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No Mercy No Malice

Cognitive Dissonance

December 2, 2022

My dad claims “communication is with the listener,” usually after he says something absurd he’d rather not own. I believe most men born before 1970 are biologically incapable of apologizing … “I’m sorry” is admitting defeat to the universe. My dad also often says “perception is reality.” These are two sides of the same coin: We hear what we want to hear — or what the powerful want us to hear. Trump and Elon’s flying monkeys create a reality for them, perceiving every imbecilic action as leadership or part of a genius plan mere mortals don’t have the capacity to understand. Subsequently, their perception/reality: They alone can save us.     

Noise

Psychologists Amos Tversky and Daniel Kahneman earned a Nobel Prize for their research into how we create subjective realities. They identified unconscious patterns of thinking — they called them “cognitive biases” — that can lead us to illogical and irrational decisions. In my experience, strong institutions help protect us from these biases. Wealth and success, however, feed them.

Living in a penthouse apartment in the Bahamas with his friends and Adderall, taking breaks to be fellated by the most powerful men in finance or read love letters from Sequoia Capital … what was SBF’s reality? Was he commingling funds between distinct corporations unbeknownst to customers (i.e., fraud) or cross-collateralizing appreciating assets to make others wealthier and the world a better place (see above: genius)? Pro tip: There is an objective truth … and it’s the former.

We’re all at the mercy of these thought patterns. “Reality” is increasingly subjective. A perfect storm of our need for idols, algorithms based on rage that dictate what we see, and the politicization of science has left us adrift, floating through an archipelago of alternative facts. And everyone’s map of the sea is unique. Elon posts a picture of fake guns on his bedside table — some find it baller, others disturbing. He shitposts elected officials — some find it waggish, others gross. Reducing Twitter’s headcount by 50% was justified or cruel based on … the listener.

One flavor of these mental thickets: confirmation bias. This is where we unconsciously value certain facts over others so we can draw a conclusion that aligns with our preexisting beliefs.

Social media is a nuclear reactor of confirmation bias, especially when the conversation on social is about social. Peer-reviewed quantitative research has found that Twitter’s algorithms amplify right-wing content. Facebook is similarly favorable terrain for the right. It’s not intentional: Right-wing content just turns out to be better uranium for the rage fission reaction. But that hasn’t stopped the right from claiming it’s being suppressed. (The irony: Those claims get more traction thanks to the algorithms they are complaining about.) The basis? Confirmation bias. Listing only the (anecdotal) evidence favoring their view and declaring “a pattern has emerged” while ignoring contrary evidence and science. Elon draped himself in right-wing credibility on this issue over the past year, pandering to the right’s baseless, subjective victimhood with promises to restore “free speech.” The right confirms this, acting as if letting the Babylon Bee back on Twitter makes you John Stuart Mill.

Confirmation bias is bipartisan. Many who don’t like Elon want Twitter to fail. So when they heard anecdotes about technical glitches on the app — which is common across practically all apps — they concluded the entire thing was crashing and burning. I was guilty of this: “I wouldn’t be surprised,” I told Jim Acosta, “if you see the site go down in the next week.” Though grounded in reason, my confirmation bias was working part-time here. (The next week, media outlets reported I had claimed Twitter would be out of business in a week. Click-bait bias? Anyway.)

Another example: self-serving bias. This is where you irrationally take credit for wins but blame failures on something else. (Common among narcissists and assholes.)

After Twitter’s daily active users increased this quarter, Elon posted a Fox-like (distorted) chart that made the number appear extraordinary, and a product of his leadership. In fact, the growth was merely on trend. Meanwhile, Twitter’s revenue decline is extraordinary. But that’s not his fault, Elon claimed. It was “activist groups” pressuring advertisers. Elon’s sycophants also adopted the self-serving bias on his behalf. Nothing that goes wrong is his fault; it’s the media, it’s the government, it’s the woke left. But when two rockets land concurrently on two barges? 1,000% Elon.

Another example: Referring to the potential performance of candidates he’d endorsed in the 2022 midterms, a former president said, “If they win, I should get all the credit, if they lose I shouldn’t get blamed.” He went on to complain that “when they win, I won’t be given any credit.” We’ll never know.

