Sean Cheng

Narrative Arbitrage

May 21, 2021

Many of the narratives we tell ourselves are only partially true.

I’ve noticed this phenomenon among acquaintances, friends, and in my own life. We arbitrarily set limitations on what we can do, while heightening the perceived risk of certain pursuits.

This mentality manifests itself in statements formulated like “Because of X, I can’t do Y,” “I don’t have enough experience for Z,” “H is too uncertain and will cause me to lose I.”

The power of these types of statements is they often contain partial truths.

It’s likely you don’t have enough experience to work as a software engineer at the company you want. You don’t know enough about marketing and sales to become a startup founder. You don’t have enough good ideas to become a writer.

These barriers can be real and worth considering, but they are also oftentimes overstated.

People wildly overestimate the difficulty of what they don’t understand. As a result, the impossible is frequently conflated with the somewhat difficult.

Take web development for example. A lot of startup founders write themselves off as “non-technical” and never make an effort to learn to code. They tell themselves it’s too difficult and their strength lies in being the charismatic “idea person.”

But learning to code a basic web app isn’t challenging for most people. The perceived difficulty of coding is way higher than it is. And it’s probably easier than trying to find a suitable technical co-founder when you have no technical skills to evaluate whether or not they’re any good.

You can use these types of false preconceptions and other people’s self-limiting beliefs to your advantage. While everyone else is worrying about something being too hard or not practical, you’ll be pulling ahead because you recognize the challenge isn’t as great as it seems.

I call this narrative arbitrage.

Examine The Premise And Leverage Unique Data

Conducting effective narrative arbitrage requires examining the premises of other people’s claims and your internal narratives. It’s helpful if you have lesser-known data you can leverage to derive unique insights. You can then confidently swim in the opposite direction as everyone else because you know something they don’t.

In the case of my COVID gap year, I spoke with my professors, friends, and mentors about whether or not they thought this was the right choice. The overwhelming consensus I heard was no.

“Few people will be hiring during COVID so it’ll be hard to find opportunities and internships.”

“Aren’t you worried about losing touch with your friends from school?”

These objections weren’t clearly invalid. If they were, it would’ve been easy to disregard them and take my gap year. They all contained partial truths or conclusions based on logic which seemed sound on the surface.

However, upon closer inspection, these claims didn’t hold water. This is where the arbitrage comes in. Let’s break down my logic during the time while I was thinking through my gap year:

  1. “Few people will be hiring during COVID so it’ll be hard to find opportunities and internships.”

    • This case is a partial truth demonstrating how narrative arbitrage can come from the unique data you have that few others have access to. While most other students thought getting opportunities was close to impossible, I knew of several individuals who had published playbooks on how they’d done so on the online forums I frequented. I was confident I could do the same with a little bit of work. Information asymmetry created a slight barrier to entry, making it difficult for other students to recognize this opportunity.
  2. “Don’t you want to graduate with the friends from your class year and be on campus with them?”

    • This one is a bit more personal and probably depends heavily on your situation. For me, I knew I would keep in touch with my close friends regardless of whether or not I continued with school. This conclusion was based on what it was like with my high school friends when I started college.
    • I also knew I wouldn’t be missing out on any socializing on campus since many people I knew were doing school from home anyways. While it’s true many of the social relationships I had with people who were returning to campus would weaken, those relationships were usually based on proximity and not based upon deeper intellectual/long-term goal alignment.

In hindsight, it’s easy for me to logically state the counterarguments to each of these claims and seem like I was 100% sure about my gap year, but the truth is at the time, these objections seemed very real and were potential reasons to go back to school.

But luckily, by disregarding the consensus narrative I heard against taking a gap year, I gained a unique experience that’s given me a competitive advantage. I now have greater clarity over which career paths I want to continue to explore, strengthened my friendships with people where distance apart didn’t matter and pursued my intellectual interests without the pressure of grades.

This is narrative arbitrage.

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Large Scale Narrative Arbitrage

False narratives can be present at the individual and peer-to-peer level but can also exist across schools, governments, and entire societies. The larger the false narrative’s reach, the bigger potential gains from narrative arbitrage.

Look at the recent Coinbase IPO. The cryptocurrency trading platform is now valued at over 100 billion dollars, but in 2012 when the founder Brian Armstrong posted on a forum looking for a co-founder, he was met with countless objections.

Here are some replies to his original forum post on Hacker News:

I don’t think alternative currencies have a long-term future. The only reason they exist now is because people and governments in most countries are quite ignorant about technology. Once they become more widely used, they will start causing a whole lot of problems and will be banned by governments.

I don’t think you’ve properly thought this through. Many people have, and there’s a reason we still have the system we have today: How do you handle chargebacks? What about fraud? If you don’t properly protect your users, you’re not really providing a good service, and you need to make the rules incredibly clear for your merchants, they aren’t going to work with you.

Because bitcoin worked out so well. Have fun with that, dude.

The consensus view across the hacker community was Bitcoin would remain a fringe technology and it would be impossible to overcome the mass of regulatory struggles to successfully scale Coinbase.

Few believed in the long-term future for crypto.

But now 1 Bitcoin is worth over $53,000 (April 2021)— a 757043% increase from its 2012 price of $7.

Again, many of these objections both overstated the difficulties of Brian’s idea and based their claims upon partial truths. In Brian Armstrong’s own words:

[These comments] highlights the importance of resilience and ignoring haters when trying to build something new. Nine out of ten people will think it’s a terrible idea, and be quite articulate explaining why this is to you. This will go on for YEARs.

If you can find a way to identify the false/overstated narratives present in your community and violate them, you’ll be ahead of the curve. And soon your success will change the mainstream narrative.

Visionaries and Secrets

Narrative arbitrage makes you a visionary. But being a visionary also means being lonely— not in a physical sense but intellectually. The world won’t believe in what you’re doing, because if they did, your idea would already be a reality. Visionaries know secrets the rest of us don’t.

In the words of famed venture capitalist and founder of PayPal, Peter Thiel:

“The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.”

It’s ironic many of the biggest wins come from when most people say you’re wrong.

Moving Ahead

The stories we believe (whether they come from others or ourselves) shape our reality. Opportunities arise when we are aware enough to reject the false claims others take for granted.

Yet this truth doesn’t fully assuage the fear of venturing into the unknown. And when the line between a good idea and a bad one is unclear, the right decision can’t always be made. But this ambiguity is exactly why narrative arbitrage presents the best way to differentiate yourself.

The only way you can achieve what others cannot, is if you’re willing to do what others will not— even if it means failing spectacularly.

Each step of the way you’ll be tempted to internalize other people’s doubts, fears, and criticism. Resist this temptation. Craft your narrative and arbitrage your way to success.

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