(Ep.129) The Acquirers Podcast: Dr Richard Smith – Risky Business: Managing Risk Under Uncertainty

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In this episode of The Acquirers Podcast, Tobias chats with Dr Richard Smith, PhD in Systems Science and expert in making decisions under uncertainty. During the interview Richard provided some great insights into:

  • What Happens To Robinhood If The SEC Bans Payment For Order Flow?
  • Robinhood’s Deals With Wholesale Market Makers
  • Dopamine & Addiction In Investing
  • Price Is An Hallucinogenic Drug
  • Gamblers ‘Enjoy’ Losing
  • Meme Stocks & Crypto Invert The Bell Curve
  • Making Decisions Under Uncertainty
  • Chasing Losses Makes Investors Risk-Seekers
  • The One Thing All Market-Wizards Have In Common
  • Learning To Risk-Budget
  • Leptokurtic Distributions

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Dr. Richard Smith. He’s got a website, The Shape of Risk, and a PhD in Systems Science. We’re going to talk about making decisions under uncertainty, Robinhood, and its impact on new investors in the market right after this.

Let’s talk a little bit about Robinhood.

Dr. Richard: Great.

Tobias: The SEC has proposed this ban on payment for order flow, and my understanding is that’s basically how Robinhood makes its money. So, what’s the likelihood of that happening, and is that the case that’s how Robinhood makes its money, and what do they do if this ban comes into effect?

What Happens To Robinhood If The SEC Bans Payment For Order Flow?

Dr. Richard: It is how Robinhood makes its money today. Meanwhile, Robinhood has built an admirable user base at this point and their users will mature. [chuckles] I started my investing life back in 1998, 1999, or so. I got an account at TD Waterhouse at the time. I haven’t changed my account, man. It’s been 25 years almost and the inertia to change your account for something that’s essentially a commodity service at this point. It’s not really there. I don’t think Robinhood’s going away even if payment for order flow does get banned. I do think there are some real issues with payment for order flow, and I even have an alternative proposal for secretary Gensler. He is not a secretary, what do you call the head of the SEC? Chairman Gensler [laughs] About how I think he could address his concerns, which I think are really legitimate. And also, it really illustrates how Robinhood has gotten its toehold.

I have very mixed feelings about Robinhood, because on the one hand, I deeply admire that they’ve brought so much interest to the markets and made the market so accessible, as I’m sure you know as a professional investor, accessibility does not equal success. To me, accessibility, more often leads to failure, because the lowest common denominator of retail finance, I’m afraid is an addictive relationship is the capital markets. I would love to talk about that because I’ve actually just written a piece on that that is actually going to come out today. I think it’s a really serious topic to talk about these patterns of addiction that are really driving a lot of the business models and retail finance right now. But just to go back to what Robinhood has uniquely done in terms of a revenue model is, they’re able to take a much lower size account, because their customers transact in much wider spread, much less liquid assets. Huge options trading for really tiny accounts.

To me, the guy who really has pulled the veil back on this more than anyone is Paul Rowady over at alphacution.com. He really looks at market structure in a very deep way, and how market makers, and retail investors, retail broker dealers like Robinhood have really– Let’s agree brought a new generation of participants into the markets. I can’t really call them investors at this point. I’m sure there are some investors. But Robinhood is making its money off of transaction frenzies in illiquid assets. And that’s how they’ve been able to generate so much revenue with small account sizes. Now, I don’t think that’s going to end well. 25 years of my experience in the markets tells me that that’s not the recipe for success, I’m sure as a value investor you would agree. I’m personally very interested in how do we help retail investors to actually lengthen their time horizon that they’re focused on, whereas everything right now is compressing the time horizon down to shorter and shorter timeframes. So, just to back up and make sure we’re clear on the payment for order flow issue, yes, Robinhood makes its money off of payment for order flow. That’s when they work with wholesale market makers like Citadel Securities to–

Citadel and their Citadel Securities, I’m not quite sure which ones which but Citadel is market making arm right. They will get a better. Execution price, then if Robinhood went straight to the exchange, and then Robinhood gets a portion of that price improvement, and the user gets a portion of that price improvement. Then Robinhood has just really amped that up in a way that no other retail broker has done. They made huge amounts of money on options in 1Q. I think that was the GameStop frenzy, and then in 2Q, they made huge amounts of money, and Dogecoin, tens of millions of dollars. I think payment for order flow like phenomenon are coming into cryptocurrency now, too. That’s kind of a basics of payment for order flow and Robinhood’s model.