The flip side? The ridiculous “Elon didn’t create Tesla, he bought it with his dad’s emerald fortune” narrative. Here are some objective facts. The number of months Tesla existed before Elon invested $6.5 million (source: selling PayPal) and became chairman of the board: 7. The number of cars Tesla produced before he came on board: 0. Elon may be a narcissist, but he’s built at least two remarkable companies, Tesla and SpaceX (with, at most, some early seed capital from his father).

Signal

So let’s attempt to discern the signal from the noise. Twitter is not just a billionaire’s plaything, it’s a global communications network that, at its best, sustains humanity’s first global conversation. What is going to happen under Elon’s ownership? At the outset of his Twitter acquisition adventure, he claimed he wanted to make Twitter “an inclusive arena for free speech.” He also emphasized that his mission was “not to make money … I don’t care about the economics at all.”

Elon might mean what he says about free speech. But the second part, about not caring about the economics? That appears to be bullshit. I know this, not because I can read minds, but because I can read income statements. And Twitter’s is ugly. Elon has no choice but to care about the economics: The economics will determine the platform’s fate and Elon’s control over it.

At this rate, even after Elon’s significant headcount reduction, Twitter could lose several billion dollars over the next year, and again in the next. Active users and traffic are important only if Twitter can sell high-priced ads against that traffic. But if the only ads customers see are for local businesses and counterfeit fashion brands, all that traffic just means additional server costs, moderation costs, and more overhead. Fifty of Twitter’s 100 largest advertisers have stopped spending on the platform. It’s highly likely the other 50 have significantly reduced theirs, which could mean revenue from Twitter’s major advertisers is down 70% or more. If this is a proxy for the rest of the ad base, then Elon — in less than a month — has turned a $5 billion business into a $1.5 billion business. Put another way, Musk might have paid 30 times revenues for the platform. The faster growing, more profitable Meta and Google, trade at four and six times revenues, respectively. In the first month, this is already the second worst acquisition in history.

It’s still early, but Elon’s commitment to free speech appears to amount to letting right-wing trolls back onto the platform and selling blue checks for $8. Despite media reaction, the blue check proved the most powerful ROI vehicle in the history of media. One (fake) account was able to destroy $5 billion of Eli Lilly’s market cap with a single tweet announcing the company would offer insulin for free. Note: It isn’t.

Meanwhile, as he plays to the red cheap seats, Elon is winking and nodding to advertisers that all the rhetoric is just jazz hands. He assured advertisers he wouldn’t let the site descend into being a “free-for-all hellscape.” In fact, he’s claimed the company’s content moderation strategy “remains absolutely unchanged.” This is mostly true. Outside of readmitting the Babylon Bee and some other bits of right-wing noise, he hasn’t opened the floodgates.

However, with nearly the entire content moderation team escorted by security out of the building, you are likely going to see several Cat 5 objectionable content shitstorms hit the platform.

The relationship between content moderation and value creation is clear; it’s positive. In sum, the more moderated a platform, the stronger the growth and enterprise value. The Wild West of (no) moderation are 4chan and 8chan. They are literally worthless, garnering a fraction of the traffic of Twitter. The “free speech as a strategy” platforms — Gettr, Rumble, and Parler — are out of business, they just don’t know it yet. The quasi-moderated platforms Facebook, Instagram, Twitter, and YouTube are collectively worth about half a trillion dollars. And the most ascendant digital media company in history is likely the most moderated: TikTok. Whatever you believe a private firm’s approach to free speech should be is mental masturbation. Moderation drives revenue, and revenue is oxygen.

Driving away advertisers is asphyxiating Twitter. But it gets worse. Elon has saddled the business with an unsustainable debt load that requires $250 million in quarterly interest payments. But wait, it gets even worse, because much of that debt is floating — meaning every time Jerome Powell opens his mouth, Twitter’s interest payments increase $100 million.

What all this means is that Elon may have to come up with $3 billion or $4 billion a year until he turns the SS Twitter around, or the Wall Street banks he spent six months jerking around will escort the firm into bankruptcy court and take the keys away from him.

