network for the people.
Greetings if you're working on it. I'm not a company founder, but I like to help hard-working folks.
Techletters
2 years ago
Using Synthesia, DALL-E 2, and Chat GPT-3, create AI news videos
Combining AIs creates realistic AI News Videos.
Powerful AI tools like Chat GPT-3 are trending. Have you combined AIs?
The 1-minute fake news video below is startlingly realistic. Artificial Intelligence developed NASA's Mars exploration breakthrough video (AI). However, integrating the aforementioned AIs generated it.
AI-generated text for the Chat GPT-3 based on a succinct tagline
DALL-E-2 AI generates an image from a brief slogan.
Artificial intelligence-generated avatar and speech
This article shows how to use and mix the three AIs to make a realistic news video. First, watch the video (1 minute).
Talk GPT-3
Chat GPT-3 is an OpenAI NLP model. It can auto-complete text and produce conversational responses.
Try it at the playground. The AI will write a comprehensive text from a brief tagline. Let's see what the AI generates with "Breakthrough in Mars Project" as the headline.
Amazing. Our tagline matches our complete and realistic text. Fake news can start here.
DALL-E-2
OpenAI's huge transformer-based language model DALL-E-2. Its GPT-3 basis is geared for image generation. It can generate high-quality photos from a brief phrase and create artwork and images of non-existent objects.
DALL-E-2 can create a news video background. We'll use "Breakthrough in Mars project" again. Our AI creates four striking visuals. Last.
Synthesia
Synthesia lets you quickly produce videos with AI avatars and synthetic vocals.
Avatars are first. Rosie it is.
Upload and select DALL-backdrop. E-2's
Copy the Chat GPT-3 content and choose a synthetic voice.
Voice: English (US) Professional.
Finally, we generate and watch or download our video.
Synthesia AI completes the AI video.
Overview & Resources
We used three AIs to make surprisingly realistic NASA Mars breakthrough fake news in this post. Synthesia generates an avatar and a synthetic voice, therefore it may be four AIs.
These AIs created our fake news.
AI-generated text for the Chat GPT-3 based on a succinct tagline
DALL-E-2 AI generates an image from a brief slogan.
Artificial intelligence-generated avatar and speech
Theo Seeds
3 years ago
The nine novels that have fundamentally altered the way I view the world
I read 53 novels last year and hope to do so again.
Books are best if you love learning. You get a range of perspectives, unlike podcasts and YouTube channels where you get the same ones.
Book quality varies. I've read useless books. Most books teach me something.
These 9 novels have changed my outlook in recent years. They've made me rethink what I believed or introduced me to a fresh perspective that changed my worldview.
You can order these books yourself. Or, read my summaries to learn what I've synthesized.
Enjoy!
Fooled By Randomness
Nassim Taleb worked as a Wall Street analyst. He used options trading to bet on unlikely events like stock market crashes.
Using financial models, investors predict stock prices. The models assume constant, predictable company growth.
These models base their assumptions on historical data, so they assume the future will be like the past.
Fooled By Randomness argues that the future won't be like the past. We often see impossible market crashes like 2008's housing market collapse. The world changes too quickly to use historical data: by the time we understand how it works, it's changed.
Most people don't live to see history unfold. We think our childhood world will last forever. That goes double for stable societies like the U.S., which hasn't seen major turbulence in anyone's lifetime.
Fooled By Randomness taught me to expect the unexpected. The world is deceptive and rarely works as we expect. You can't always trust your past successes or what you've learned.
Antifragile
More Taleb. Some things, like the restaurant industry and the human body, improve under conditions of volatility and turbulence.
We didn't have a word for this counterintuitive concept until Taleb wrote Antifragile. The human body (which responds to some stressors, like exercise, by getting stronger) and the restaurant industry both benefit long-term from disorder (when economic turbulence happens, bad restaurants go out of business, improving the industry as a whole).
Many human systems are designed to minimize short-term variance because humans don't understand it. By eliminating short-term variation, we increase the likelihood of a major disaster.
Once, we put out every forest fire we found. Then, dead wood piled up in forests, causing catastrophic fires.