I can’t swear to this, Tobias, but I think that Robinhood uniquely negotiated deals with some of the major wholesale market makers where they earn a percent of the spread as opposed to just getting a fixed fee for payment for order flow. So, that incentivizes them to go into wider spread trades.

Robinhood’s Deals With Wholesale Market Makers

Tobias: What’s wrong with that?

Dr. Richard: What’s wrong with that? It incentivizes Robinhood to put their novice customers into illiquid widespread trades like options for example. I do think that’s a very risky way to proceed for novice investors, and I think it creates a bit of a conflict of interest between Robinhood and its users.

Tobias: How does Robinhood’s approach to investing differ from some of the more established brokers that are out there, and why is their behavior, why does that necessitate a regulatory response?

Dr. Richard: Again, Robinhood has brought many small accounts and facilitated engagement in the markets, and versus somebody like Schwab for example. I think the average count in Schwab is maybe $250,000, and the average count at Robinhood is $2500. Ballpark figures. I don’t think I’m off by an order of magnitude. Traditionally, the SEC has look to protect smaller retail investors. I think that’s what you have at Robinhood. There’s also an element of what are the wholesale market makers doing with the data that they get from the Robinhood users and other retail traders. So, I believe that Robinhood really has taken the Silicon Valley user as product business model that the Facebook’s, the Google’s, etc., and has imported that into retail finance, and that is done in collaboration with the market makers.

Instead of, Google and Facebook might have advertisers that pay to get the attention of the users of the platform, and Google and Facebook are incentivized to nudge behavior in the direction of their paid customers. They’re paying customers, which are the advertisers. I think that Robinhood is incentivized to nudge behavior in the direction of its paying customers, which right now are the wholesale market makers. So, I think that we don’t really get to see what the wholesale market makers do with that data, how they use it to make intelligent decisions in the markets. They’re really in the business of risk management.

But I think they’re getting value out of that data, and that’s why they’re paying for it. So, I do think that sets up a conflict of interest with Robinhood’s users potentially. I would love to just see more transparency around all this. If it’s so great for retail investors such a great deal, let’s see all the data. Let’s see what are the assets that are really driving transaction fees at Robinhood, and is that ending up being profitable for its customers? What are the wholesale market makers able to do with this data, and how is it profiting them and their other sister businesses?

I think all those questions are really unclear, and it would be great to see more transparency. The SEC actually made a rule change a couple years ago that required broker dealers to disclose the relationship of payment for order flow with wholesale market makers. That wasn’t happening before two years ago. That’s why payment for order flow is a household word today, household phrase, I guess. Because the SEC required that disclosure, and before that Robinhood didn’t tell anybody that it was making money on payment for order flow, and they actually even pretended that they weren’t. So, more of those kinds of actions by the SEC, I think, even on the wholesale market maker side, more transparency, more disclosure, I think some things would come to light that in the end, it could help us all make better markets.

It’s such an incredible generational opportunity right now to engage a new generation of investors in the capital markets hopefully for decades, and not just up to a flame out like we had in March of 2000. I’m personally concerned, is an elevated risk right now. So, I would love to see all these young investors learn to love capitalism, learn to love capital markets, not have this just be a war against Wall Street. But I think we all got to work together to do that, and I think that everybody wants a better future, and especially for the markets, everybody wants the markets to succeed. We only have ourselves to look at to solve this problem and I’m hopeful that we [crosstalk] something about it.