And there’s a decent chance he won’t be able to come up with the cash. Yes, he’s the richest man in the world. But wealth and liquidity are not the same. Elon’s liquid wealth (i.e. wealth he can convert to cash) is mainly in shares of Tesla. According to the automaker’s SEC disclosures, Elon has pledged 277 million of his 445 million shares toward personal loans. And those disclosures were made before he bought Twitter — it’s possible he’s pledged even more. On top of that, he’s already sold $35.8 billion of his Tesla holdings just in the past year, to pay taxes and buy Twitter. Stocks trade on supply and demand, and as Elon sells he’s increasing the supply. In his last round of selling, he dumped $4 billion of TSLA onto the market between November 4 and 8. The stock price fell every single one of those days, from $215 to $191 overall. (The S&P 500 was up 3% over that period.) For typical billionaire purchases (i.e., $100 million yachts), Elon’s liquidity needs will not move Tesla stock. But  billions here,  billions there — he risks a downward spiral that could result in margin calls and the stench of a forced seller that will keep new buyers of TSLA at bay.

Regardless, Tesla is a $600 billion company, which does provide Musk with some breathing room. However, about that …

Pre-shock

The earthquake to the pre-shock of Twitter is happening at Tesla. Specifically, Elon’s not-so-great, really bad, awful decision to acquire Twitter is contaminating the EV maker. Tesla’s brand equity has taken a hit, as it’s inextricably linked to Elon and his actions. Apart from where you live or the university you went to, a car is the ultimate self-expressive benefit brand — you are what you drive. And buyers will increasingly decide they do not want to express many of the qualities Musk is displaying. Specifically, he has politicized the brand, and a core cohort of his market (affluent Democrats) are less likely to buy a Tesla. True story: I recently sold my Falcon ModelX and, before selling, took a dump in the passenger seat. The first part of the last sentence is true.

In the past month alone, the net favorability of Twitter among Americans declined 5%. That’s bad for Elon. What’s catastrophic for Elon is the contagion: Tesla is faring worse. In the same period, net favorability of the Tesla brand dropped 6%. Among Democrats, it’s down 20%. Few brands fall this far this fast.

The brand erosion, coupled with the explosion in EV choices, will likely dampen growth. The earthquake to the pre-shock of $30 billion in immolated value at the Blue Bird is the possible destruction of $300+ billion in shareholder value I believe Tesla could register over the next 12 months. The past 12 months have seen the most powerful force in the markets — that is, reversion to the mean — rear its ugly head. And there is serious reversion knocking at the door here. That said, even after the 50% decline that TSLA has experienced the past year, it could get cut in half again and still be worth more than the most iconic German and U.S. car manufacturers, combined.

Q: How do you lose the value of seven Twitters? A: You fuck up the Tesla brand with … Twitter.

Note: There is serious confirmation bias all over the previous paragraph.

What Can Be Learned?

The gelatinization of truth in our society, combined with an idolatry of innovators, has created warring cults that prey on our biases. My favorite saying is “nothing is ever as good or as bad as it seems.” In the U.S. now, nothing is ever as “anything” as it seems. SBF spoke at the Dealbook conference yesterday. Afterward, this question was posed to me (several times): Do you believe him? Yes, I do believe him. I believe he believes he did not commit fraud. He did. We, as a species, cannot choose whether we worship — it’s hard-wired into us. We can choose who we worship. And we choose to worship tech billionaires who demonstrate a lack of grace, personal hygiene, or guardrails. SBF is a spectacle, but if not him … it would have been someone else. Opting for the individual, the innovator, over institutions led to “trustless” systems we couldn’t trust. And confirmation that power corrupts.

Elon paid 30 times revenues for a super virus that has escaped the Twitter lab to infect Tesla, where it may destroy a third of a trillion dollars within a year. Why does this make me happy — joyous, even? I must be biased.

Life is so rich,

P.S. Last call to sign up for Predictions 2023 on December 7. Don’t miss it.

 

41 comments

  1. Andrew Smith says:

    I was born before 1970. I am a tediously average middle-aged white guy; my surname is Smith for heaven’s sake. I apologize all the time. Please do not use throwaway generalizations in the first freaking paragraph. You’re better than that, but more importantly it obscures the real message you’re trying to convey.

  2. AndrewVF says:

    Market cap comparison is one thing, but EPS comparison sheds more light. TSLA yields $3.19 and the other stocks total EPS is $22.99. Sure TSLA has 2x market cap, but 1/7th of the yield by my calculations (using data from BMWYY, POAHF, VWAGY, F, GM).

  3. Laura F says:

    I would really appreciate it if you would stop making jokes about Adderall. This medication along with others like it saves lives and spare people with ADHD a lifetime of mental health issues.
    While some may abuse this drug as they do many others, most people take it responsibly under the care of a physician or psychiatrist. https://www.singlecare.com/blog/adhd-medication-for-teens/

  4. Jack Isquith says:

    The cult of individual personalities is always, in my view, unjustified.
    To be sure, nature distributes her gifts variously among her children. But there are plenty of the well-endowed ones too, thank God, and I am firmly convinced that most of them live quiet, unregarded lives.

