When I think about problems like these, I use what feels to me like a natural generalization of the economic idea of efficient markets. The goal is to predict what kinds of efficiency we should expect to exist in realms beyond the marketplace, and what we can deduce from simple observations. For lack of a better term, I will call this kind of thinking inadequacy analysis.

Surely some humility is appropriate when criticizing the elite decision-makers governing the Bank of Japan. What if it’s you, and not the professional economists making these decisions, who have failed to grasp the relevant economic considerations? I’ll refer to this genre of arguments as “modest epistemology.”

The Dunning-Kruger effect shows that unskilled individuals often rate their own skill very highly. Specifically, although there does tend to be a correlation between how competent a person is and how competent they guess they are, this correlation is weaker than one might suppose. In the original study, people in the bottom two quartiles of actual test performance tended to think they did better than about 60% of test-takers, while people in the top two quartiles tended to think they did better than 70% of test-takers.

If I had to name the single epistemic feat at which modern human civilization is most adequate, the peak of all human power of estimation, I would unhesitatingly reply, “Short-term relative pricing of liquid financial assets, like the price of S&P 500 stocks relative to other S&P 500 stocks over the next three months.” This is something into which human civilization puts an actual effort.

In the thickly traded parts of the stock market, where the collective power of human civilization is truly at its strongest, I doff my hat, I put aside my pride and kneel in true humility to accept the market’s beliefs as though they were my own, knowing that any impulse I feel to second-guess and every independent thought I have to argue otherwise is nothing but my own folly. If my perceptions suggest an exploitable opportunity, then my perceptions are far more likely mistaken than the markets. That is what it feels like to look upon a civilization doing something adequately.

So to the extent the Bank of Japan has poor incentives or some other systematic dysfunction, their mistake can persist. As a consequence, when I read some econbloggers who I’d seen being right about empirical predictions before saying that Japan was being grotesquely silly, and the economic logic seemed to me to check out, as best I could follow it, I wasn’t particularly reluctant to believe them. Standard economic theory, generalized beyond the markets to other facets of society, did not seem to me to predict that the Bank of Japan must act wisely for the good of Japan. It would be no surprise if they were competent, but also not much of a surprise if they were incompetent.

We have a picture of the world where it is perfectly plausible for an econblogger to write up a good analysis of what the Bank of Japan is doing wrong, and for a sophisticated reader to reasonably agree that the analysis seems decisive, without a deep agonizing episode of Dunning-Kruger-inspired self-doubt playing any important role in the analysis.

If you want to outperform—if you want to do anything not usually done—then you’ll need to conceptually divide our civilization into areas of lower and greater competency. My view is that this is best done from a framework of incentives and the equilibria of those incentives—which is to say, from the standpoint of microeconomics. This is the main topic I’ll cover here.

In the process, I will also make the case that modesty—the part of this process where you go into an agonizing fit of self-doubt—isn’t actually helpful for figuring out when you might outperform some aspect of the equilibrium.

In particular, an efficient market, from an economist’s perspective, is just one whose average price movement can’t be predicted by you.

What about houses? Millions of residential houses change hands every year, and they cost more than stock shares. If we expect the stock market to be well-priced, shouldn’t we expect the same of houses? The answer is “no,” because you can’t short-sell a house. Sure, there are some ways to bet against aggregate housing markets, like shorting real estate investment trusts or home manufacturers. But in the end, hedge fund managers can’t make a synthetic financial instrument that behaves just like the house on 6702 West St. and sell it into the same housing market frequented by consumers like you. Which is why you might do very well to think for yourself about whether the price seems sensible to you before buying a house: because you might know better than the market price, even as a non-specialist relying only on publicly available information.

Whereas a predictably underpriced house, put on the market for predictably much less than its future price, would be an asset that any of a hundred thousand rational investors could come in and snap up. So a frothy housing market may see many overpriced houses, but few underpriced ones. Thus it will be easy to lose money in this market by buying stupidly, and much harder to make money by buying cleverly. The market prices will be inefficient—in a certain sense stupid—but they will not be exploitable.