Dopamine & Addiction In Investing

Tobias: When I look at Robinhood, I think that there are two issues. One is that, we don’t necessarily know what’s happening to that order flow and it might be front run or used in some other way. But if ultimately that allows you to trade more cheaply and in a more illiquid stocks, more easily, then it’s probably a good thing. The other problem, which I think is possibly the bigger problem with Robinhood is the gamification if you like all the experience from the perspective of a user when there’s a lot of– They’ve imported those Silicon Valley’s social media dopamine hacking elements that make you want to do things on the site. You get confetti going off, and they simplify an option trade even for experienced investors is a reasonably complex thing.

You’ve got to think about are you getting sufficiently compensated on the volatility side? There are lots of other– is the underlying where you want it to be, or it’ll end up being where you want it to be? They’ve condensed all of that down into, do you think the stock is going to go up or down, or do you think the security is going to go up and down, which is potentially too simple. To your point about the addiction side that dopamine hacking is certainly an addiction.

Dr. Richard: I’ve just been finished up a book called Dopamine Nation. It’s a new book out right now by Stanford psychiatrist and Director of the Medical Addiction Center or something like that, Dr. Anna Lembke, wonderful book. Not a lot of behavioral finance in it, but she does talk about some research around gambling for example. The four things that really trigger dopamine release in the brain in the neuro transmitters, one is, getting a reward. Two is, anticipating a reward. We’re doing that all the time. Every time we look at the screen, we’re thinking, “Oh, am I going to get a reward?” Even if it’s just a temporary paper reward. The markets up today, my portfolios up today, whatever.

Gamblers ‘Enjoy’ Losing

Then three, another one is that, if it’s a rich complex environment with lots of learning opportunities, that’s another thing that elevates dopamine levels. You can spend your life learning about markets. [laughs] That is a rich complex environment that you can learn a lot. Then the fourth one that really was particularly relevant is that, if the environment is highly randomized, if it’s really like 50-50, that’s the maximum situation where dopamine is released in your attempts to one anticipate reward and try to solve for reward. That actually ends up in gamblers, it produces what’s called loss chasing.

You actually enjoy losing for a while, because the outsized thrill you’re going to get when you finally get that reward. Meanwhile, we know markets don’t tolerate loss chasing indefinitely. [laughs] As John Maynard Keynes said, “Markets can remain irrational longer than we can remain solvent.” Risk of ruin is a big issue. It does eventually catch up with loss chasers. All these things are going on in the markets and they’re creating a very addictive relationship with our screens and with the markets. The presence of dopamine is an indication of an addictive experience, whether it’d be drugs or retail financial markets. So, all of that is going on, going back to my wish for transparency. If Robinhood would disclose, what they’re gamifying and what they’re making money on, I’m pretty certain that we’d find a correlation between those things.

Tobias: I thought you’re going to quote the Keynes quote, where he says, “Investing is intolerably boring to those who don’t possess the gambling gene.” But if you do then you have to– [crosstalk]

Dr. Richard: I did quote that in my article that will come out later today. [laughs]

Tobias: If you do have possess that propensity, you have to pay the toll something like that [crosstalk]

Dr. Richard: Yes, you do. It’s fine. If you say, “Hey, here’s my playing money. This is entertainment. I’m going to pay the toll.” But that’s not really what most people do.

Tobias: It’s not investing. It’s– [crosstalk]

Dr. Richard: Not investing. No, it’s not. To say that access to markets equals investing, which is what the Robinhood PR machine says over and over again is really disingenuous. It’s really disingenuous and it’s really setting, I think, a generation of investors up for potential catastrophic failure.

Tobias: To what extent do they have an obligation to those investors to ensure that they have some success in the markets and to what extent are they just facilitating a transaction?

Dr. Richard: Well, I wish I knew. On the one hand, I do believe that the founders really did set out with an aspiration to democratize investing. I think that like anyone who’s running a business, you do end up having to not be entirely idealistic [laughs] at some point to generate a profit. Then I think that they got swept up in a bit of a unique situation with COVID, and everybody, all of a sudden taking an interest in retail finance, and Mr. Tenev admitted recently like, “Hey, we didn’t have all our ducks in a row to really take on this level of responsibility.”