    — Albert Einstein

  5. Mark Miller says:

    Prof G – #Ischeduledacolonoscopy

  6. Jenn says:

    I loved how you acknowledge your own confirmation bias 🙂
    Thank you

  7. KEVIN DILLON says:

    Just called my broker, time to short TSLA, again, thx Scott

  8. Josh G says:

    What if Elon’s genius set out to gain the admiration of the right to actually sell more Teslas? The Democratic left that is a large purchaser of Tesla will always go electric, and most likely stay Tesla. As Elon’s fame rises in the right ocean, we may start seeing MAGA diesel-blowhards start going electric. Elon pulls in a new demographic, sells MORE Teslas and saves the earth…just a little bit more than before.

  9. Matt Petersen says:

    Scott,
    I am getting fatigued on the obsession with twitter. There are so many other stories and discussions to be had and your focus on this guy and his companies give him so much more space/power than he deserves. Too much of my time goes to Elon, because I enjoy your content so much that reading/listening to you means Elon 24/7. I am ready for you to be back to the broad set of topics out there. Life is richer than Elon.

  10. C Cook says:

    ‘a Fox-like (distorted) chart’
    A woke-like (distorted) diss
    In other words, the column is CNN-like

  11. Eric Hughes says:

    Excellent article, Scott. Your mix of data, analysis, humor, insight, personal reflection, and good writing is a brand all its own now, one whose net favorability is going up in my book. I’m likewise experiencing intense schadenfreude watching these idols (Holmes, SBF, Musk) fall.

  12. Finn says:

    Cancelled my cybertruck. Will now never own a Tesla.

  13. Michael says:

    Hmm, if individuals are untrustworthy, institutions merely provide them cover. At least we know what Elon is doing or can sanction SBF, but look at the FBI and DOJ and CIA.

    • hugh jasol says:

      It must be tiring, even burdensome , hiding behind trees, peeking under rocks and looking over your shoulder , wondering if the boogeyman is hot on your tail

  14. Jan Rogers Kniffen says:

    I don’t worship much, hard wired or not, but I do worship at the alter of Scott Galloway. Having said that, and given the long odds against landing two rockets anywhere successfully, when you write, “But when two rockets land concurrently on two barges? 1,000% Elon,” I wonder about your confirmation bias. Hell, yes, that is definitely 1,000% Elon.

  15. Harry Shearer says:

    Most people form their opinions about Musk from the media. Direct experience with the way he runs Tesla is, imho, a better teacher. I was an enthusiastic early adopter, and loved the car. However, without going into tedious detail, two unfortunate experiences with Tesla (and, particularly, that ephemeral thing called “Tesla service”) convinced me that the old saw about founders not being good managers is, in face, a very contemporary saw. Musk’s main talent, I have concluded, is attracting very talented engineers, and his main anti-talent is managing poorly if at all.

  16. Will Sheldon says:

    A comment from history: “The owl of Minerva flies at dusk” and “All glory fades”.

  17. Delonna says:

    Your brilliant/intense communication of data – opinion-science, reflect your dimensional intellect. You commented on your father…Did he live in Santa Monica? If so, is his name “Frank”?

  18. Tom Murphy says:

    “ I believe most men born before 1970 are biologically incapable of apologizing …” Talk about confirmation bias, Scott! Your fraught relationship with your father has been self-proclaimed many times and leads to a biased, asshole statement like this.

  19. Joe Lurie says:

    Wonderful Post. To continue the conversation, consider dipping into this book: PerceptionAndDeception.com

  20. yves rebetez says:

    Sounds like critical Elon put Twitter in other people’s hands and focus on NOT seeing Tesla’s brand further tarnished and market cap evaporation …

  21. Phillip says:

    Volvo XC EV COMING SOON

  22. Jeff Su says:

    Really enjoyed this insight on the coupling of Tesla net favorability to the recent chaos at Twitter. In the net favorability chart, what is the mechanism / process to determine that ? Total novice here, but interested to learn

  23. ben says:

    Confirmational bias goes both ways and is not as concrete or with lack of fluidity across groups and individuals. Also, Musk had great reasons for what you refer to as “baseless attacks”. Biden giving NO credit for EV revolution. Warren and Sanders attacking him regardless of being highest EVER taxpayer and paying more in taxes for 2021 than entirety of Congress! As far as his reluctance to close plants, any delay in EV progress is an assault on the planet and further risk to our collective well being from ICE vehicles. Proper distancing and testing with protective measures should have been allowed as with all essential workers.

