Cognitive Dissonance

Courtesy of Scott Galloway, No Mercy/No Malice, @profgalloway

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,