In contrast, in a thickly traded market where it is easy to short an overpriced asset, prices will be efficient in both directions, and any day is as good a day to buy as any other. You may end up exposed to excess volatility (an asset with a 50% chance of doubling and a 50% chance of going bankrupt, for example), but you won’t actually have bought anything overpriced—if it were predictably overpriced, it would have been short-sold.

We can see the notion of an inexploitable market as generalizing the notion of an efficient market as follows: in both cases, there’s no free energy inside the system. In both markets, there’s a horde of hungry organisms moving around trying to eat up all the free energy. In the efficient market, every predictable price change corresponds to free energy (easy money) and so the equilibrium where hungry organisms have eaten all the free energy corresponds to an equilibrium of no predictable price changes. In a merely inexploitable market, there are predictable price changes that don’t correspond to free energy, like an overpriced house that will decline later, and so the no-free-energy equilibrium can still involve predictable price changes.

Our ability to say, within the context of the general theory of “efficient markets,” that houses in Boomville may still be overpriced—and, additionally, to say that they are much less likely to be underpriced—is what makes this style of reasoning powerful. It doesn’t just say, “Prices are usually right when lots of money is flowing.” It gives us detailed conditions for when we should and shouldn’t expect efficiency. There’s an underlying logic about powerfully smart organisms, any single one of which can consume free energy if it is available in worthwhile quantities, in a way that produces a global equilibrium of no free energy; and if one of the premises is invalidated, we get a different prediction.

This doesn’t quite follow logically, because the stock market is far more efficient at matching bids between buyers and sellers than academia is at matching researchers to grantmakers. (It’s not like anyone in our civilization has put as much effort into rationalizing the academic matching process as, say, OkCupid has put into their software for hooking up dates. It’s not like anyone who did produce this public good would get paid more than they could have made as a Google programmer.)

Usually when we find trillion-dollar bills lying on the ground in real life, it’s a symptom of (1) a central-command bottleneck that nobody else is allowed to fix, as with the European Central Bank wrecking Europe, or (2) a system with enough moving parts that at least two parts are simultaneously broken, meaning that single actors cannot defy the system. To modify an old aphorism: usually, when things suck, it’s because they suck in a way that’s a Nash equilibrium.

In the same way that inefficient markets tend systematically to be inexploitable, grossly inadequate systems tend systematically to be unfixable by individual non-billionaires.

So inadequacy is even more important than exploitability on a day-to-day basis, because it’s inadequacy-generating situations that lead to low-hanging fruits large enough to be worthwhile at the individual level.

A critical analogy between an inadequate system and an efficient market is this: even systems that are horribly inadequate from our own perspective are still in a competitive equilibrium. There’s still an equilibrium of incentives, an equilibrium of supply and demand, an equilibrium where (in the central example above) all the researchers are vigorously competing for prestigious publications and using up all available grant money in the course of doing so. There’s no free energy anywhere in the system.

even in a stock market, some stocks are harder to short than others—like stocks that have just IPOed. Drechsler and Drechsler found that creating a broad market fund of only assets that are easy to short in recent years would have produced 5% higher returns (!) than index funds that don’t kick out hard-to-short assets (). Unfortunately, I don’t know of any index fund that actually tracks this strategy, or it’s what I’d own as my main financial asset.

There’s a toolbox of reusable concepts for analyzing systems I would call “inadequate”—the causes of civilizational failure, some of which correspond to local opportunities to do better yourself. I shall, somewhat arbitrarily, sort these concepts into three larger categories: Decisionmakers who are not beneficiaries; Asymmetric information; and above all, Nash equilibria that aren’t even the best Nash equilibrium, let alone Pareto-optimal.

In other words: Cases where the decision lies in the hands of people who would gain little personally, or lose out personally, if they did what was necessary to help someone else; Cases where decision-makers can’t reliably learn the information they need to make decisions, even though someone else has that information; and Systems that are broken in multiple places so that no one actor can make them better, even though, in principle, some magically coordinated action could move to a new stable state.

The Gell-Mann Amnesia Effect is the term for how we read the paper about subjects we know about, and it’s talking about how wet streets cause rain; and then we turn to the story about international affairs or dieting, and for some reason assume it’s more accurate.