So, I do sometimes hear him talk about really being in this for the long haul and wanting to encourage long-term participation in the markets. But when I see the quarterly statements come out, and I see all the revenue from meme stocks, and Dogecoin, and GameStop, and AMC, and I see the research of Paul Rowady over at Alphacution, showing how this data is being used to put together market structure, and market forecasting by really sophisticated players.

When Robinhood stops making money off of YOLO type trading and FOMO type psychology, that’s when I’ll really start to breathe a sigh of relief, because I really do think they have some accountability and responsibility to a new generation of investors, and it’s quite an opportunity for them. If they can think in terms of a decade instead of quarter to quarter, man, they’re in the catbird seat, and there’s an incredible opportunity. So, maybe now, they’ve gone public, they’ve gotten through the phase of having to make whole their original investors, and hopefully they can do something positive from here on out.

Tobias: We’ve lived through an unusual few years, because we’ve had COVID, people locked at home, people trading probably more than they would otherwise have done, and then we’ve had some unusual ramps in GameStop, AMC, and then also in crypto, and now in NFT’s. To what extent are they reliant on this boom, bubble, ramping type behavior? In a more normal market, where there’s less of that speculative behavior going on, how do they fare?

Dr. Richard: Robinhood?

Tobias: Yeah. [crosstalk]

Dr. Richard: I think they’re in big trouble.

Tobias: Yeah.

Meme Stocks & Crypto Invert The Bell Curve

Dr. Richard: I think they’re in big trouble. I have been developing some ideas at a website called shapeofrisk.com. What I’ve been doing is looking at price data and histograms. Your audience probably knows what a histogram is. But there’s the bell curve, the normal distribution. If you look at how prices change from day-to-day, how many times are they up less than 1%, or down less than 1%, or 1% to 2%, or minus 1% to 2%? For mature assets, you have a normal distribution.

Most of the changes are plus or minus 1% on a given day. But when you look at things like GameStop, and AMC, and Dogecoin, and even bitcoin, although it’s maturing a bit, what you see is almost nothing in the middle and huge tail poles. My tails are plus/minus 5%. So, an asset that moves 5% or more up in a day or 5% or more down in a day.

When you look at AMC entertainment for example, over the past year, it’s nothing but two big poles at the end every day. It’s up. Plus, or minus or down 5% or more. This is going back to what triggers that maximum dopamine release. That is the equivalent of randomness. That’s the equivalent of a coin flip. It’s an environment that your brain can’t make sense of, and so, when you do get a reward, it’s like, “Oh, what a relief.” Finally, something makes sense. It’s only temporary because it’s actually just a random event that you’re interpreting as you being intelligent. [laughs] But really, it’s randomness that you can’t make sense of that all of a sudden you think you’re right, and that’s a powerful experience, and you want to keep doing it again.

You look at all these stocks and cryptos that are generating such buzz, and they all have that pattern. They all have that pattern. I call it polarization. I think in general, social media and user as product business models, all have this tendency to profit from polarization. The polarization, what it does is it creates engagement, it creates stickiness, it creates actually cognitive dissonance, and because we are since making creatures, we want to make sense of things, we just lean in to try to make sense of something that actually, is maybe cautious here, but–

Tobias: Randomish

Dr. Richard: There is an element of it that’s intentionally nonsensical.

Tobias: Was it intentionally nonsensical?

Dr. Richard: Because it’s highly profitable. In the world of finance, you can say that Robinhood didn’t create GameStop. But Robinhood certainly figured out a way to profit from GameStop, and they certainly figured out a way to make it easy to participate in that GameStop frenzy.

Tobias: Are they drawing it to people’s attention on the app as well? Are they showing that there’s lots of moves in the stock, and so, this might be one of those opportunities, where you can get that big dopamine hit if you go in the trading?

