The Breakdown - When Investors Should Say "No" vs. "Yes"

Episode Date: May 19, 2025

A reading and discussion inspired by https://blockworks.co/news/investors-prediction-market-no-bet-outcome Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, May 18th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends.

Well, as you heard earlier this week, the breakdown has officially become the daily content brand of Blockworks overall, meaning that their daily newsletter written by Byron Gilliam is also going to be called The Breakdown, and we're going to be finding cool ways to cross-pollinate some of that content. None of this will be forced. I don't have to care about what Byron is writing about, and he doesn't have to care about what I'm talking about, but we're both going to be looking out to see if there are ways that are worthy of overlap. And Long Green Sunday feels like an obvious place to me for a chance to get some of Byron's thinking onto the show, for a chance to bring some of that different thinking in.

This week, we're doing something a little bit different. A lot of the Long Read Sundays recently have been from sitting U.S. congressmen about the need for crypto regulation, or about stable coins, or basically about a handful of topics that get rotated in and out, which makes sense. It's those handful of topics that are dominating things right now. But this week, we're getting a little bit more philosophical. Byron wrote a piece called Why Investors should say no more often.

And I think there's some interesting things there to contemplate more broadly. So I'm going to turn it over to the 11 Labs version of me to read this piece, and then we'll come back and discuss it. If you've ever tried meditation, you'll know that doing nothing for more than about 10 seconds is weirdly difficult. If you haven't, you might not realize just how much the human mind rebels against inactivity, an evolutionary inheritance from when doing nothing meant starving on the savannah, or getting eaten, I guess.

These days, our bias for taking action is nowhere more. evident than in financial markets, where the headlines are always imploring investors to take action. Something is happening they tell us, and we'd better do something about it, now. Only the most stoic among us can resist for long. Traders, investors, gamblers, and even business people are constantly reacting to events and placing bets on their consequences, but events are rarely as consequential as we expect. One measure of investors' propensity to overreact to events is options pricing. An academic study from 2003 found that traders so overpaid for put options on the S&P 500 that they'd need equities to experience a 1987-sized crash once every nine months just to break even. That hasn't worked out so

well. 22 years later, there has still only ever been one 1987-sized market crash. Mercifully, Black Monday's vertiginous drop of 22.6% remains the biggest of all time. Another measure of our tendency to overestimate the probability of unlikely outcomes is found at the horse track. Two researchers studying the favorite long-shot bias concluded that long-shots are over-bet while favorites are under-bet. Betting on horses with odds of 100 to 1 or greater, they found, resulted in losses of 61 percent, far greater than the 23 percent loss that betters would have incurred by placing their bets randomly. A study of prediction markets similarly found a long-shot bias, among betters, causes high likelihood events to be underpriced and low-likelihood events to be

overpriced. The long shots do sometimes hit, of course. When Leicester City won the English Premier League in 2016, for example, it turned one fan's five-pound bet into a 25,000-pound payout. At 5,000 to 1, it was probably the longest odds bet on a single sporting event ever to hit. Other 5,000-to-one bets available at UK bookies implied that Leicester City winning the league was exactly as likely as Elvis being found alive or Barack Obama playing cricket for England. It's fun to bet on something like that happening. It scratches our itch to believe that one extraordinary things happen more frequently than they do, and two, we have an ability to anticipate them. Most of the time, though, you want to bet against things happening. For example, one polymarket better

recently made about $2.1 million betting no on seemingly everything. When you look at some of the bets on offer, you can see why that might be a profitable strategy. Polymarket betting implies there's a 4% chance that Canada will be the 51st U.S. state by the end of 2025, and that there's a 13% chance that Jesus will return before the release of Grand Theft Auto 6. I imagine the people betting yes on those are doing it just for laughs. Surely Grand Theft Auto won't take that long. But these yes-betters could be doing us a favor by illustrating the power of betting no. Prediction markets show that people bet in anticipation of things happening far too often. horse racing shows that people anticipate extraordinary things far more frequently than they occur,

