In the movie Pulp Fiction, crime boss Marsellus Wallace gives a speech to the boxer character Butch, shortly before Butch’s final fight. Wallace is paying Butch to throw the fight, because this is what crime bosses do. Wallace knows there will be a moment in Butch’s mind where he, as the favorite in the fight for good reason, realizes he could be going out on a win. Wallace wants to get in front of that thought. He tells Butch that the feeling of being able to win – that’s pride. In some more colorful language, he explains what he can do with that pride in exchange for the money he’s going to get. In the background we hear Al Green singing, “let’s, let’s stay together…”
– Hedge Fund super investor Ray Dalio talks about being aware of two barriers: the ego barrier and the blind spot barrier. When you’re right, these barriers don’t matter to you so much. But when you’re wrong, often it’s your ego (pride) that kept you from being aware of your blind spots. As Mark Twain says, “it’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.” Dalio has made a career of systematically learning from his own errors while building systems around exploiting the errors of others.
– In a process that they call “radical transparency,” Dalio’s Bridgewater looks at consensus opinions, sniffs out the egos and the blind spots, and only then puts the trade on. They’re not the largest hedge fund in the world for nothing. Wallace is taking the same approach with Butch.
– But what about the other side of the trade? What about those consensus opinions? What about Butch? Even Bridgewater isn’t always right. Whatever you sell for some expected outcome, somebody else is theoretically buying for the opposite outcome. Don’t forget how cutthroat this actually is, especially when both parties are “barrier aware.” For every Wallace, there’s a Butch. You’re a fool to not think that both are scheming for their edge.
– Wallace’s edge is he thinks he can get Butch to throw the fight, so his blind spot is that he thinks he can control Butch’s ego. The pep talk is supposed to hedge that view, but – spoiler alert – it fails. Butch finds his edge in Wallace’s assumptions. “I just can’t see / You’d never do that to me (would you baby).”
– The world is hard. We’re all making forecasts. Think about that. We’re ALL making forecasts. Wallace has Butch. Dalio has his foil too. Markets are the consensus results, aggregated. Markets are those buyers and sellers singing, “Let’s stay together / lovin’ you whether, whether / times are good or bad, happy or sad.” They can only exist with each other.
– So what do we do? The best of the best are controlling for both their ego and their blind spots, and they don’t win all of the time. Assess failure by focusing on the barriers. Bet so you can survive to play again. “Let’s Stay Together” is not just a love song, and he didn’t become the Reverend Al Green for nothing. You have to survive to keep playing the game. Just ask Zed.