We don't like price changes, so politicians prop up markets with stimulus packages and printing money. This leads to a bigger crash later. Two years ago, we printed a ton of money for stimulus checks, and now we have double-digit inflation.
Antifragile taught me how important Plan B is. A system with one or two major weaknesses will fail. Make large systems redundant, foolproof, and change-responsive.
Reality is broken
We dread work. Work is tedious. Right?
Wrong. Work gives many people purpose. People are happiest when working. (That's why some are workaholics.)
Factory work saps your soul, office work is boring, and working for a large company you don't believe in and that operates unethically isn't satisfying.
Jane McGonigal says in Reality Is Broken that meaningful work makes us happy. People love games because they simulate good work. McGonigal says work should be more fun.
Some think they'd be happy on a private island sipping cocktails all day. That's not true. Without anything to do, most people would be bored. Unemployed people are miserable. Many retirees die within 2 years, much more than expected.
Instead of complaining, find meaningful work. If you don't like your job, it's because you're in the wrong environment. Find the right setting.
The Lean Startup
Before the airplane was invented, Harvard scientists researched flying machines. Who knew two North Carolina weirdos would beat them?
The Wright Brothers' plane design was key. Harvard researchers were mostly theoretical, designing an airplane on paper and trying to make it fly in theory. They'd build it, test it, and it wouldn't fly.
The Wright Brothers were different. They'd build a cheap plane, test it, and it'd crash. Then they'd learn from their mistakes, build another plane, and it'd crash.
They repeated this until they fixed all the problems and one of their planes stayed aloft.
Mistakes are considered bad. On the African savannah, one mistake meant death. Even today, if you make a costly mistake at work, you'll be fired as a scapegoat. Most people avoid failing.
In reality, making mistakes is the best way to learn.
Eric Reis offers an unintuitive recipe in The Lean Startup: come up with a hypothesis, test it, and fail. Then, try again with a new hypothesis. Keep trying, learning from each failure.
This is a great startup strategy. Startups are new businesses. Startups face uncertainty. Run lots of low-cost experiments to fail, learn, and succeed.
Don't fear failing. Low-cost failure is good because you learn more from it than you lose. As long as your worst-case scenario is acceptable, risk-taking is good.
The Sovereign Individual
Today, nation-states rule the world. The UN recognizes 195 countries, and they claim almost all land outside of Antarctica.
We agree. For the past 2,000 years, much of the world's territory was ungoverned.
Why today? Because technology has created incentives for nation-states for most of the past 500 years. The logic of violence favors nation-states, according to James Dale Davidson, author of the Sovereign Individual. Governments have a lot to gain by conquering as much territory as possible, so they do.
Not always. During the Dark Ages, Europe was fragmented and had few central governments. Partly because of armor. With armor, a sword, and a horse, you couldn't be stopped. Large states were hard to form because they rely on the threat of violence.
When gunpowder became popular in Europe, violence changed. In a world with guns, assembling large armies and conquest are cheaper.
James Dale Davidson says the internet will make nation-states obsolete. Most of the world's wealth will be online and in people's heads, making capital mobile.
Nation-states rely on predatory taxation of the rich to fund large militaries and welfare programs.
When capital is mobile, people can live anywhere in the world, Davidson says, making predatory taxation impossible. They're not bound by their job, land, or factory location. Wherever they're treated best.
Davidson says that over the next century, nation-states will collapse because they won't have enough money to operate as they do now. He imagines a world of small city-states, like Italy before 1900. (or Singapore today).
We've already seen some movement toward a more Sovereign Individual-like world. The pandemic proved large-scale remote work is possible, freeing workers from their location. Many cities and countries offer remote workers incentives to relocate.
Many Western businesspeople live in tax havens, and more people are renouncing their US citizenship due to high taxes. Increasing globalization has led to poor economic conditions and resentment among average people in the West, which is why politicians like Trump and Sanders rose to popularity with angry rhetoric, even though Obama rose to popularity with a more hopeful message.
The Sovereign Individual convinced me that the future will be different than Nassim Taleb's. Large countries like the U.S. will likely lose influence in the coming decades, while Portugal, Singapore, and Turkey will rise. If the trend toward less freedom continues, people may flee the West en masse.