and financial markets show that even when extraordinary things do occur, they're typically less consequential than we expect. How else to explain U.S. equities being unchanged on the year, despite all the unprecedentedly dramatic news on tariffs? Liberation Day turned out to be far less consequential than feared, not quite a nothing burger, but seemingly unimportant for long-term investors. In the meantime, traders betting that the dramatic tariff headlines were inconsequential, betting as if nothing would happen, would have cleaned up. This is not unique to tariffs. There have been enough such instances that nothing ever happens has become a modestly viral meme. Nothing ever happens isn't meant literally. It captures the idea that despite a nonstop

drumbeat of headlines about dramatic events, markets, and life, often stay surprisingly stable. Polymarket even lets you bet on it, as it defines. it, the probability of nothing happening in May has risen to 78%. Even at those odds, it might still be a good bet because people so optimistically overestimate their ability to predict what will happen. This optimism bias is a good thing for society. If founders correctly assess their chances of success, no companies would ever be founded. But their success rate might improve if they spent less time thinking about what's going to happen and more time thinking about what won't happen. Jeff Bezos notes that he frequently gets the question, what's going to change in the next 10 years,

and almost never gets the question what's not going to change in the next 10 years. That's unfortunate because the second question, he says, is actually the more important of the two. Bezos says founders and business executives should think more about what won't change because it's easier to build a business around things that are stable in time, like Amazon customers wanting low prices and fast delivery, for example, than it is around things that will be different in time. But investors too should probably spend more time thinking about what's not likely to change, effectively betting no on the constant drumbeat of predictions about what's going to happen

and how that will change everything. It's a better bet than we're hardwired to think. All right, back to Real NLW here. I thought this was a fun little thought piece. And certainly we have had evidence recently around this idea that events are rarely as consequential as we think. One very poignant recent example was the absolute implosion of market. at the beginning of April based on tariff concerns, to them coming all the way back and round-tripping

right to more or less where they started. Zooming out, though, on an individual level, a lot of life really is learning how to prioritize and what to say no to. We all live in a world of ultimately scarce resources. For most of us, money is a key part of that scarcity, but even for those for whom it's not. No one, not even Brian Johnson, can escape the vicissitudes of time. That means that you have to say no to some things. You can't pursue 18 different careers, you can only have so many majors, and especially as time moves on in one's life, the most poignant realization for many is that you simply cannot get back lost days with family. There's an entire genre of TikTok content that reminds us that your kids will never be the same age they are now, ever again.

All of this is to say that no really is important. But on both an individual and a societal a level, we really need people to say yes. From both a personal and economic level, growth only happens with yes. Sometimes because we say yes and it works, more often because we say yes and it doesn't, and the failed yes becomes a learning experience on which we build the next yes, which is maybe more successful. Ultimately, we have to try and stretch ourselves and that only happens with yes. In his poem about painter Andrea del Sarto, Robert Browning wrote, A man's reach should exceed his grasp or else what's a heaven for? Moving societally and economically, entrepreneurship, which is the most important force in the long-term growth of the

economy, only comes from nigh irrational yeses, a willingness to hurl forward with yes despite the odds, backed of course by VCs who have the very difficult task of saying no to most things, but not all things, and yes to a few. Crypto, though, has shown the value of another type of yes. Hodler culture is one of our most powerful exports, which is not to say, of course, that all crypto should be held to zero. I'm sure I have a lot of listeners looking at their NFT portfolios who wish that they hadn't held quite so much. And it's also not to say that crypto isn't full of some of the most viciously dispassionate investors on the planet. But I will say that in general, crypto people tend to index higher on belief. And nowhere is this more clear than in Bitcoin.

Bitcoin was willed into existence. It was willed to the place it is. Through all the hundreds and hundreds of times that it was declared dead, it didn't die because of the belief of its hoddler base, because of people who said yes to it. We often debate risk on or risk off when it comes to Bitcoin, but when the chips fall, there is no doubt. Bitcoin has the most uniquely strong base of holders that will not buckle or sell for any price. And in that, an empirically long-term yes becomes a no, a no to the vagaries of short-term markets, a no to anxiety and overreaction. If Bitcoin can bring a little bit of that to stocks in traditional finance, and even our general attitudes and sense of volatility, I think it would be much for the better.

For now that that is going to do it for today's breakdown, appreciate you listening as always, and until next time, be safe and take care of each other. Peace.