Dr. Richard: [crosstalk] I love to see what are their algorithms that decide what gets in front of their users, what opportunities get in front of their users, how are they subtly directing the attention of their users? In the GameStop thing, it was Robinhood, it was WallStreetBets so Reddit got a huge boost. Look at how much Reddit and Robinhood benefited from the GameStop phenomenon, not just in terms of revenues, but in terms of cementing themselves in the public consciousness. Citadel Securities, Paul Rowady again was just talking about how God bless him. Citadel Securities basically bailed out Melvin Capital.

Well, there’s a pretty compelling narrative of why that was actually really good thing to do for their risk book given the position they had gotten into with GameStop of one having to sell put options or take the other side of the call options, so, essentially, be short the stock, and then have the gamma squeeze come into play, where you have to buy call options or buy the stock to hedge your risk, and then, how do you make sure that you’re not going to be caught upside down if this thing unravels? All of that is going on behind the scenes, and I think it is something that the industry really needs to look at in terms of incentives that it creates for novice investors and the risk that puts novice investors at of ultimately having a disappointing experience and being alienated from the markets for the next couple of decades. You think they’re mad at WallStreet now. [laughs] Have that really blow up in everybody’s face? Then it’ll be a game over.

Tobias: It is sort of inevitable, isn’t it?

Dr. Richard: It feels inevitable. I am a hopeless optimist. So, I have seen society do miraculous things before. Don’t ask me to name one right now.


Making Decisions Under Uncertainty

Tobias: What’s your background, Richard? How do you come to be interested in risk and this analysis of the markets where, use a histogram type approach to look at the moves?

Dr. Richard: Yeah, well, so, my undergrad was in mathematics, and then I ended up doing a PhD in a field called Systems Science. But my focus was on decision making under uncertainty, and using probability and information theory to help people be more help– At that point, researchers and scientists actually be more honest about the uncertainties in their models and not put premature assumptions in there that then propagated throughout the system, and led to some poor policy choices. I’ve always been fascinated by human psychology, I love math and computers, and human behavior. It was natural, and it was also– I finished my PhD in 2000. I was in the markets like everybody else was right.

I decided not to continue on with an academic career. I wanted to actually develop education and technology to help people, make better decisions under uncertainty, the markets were a natural place to do that. I developed a website called tradestocks.com in 2005 that started to bring trailing stop loss alerts to retail investors like me at the time. It actually was something that the brokers didn’t offer at the time, and if they did offer it, then you could only keep your alerts in the market for 60 days or so, and you didn’t even know you were giving visibility to the market or not.

Chasing Losses Makes Investors Risk-Seekers 

Dr. Richard: So, that business grew, and eventually, I really connected it to behavioral finance and to the work of Kahneman and Tversky, and Richard Thaler in Loss Aversion, Nobel prizes in economics, because we hate to lose, but that Loss Aversion, the fact that we hate to lose manifests itself differently when we’re losing on a position versus when we’re winning on a position. When we are losing, we don’t want to sell in the words of Daniel Kahneman. We are risk seeking, when we’re losing. We take more risk. We amplify our risk actually when we’re losing.

But conversely when we’re winning, our fear of loss attaches itself to our profits, and we become fearful of losing our profits, so, we actually become risk averse when we’re winning. We’re risk seeking when we’re losing or risk averse when we’re winning. The only thing that academics and technicians agree on is that markets manifest momentum. So, things that are going down tend to keep going down, things that are going up tend to keep going up, and so you have this recipe for chasing losses, being risk seeking when you’re losing, till you finally throw in the towel, because you can’t take the pain anymore, you end up with a 90% loss. Well to make up a 90% loss, you have to have 1,000% gain. It’s not just a 90% gain, it’s 1,000% gain in a 10x.

But you get a 50%, 100% profit, you’re like, “Hey, take that off the table. I don’t want to lose that.” So much of investing is behavioral and psychological, and that’s really like why this stuff about addiction has really snapped into place for me and explain so many things is that, hey, you’ve mentioned the quote earlier from Keynes about, “If you have the gambling instinct, you got to pay the toll.” Unfortunately, it seems to me so much of retail finance today is actually just monetizing the gambling instinct. Meanwhile, if you can admit that and accept that, then your mandate is actually to put yourself in a different situation than everybody else. Because the markets transfer wealth from the impatient to the patient. It’s an incredible opportunity to actually start to really study your own behavior, make sure you’re not behaving in the way that the mass majority of participants are behaving, and that’s where you can really find your edge.