I suspect that for many people, the primary benefit of inadequacy analysis will be in undoing a mistake already made, where they disbelieve in inadequacy even when they’re looking straight at it. There are people who would simply never try to put up 130 light bulbs in their house—because if that worked, surely some good and diligent professional researcher would have already tried it. The medical system would have made it a standard treatment, right? The doctor would already know about it, right? And sure, sometimes people are stupid, but we’re also people and we’re also stupid so how could we amateurs possibly do better than current researchers on SAD, et cetera.

Often the most commonly applicable benefit from a fancy rational technique will be to cancel out fancy irrationality.1 I expect that the most common benefit of inadequacy analysis will be to break a certain kind of blind trust—that is, trust arrived at by mental reasoning processes that are insensitive to whether you actually inhabit a universe that’s worthy of that trust—and open people’s eyes to the blatant brokenness of things that are easily observed to be broken. Understanding the background theory helps cancel out the elaborate arguments saying that you can’t second-guess the European Central Bank even when it’s straightforward to show how and why they’re making a mistake.

This brings me to the single most obvious notion that correct contrarians grasp, and that people who have vastly overestimated their own competence don’t realize: It takes far less work to identify the correct expert in a pre-existing dispute between experts, than to make an original contribution to any field that is remotely healthy.

Distinguishing a correct contrarian isn’t easy in absolute terms. You are still trying to be better than the mainstream in deciding who to trust.8 For many people, yes, an attempt to identify contrarian experts ends with them trusting faith healers over traditional medicine. But it’s still in the range of things that amateurs can do with a reasonable effort, if they’ve picked up on unusually good epistemology from one source or another.

a realistic lifetime of trying to adapt yourself to a broken civilization looks like: 0-2 lifetime instances of answering “Yes” to “Can I substantially improve on my civilization’s current knowledge if I put years into the attempt?” A few people, but not many, will answer “Yes” to enough instances of this question to count on the fingers of both hands. Moving on to your toes indicates that you are a crackpot.

Once per year or thereabouts, an answer of “Yes” to “Can I generate a synthesis of existing correct contrarianism which will beat my current civilization’s next-best alternative, for just myself (i.e., without trying to solve the further problems of widespread adoption), after a few weeks’ research and a bunch of testing and occasionally asking for help?” (See my experiments with ketogenic diets and SAD treatment; also what you would do to generate or judge a startup idea that wasn’t based on a hard science problem.)

Many cases of trying to pick a previously existing side in a running dispute between experts, if you think that you can follow the object-level arguments reasonably well and there are strong meta-level cues that you can identify.

It’s just that it’s okay to reason about the particulars of where civilization might be inadequate, okay to end up believing that you can state a better monetary policy than the Bank of Japan is implementing, okay to check that against observation whenever you get the chance, and okay to update on the results in either direction. It’s okay to act on a model of what you think the rest of the world is good at, and for this model to be sensitive to the specifics of different cases.

Overengineering is when you try to make everything look pretty, or add additional cool features that you think the users will like… not when you try to put in the key core features that are necessary for your product to be the best tool the user has ever seen for at least one workflow.

Several people have now told me that the most important thing I have ever said to them is: “If you never fail, you’re only trying things that are too easy and playing far below your level.” Or, phrased as a standard Umeshism: “If you can’t remember any time in the last six months when you failed, you aren’t trying to do difficult enough things.”

If you’ve never wasted an effort, you’re filtering on far too high a required probability of success. Trying to avoid wasting effort—yes, that’s a good idea. Feeling bad when you realize you’ve wasted effort—yes, I do that too. But some people slice off the entire realm of uncertain projects because the prospect of having wasted effort, of having been publicly wrong, seems so horrible that projects in this class are not to be considered.

“The strongest predictor of rising into the ranks of superforecasters is perpetual beta, the degree to which one is committed to belief updating and self-improvement. It is roughly three times as powerful a predictor as its closest rival, intelligence.”

if you’re trying to do something unusually well (a common enough goal for ambitious scientists, entrepreneurs, and effective altruists), then this will often mean that you need to seek out the most neglected problems. You’ll have to make use of information that isn’t widely known or accepted, and pass into relatively uncharted waters. And modesty is especially detrimental for that kind of work, because it discourages acting on private information, making less-than-certain bets, and breaking new ground.