Strategic depth
When all our borders are attacked, where can we retreat?
Once the enemy has invaded us, how long until the core is hit, how far does they have to reach to win us over?
Over the centuries, Russia had notoriously great strategic depth. Its vast territories acted as natural defence against foreign threats. The land shape compensated for its weak borders.
In 1812, Napoleon lost nearly half a million men stuck chasing the retreating Russian army. Time and weather decimated his forces. During WW2, Russians similarly managed to outsmart and manoeuvre away from the Axis’ siege and threats. Strategic depth consists in a space-time frontier, that measure the distance to the core objectives (the military facilities, the cities) from the outer boundaries.
Metaphorically, we can extend the concept of strategic depth beyond the geography of countries. Within ourselves, how vulnerable are we to external forces? How solid are our core values? How self-consistent are our beliefs? How much fake news and intoxication can we resist before we capitulate and proclaim with the crowd: 2 + 2 = 5?
Any living thing is endowed with some degree of anti-fragility. Any ecosystem when it is invaded can "withdraw into its own territory" to rebalance. It may absorb the shock of adversities, reshape its forces to respond to its stressors. Over-solicitude usually produces the opposite effect in a dynamic equilibrium.
Times have wildly changed, space-time has bended under ultrasonic jets, satellite communication and spaceships, yet the notion is far from obsolete.
For example, Israel with respect to this metric is always somehow in a paradox: its narrow borders offer low physical strategic depth with respect to foreign invasion or attack under any reasonable measurement, while the strong diplomatic ties and consistent cultural roots of its people make it undoubtably resilient.
Similarly, the Japanese markets and society can also be considered strategically deep. The strong stakeholder alignment within Japan makes ¥-denominated borrowing available at negligeble costs for Japanese banks. Isolation is powerful in this model.
Any strong belief, faith or religious norm acts as a strategic cement. Close famility ties, repeated practices and shared customs deepen a group's strategic frontier to the outside. Habit is margin.
Measuring time-based strategic depth
Any company with higher margins is more defensible than a lower margins peer. They can withstand for longer competitive pressure on price or quality. They can avail greater counterparty and fraud risk on a continued basis.
How much (moral, psychological, monetary) risk one can afford each day is a good measure of our strategic depth. In probability theory, the most well known mathematical model developed to measure such exposure is the Kelly Criterion. In its simplest form it reads as follow.
The behavioural picture is simple. Imagine you have a limited budget (100 €) and a repeated positive expected utility binary bet. For example, you toss an unfair coin on even odds (b=1.0). You know coin has a 60% (p= 0.6; q=0.4) probability to turn Head. Betting is allowed only for a limited time-interval, say 100 times; and you must choose what amount to bet consecutively (f*). The odds are even, you win or loose what you staked. How much should you rationally bet?
If your stake is too large, there is a chance you will go bust after a few consecutive Tail runs; if you stake too little, you will miss out on the compounded growth and long-term appreciation.
To the most risk averse folks, it may feel surprising, but Kelly says you should be gambling 20% of your bankroll, or 20€ on the first round!
F = 0.6 - (0.4 / 1) = 0.2
It's worth noting, that as a rational corollary, Kelly prescribes that whenever we have no edge we should not gamble at all. A very good insight is the following:
Kelly formula can be thought as 'time diversification', which is taking equal risk during different sequential time periods (as opposed to taking equal risk in different assets for asset diversification). Cf. Wikipedia, Kelly criterion.
You can see the analogy with strategic depth: how many coin tosses away are you from being bankrupt? Five coin tosses away may feel very scary to most, but that would be a gross misreading of the above. You should continuously adjust your stakes! In a scenario where there no fixed fees and fully divisible stakes (such as crypto tokens... uhm) you are potentially an infinite amount of coin tosses away from the endgame.
Strategic intensity
A closely related concept is strategic intensity (HBR). By this I mean a quality not unlike a Chess player that perceptive and deductive. Think Sherlock Holmes. A master of deduction, he doesn't miss a clue. Reads between the lines of every possible bluff of his adversary and conceives a balanced forward-looking outlook. The actions of a strategically intense player are informed by second-order effects, third-order effects, etc…
The returns of such player are convex: they increase more than proportionately to the market returns. Life-long learning is typically convex.
In zero-sum game, we must note it is wasteful and utterly ineffective to play a high-intensity game against low-intensity players. During an online poker hand, the counterparty might be taking longer to play not because they're designing a masterplan, but they’re likely just distracted watching the game of football in the background. Similarly, under time pressure in a game of Chess, mastering simple do-not-loose moves is more important that perfect calculations.
Managing the game strategic volatility is another very important skill. Do you want to trade pieces and simplify, or build up the tension and complicate the position even further? The Chess World Champion Mikhail Tal used to master this style of action: with risky sacrifices he would bring the most solid adversaries into unchartered territories.
Today's times are wild. The international order governing the world economy is fragile and stretched in multiple directions, having to respond to multi-polar stresses and slow coordination. Regulatory uncertainty around digital goods & services (AI), currencies and securities create new risks opportunities. New markets open every day a new (zero-value) token is launched, after all.
Yet, our worldview is intrinsically valuable. If not to everyone at least to some, namely at least to ourselves. We are hence somehow all given a minimal but definite edge, so why miss out on the convex pay-offs of leveraged asymmetric betting?
Markets allow us to assert something (anything really, even just a cultural statement, a meme) in a way that can be falsified and offer all others a chance to respond. If the predictions we make are reasonable, if our positions are internally and externally consistent, if we produce useful interventions in the back and forth of an exchange… we will have achieved meaningful action.
Let the clouds fly higher 🎈
David