So a traditional life of college, a big firm job, hard work, and corporate advancement may not be wise. Young people should learn as much as possible and develop flexible skills to adapt to the future.
Sapiens
Sapiens is a history of humanity, from proto-humans in Ethiopia to our internet society today, with some future speculation.
Sapiens views humans (and Homo sapiens) as a unique species on Earth. We were animals 100,000 years ago. We're slowly becoming gods, able to affect the climate, travel to every corner of the Earth (and the Moon), build weapons that can kill us all, and wipe out thousands of species.
Sapiens examines what makes Homo sapiens unique. Humans can believe in myths like religion, money, and human-made entities like countries and LLCs.
These myths facilitate large-scale cooperation. Ants from the same colony can cooperate. Any two humans can trade, though. Even if they're not genetically related, large groups can bond over religion and nationality.
Combine that with intelligence, and you have a species capable of amazing feats.
Sapiens may make your head explode because it looks at the world without presupposing values, unlike most books. It questions things that aren't usually questioned and says provocative things.
It also shows how human history works. It may help you understand and predict the world. Maybe.
The 4-hour Workweek
Things can be done better.
Tradition, laziness, bad bosses, or incentive structures cause complacency. If you're willing to make changes and not settle for the status quo, you can do whatever you do better and achieve more in less time.
The Four-Hour Work Week advocates this. Tim Ferriss explains how he made more sales in 2 hours than his 8-hour-a-day colleagues.
By firing 2 of his most annoying customers and empowering his customer service reps to make more decisions, he was able to leave his business and travel to Europe.
Ferriss shows how to escape your 9-to-5, outsource your life, develop a business that feeds you with little time, and go on mini-retirement adventures abroad.
Don't accept the status quo. Instead, level up. Find a way to improve your results. And try new things.
Why Nations Fail
Nogales, Arizona and Mexico were once one town. The US/Mexico border was arbitrarily drawn.
Both towns have similar cultures and populations. Nogales, Arizona is well-developed and has a high standard of living. Nogales, Mexico is underdeveloped and has a low standard of living. Whoa!
Why Nations Fail explains how government-created institutions affect country development. Strong property rights, capitalism, and non-corrupt governments promote development. Countries without capitalism, strong property rights, or corrupt governments don't develop.
Successful countries must also embrace creative destruction. They must offer ordinary citizens a way to improve their lot by creating value for others, not reducing them to slaves, serfs, or peasants. Authors say that ordinary people could get rich on trading expeditions in 11th-century Venice.
East and West Germany and North and South Korea have different economies because their citizens are motivated differently. It explains why Chile, China, and Singapore grow so quickly after becoming market economies.
People have spent a lot of money on third-world poverty. According to Why Nations Fail, education and infrastructure aren't the answer. Developing nations must adopt free-market economic policies.
Elon Musk
Elon Musk is the world's richest man, but that’s not a good way to describe him. Elon Musk is the world's richest man, which is like calling Steve Jobs a turtleneck-wearer or Benjamin Franklin a printer.
Elon Musk does cool sci-fi stuff to help humanity avoid existential threats.
Oil will run out. We've delayed this by developing better extraction methods. We only have so much nonrenewable oil.
Our society is doomed if it depends on oil. Elon Musk invested heavily in Tesla and SolarCity to speed the shift to renewable energy.
Musk worries about AI: we'll build machines smarter than us. We won't be able to stop these machines if something goes wrong, just like cows can't fight humans. Neuralink: we need to be smarter to compete with AI when the time comes.
If Earth becomes uninhabitable, we need a backup plan. Asteroid or nuclear war could strike Earth at any moment. We may not have much time to react if it happens in a few days. We must build a new civilization while times are good and resources are plentiful.
Short-term problems dominate our politics, but long-term issues are more important. Long-term problems can cause mass casualties and homelessness. Musk demonstrates how to think long-term.
The main reason people are impressed by Elon Musk, and why Ashlee Vances' biography influenced me so much, is that he does impossible things.
Electric cars were once considered unprofitable, but Tesla has made them mainstream. SpaceX is the world's largest private space company.
People lack imagination and dismiss ununderstood ideas as impossible. Humanity is about pushing limits. Don't worry if your dreams seem impossible. Try it.
Thanks for reading.