The One Thing All Market-Wizards Have In Common

I interviewed Jack Schwager, the author of all the Market Wizards books over at the foundation for the study of cycles. You ask Jack, “What do all the Market Wizards have in common?” He says, “Well, pretty much nothing. They’re each as different as you can imagine.” But the one thing they do all have in common is they all have a pretty rigorous commitment to risk management. [laughs] Where is risk management and retail finance? Let me ask you. Maybe you got a trailing stop here or there on a single stock, but where do you find in retail finance things like correlation or Sharpe or Sortino, or what I love is value at risk. You know all these things, professionals know all these things. They are completely absent in the retail world.

Learning To Risk-Budget

My personal quest is to actually make risk management, risk budgeting, risk spending something that retail finance really finally understands and can start to leverage. I don’t think it can be done in a technical academic way. I think it has to be done in a fun and a new way, edgy way, and a great user experience. That’s what I’m really working on– I saw on your website for example, you have kind of your 1-2-3 step for your Acquirers model rights, and in step two, you talk about volatility.

You talk about big stocks, less volatile small stocks, more volatile more stocks together at once less volatile. That’s one of the things I’m really working on. So, Ray Dalio called the ‘holy grail’ of investing 15 to 20 good, uncorrelated return streams. How do you help people build their own custom portfolios of good, uncorrelated return streams? How do you help people understand that you can have some influence over volatility by structuring your portfolio in a certain way, and you can budget your risk, and then you can go spend that risk in a way to maximize reward?

Tobias: How do you achieve that?

Dr. Richard: That’s a totally different way of thinking about what investing is then YOLO and take down the man.

Tobias: How do you achieve that in a practical sense, the risk budgeting, risk spending?

Dr. Richard: Well, so take value at risk as a simple model. A 95% value at risk model, so, if you have a portfolio, this says 95% of the time you should do better than this. If you ask yourself, “Hey, here’s my portfolio, what’s my 95% value at risk?” Got $100,000 in the market, “Oh, if I just use this model on my current portfolio, it says that once every 20 days or about once a month, my portfolio is going to be down likely to be down say, $3,000 in a day.” That’s a good number to know. To go in, say, “Hey, once a month, I should expect open in my app and see my 100 grand portfolio down by 3%.”

All right, I can live with that. I know it’s coming. My expectations are now better aligned with market history and market reality. You might look at that number and go 3% in a day is too much for me. I’m not comfortable with that. I need to figure out how to restructure my portfolio to make that $1,500 as my worst day in a month. You can do that. Those tools exist. They’re table stakes for professional investors.

Price Is An Hallucinogenic Drug

Meanwhile, I’m working on a new app, some financial technology, we can start to see it at shapeofrisk.com. I don’t need to call it value at risk for the retail public. I actually call it D score, which D stands for ‘Damn.’ This is the number that once a month, if you look at your phone, and you see your portfolio down that much in a day, you go, “Oh, damn, that hurt. You know what? Hey, I signed up for this.” Then to gradually interact with risk management on a daily basis and start to understand your own risk tolerance, I think is a huge opportunity to use mobile technology, to start to create a feedback mechanism, and to start to present the public with risk management data, and to have people interacting with risk and reward, and thinking in terms of risk and reward.

I think price is a hallucinogenic drug, and this really like clicked for me when I was talking to my mom. If you’re listening mom, I’m sorry. She said, “Your sister bought some Dogecoin because it was cheap.” This was when Dogecoin was 75 cents, and I was like I pulled my hair out. That’s when all my hair went away.


Dr. Richard: I was like, “Mom, Dogecoin is not cheap.” You add up all the Dogecoin in the world is worth like $75 billion right now. It’s worth more than half the companies in the S&P 500, and they don’t do anything. There’s not even any develop [crosstalk] on.