    • ben says:

      Good point regarding financial stress on Musk and Twitter leverage. Big FU on his part with rare exposure of total disregard for DD and overpayment for Sh*tbird. Agree w/ tainted brand effects. Tesla taking major hit despite only company to potentiate EV revolution in a reasonable time frame. Biggest loss of value to company other than Meta initiative. Neck and neck moronic decision making. Last of all, the downfall of Musk and Tesla making you happy is sad. Hate the man if you must. But the EV revolution is bigger than Musk and needs all our support for sustainable energy transportation infrastructure and deployment.

  24. Jim G. says:

    Let the consumer beware of snake oil salespeople. It’s all cause and effect.

  25. Bob Treuber says:

    Can you comment on the Tesla revenue from selling EV credits to GM and other ICE car manufacturers?

  26. Hal says:

    He will sell $20b of TSLA stock over next year or so (if he can get thru that time) buy back TWTR debt and own TWTR debt less ..prob still NOT profitable but more manageable

  27. spriteless aunty says:

    woah, avoid the T word and you get 1/4 as many comments.

  28. Rufus T Firefly says:

    Your final chart didn’t include Hyundai…okay, they don’t do much to lift the Tesla Competitors Market Cap bar, but the Ioniq 5 will blow your wig. I try to spend as much time in mine as the courts will allow.

  29. Maiawards.org says:

    Great article as always, Scott. Thank you.

    This one in particular stands out for calling itself out for its own cognitive biases.

    One bias I would love to see explored is the connection between people who claim Occam’s Razor (that in a choice between answers the simplest should be chosen…) and self-serving bias (…only if the simplest answer matches all my pre-existing beliefs).

    You’ve ignored that combination here, and highlighted other people doing it, by admitting that Elon didn’t get where he is by being a lucky idiot. But equally being clever and perhaps a bit lucky in the past, doesn’t make him fallible today. It’s possible that the reality is in a muddle in the middle.

    One definition of intelligence is being able to hold two contradicting ideas at the same time. Or otherwise seeing reality.

  30. Mmatu says:

    Nice one, Scott.

  31. Lucy Garrick says:

    Enjoyed today’s rantings mostly but I think you have mixed up a couple things in. Your opening: communication is with the listener” and ” perception is reality.” Neither is correct but what is true is that perception comes from the perceiver. That might be what your father was trying to say – you should ask him. My dad used to say. Perception was reality and what he meant is perception is the perceiver’s reality and he was very wise and successful in business, so you should take that seriously. Communications can’t be any good if we can’t listen but it’s only part of the equation – and cognitive dissonance is a real thing and we have all born witness to a lot of it in the past 6 years. And yes, Silicon Valley worships brains and wealth, not necessarily the same thing as wisdom. Thanks.

  32. Kieran says:

    Musk is driving his brand down (pun intended), brand that is Twitter, Tesla, SpaceX. All of which will lose value as people lose interest in Musk’s antics.

  33. Robert says:

    Betting against Musk has always been a bad bet.

  34. Toni Funicella says:

    Unfortunately,Amos Traversky (d.1995 or 1996)did not win a Nobel Prize because it is not awarded posthumously.Kahneman won iit in 2002 I believe.Kahneman was One of 17 Nobel Laureates who signed on a letter declaring inflation transitory😳.Michael Lewis book The Undoing Project is an excellent read regarding their thoughts and their relationship which was complicated.

  35. Jason says:

    It’s interesting seeing the decline in Twitter and Teslas favorability. I’m I started losing my confidence in Musk when he refused to close his plants in California at the beginning of the pandemic. His handling of the Twitter acquisition and flirting with the right destroyed any respect I had for him. I was planning to get a Tesla for my next car. I’m not now. I don’t want any of my money supporting that clown.

  36. Jim says:

    I would assume Scott must be shorting Tesla these days. Let’s see if he makes this one of his predictions next week. Would love to see him disclose his personal investments though. That’s where one finds out true bias confirmation.

  37. Jeff says:

    The layers of irony and bias in this read are almost too thick to lift.