Bubbles set a Schelling point for talent and capital

Friday, March 17th, 2023

Just as credit produces bubbles in financial markets, Dwarkesh Patel says, talent accelerates bubbles in technology:

During a bust, a highly leveraged hedge fund can experience a death spiral, where people react to bad financial news by calling in their loans, which forces the fund to sell its positions in a weak market, causing lenders to pull back further, and so on. Something very similar happens when you hire superstar employees. By virtue of their talent, these people have lots of options. As soon as you run into trouble and stop being the best place in the world for them to work, some of these 10x’ers will leave (remember, one of the things that makes them 10x is their ambition). And once their peers leave, the remaining A players will scatter too. The leverage you get from hiring really talented people is a huge risk during rough times, because these people have lots of other options and the ambition to pursue them.

Leverage is also a serious risk during a boom. Hedge funds like Tiger Management saw the late 90s Dot-com crash coming. But when they tried to short the tech market, some of their investors asked for their money back, which forced the fund to liquidate its short in a bullish market, which caused even more lenders and investors to pull out, causing further losses.

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In The Alchemy of Finance, George Soros explains market bubbles with his theory of reflexivity. Bubbles shouldn’t exist in an efficient market, because speculators will bet against any asset whose price rises above its fundamental value. But bubbles are a common and recurring phenomenon in financial history.

Soros explains that the efficient markets hypothesis does not map onto actual markets, because it treats price simply as the output of market forces despite the fact that price also acts as an input. If a company’s stock quote increases, it will be able to raise more capital from investors, and on the basis of the money it just raised, its value will rise even further. Through this feedback loop, the prevailing bias is reinforced.

Reflexivity is at work in talent markets as well. Say that you manage to convince a few A players that your startup is extremely promising. Now, you can go to investors and say, “I’ve got the beginnings of an amazing startup — look at this awesome team I’m putting together.” And now you can hire even more 10x engineers by telling them, “Hey, we just raised our seed round on a 50 million dollar valuation. How can you not join this rocketship?”

But if this self-reinforcing cycle is not backed up by a legitimate and scalable vision which can make use of the influx of talent, then you have a bubble. Theranos founder Elizabeth Holmes recruited highly credentialed biotech talent, and then advertised this team to raise billions in capital, which helped her get more clout and attention, which she used to recruit even more superstars, and so on.

Leverage tends to accelerate bubbles, because it allows people to throw more money into an already inflated asset. Similarly, extremely talented people accelerate tech bubbles. No prospect is more attractive to a 10x engineer than working with other 10x engineers, and no opportunity is more irresistible to an investor than funding a team of 10x engineers. The positive spin on this is the Byrne Hobart view, that bubbles set a Schelling point for talent and capital. A founder quality person can quit his job and start a new company in Web3 or biotech because he think he’ll get funded, and investors are willing to fund him since they expect that he will be able to recruit 10x engineers, who are comfortable making a career pivot because they find the founder’s vision exciting.

If any of of the people in this chain stop believing the hype around which their project is organized, then the hype becomes unjustified. So the con view of tech bubbles is that the entire party crashes if one person leaves early. And once the bubble starts to wobble, 10x employees will move on to the next compelling tech vision, causing the leveraged death spiral mentioned in the last section. Leveraging your company with talent increases your volatility — either you orchestrate a revolution, or you implode.

Technology, more than any other sector, seems to have this strong pattern of producing bubbles, where one hype train follows another. Perhaps this is because the smartest, most talented people go to work in tech, and just as credit produces bubbles in financial markets, talent accelerates bubbles in technology.

Comments

  1. Jim says:

    George Soros is so right.

  2. Pseudo-Chrysostom says:

    Well you know what they say, feds of a feather oft flock together.

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