Tobias: It’s a gag.

Dr. Richard: Look, I love the community, I love the spirit, I love the camaraderie, but that doesn’t add up to $75 billion of value, and just because Dogecoin cost less than $1, it doesn’t make it cheap. That kind of thinking is really– I think hallucinatory is an accurate description. How can we get people away from price? Start to look at things like risk and reward, and do some risk budgeting, and then use correlation to spend their risk more effectively, and ultimately create a shape of risk that works for them.

Leptokurtic Distributions

Tobias: One of the problems with value at risk and option pricing is that we make that simplifying assumption that it is a normal distribution. As anybody who’s spent any time in the markets or read anything knows, the thousand-year storm rolls around about every seven years.

Dr. Richard: Yeah.

Tobias: And, the technical term for that is the Leptokurtic tail, the fat tail. There’s more probability distribution in the tails than we understand. The difficulty might be for people who’ve been in the market for one, or two, or three years is that, that feels like a long period of time in the market. But it’s difficult to conceive of these gigantic moves, these gigantic waves that come through until you’ve seen them. That really is that very remote, unlikely thing. It only happens a handful of times in a decade. But it is that the thing that really destroys portfolios, particularly, because people see that wave for the first time, and then they never want to get back in the water.

Dr. Richard: Yeah, and again, whether or not you can manage that wave has to do with the level of risk that you’re taking in the markets. You have to model for that, you have to say. You know, “Am I okay with this falling 50%, 60%?” If you’re not, you really shouldn’t be in the markets. That brings me back to my proposal for Gary Gensler. Instead of banning payment for order flow, let’s take on the more volatile, widespread instruments. Let’s take a portion of that spread, let’s take a portion of that price improvement, and put it into an educational fund. I see online investing today as being a lot like smoking 30 years ago. We know it’s got pitfalls, we know it’s got problems, we don’t want to cramp people’s freedom and regulate away freedom, regulate away markets, but we do have an obligation to really educate people about exactly that thing. Don’t ban payment for order flow.

I like to use inverse volatility. I mean, if there’s price improvement on S&P 500 stocks, you don’t need to kick back for that. But penny stocks, options, more volatile stuff that tends to be the stuff that triggers addictive interactions with the markets, let’s take a portion of that, put it into an educational fund and really have a campaign to educate a new generation of people about what they can do if they’re in these markets for 30, 40, 50 years in an effective, intelligent way. If they start now, what could that do for them? So, I think there’s such an opportunity there. I don’t want to just preach to the younger generation and say, “Hey, you dummies, because that’s not what this is about.” I think they’re incredibly smart, but they are young, and we were all young ones, and we know what that was like. So, let’s work together to really educate a new generation of investors, yeah, to have some fun, but also to really make the power of the markets work for them.

Tobias: On that note, Richard, we’re coming up on time. So, if folks want to get in contact with you or follow along with what you’re doing, what’s the best way to go about doing that?

Dr. Richard: Thanks for asking. drrichardsmith.com is one place that I publish a bi-weekly newsletter right now called the RISK Rituals for free. Put some video content up there, writing about these ideas, writing about dopamine, and addiction, and user as product, and then the easiest place to follow my budding technology efforts right now is shapeofrisk.com. You can see a variety of histograms there, what they look like, and you can even start to combine a few histograms to build your own portfolio, and decide how you want your risk to look like. So, I am very excited about that. [Twitter: @investing_dr].

People have been checking it out and giving me great feedback, and ultimately, working on building a place that do it yourself asset managers, and I think in some ways, we’re all asset managers today. I think the whole concept of what an asset is, is really expanding dramatically from the availability of data, decentralized finance, etc. Tokenization, I think all those things are really expanding what we consider an investable assets. I’m building tools to help people really embrace asset management in an intuitive way, not just in equities and cryptos, but even beyond.

Tobias: Well, thank you very much for your time, Dr. Richard Smith.

Dr. Richard: Thank you, Tobias. It’s been great speaking with you.

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