FTX’s implosion on November 8, 2022 has already destroyed hundreds of billions of dollars of investor capital and sent an entire market to it’s knees. But why? How did FTX possibly self-destruct when it was making hundreds of millions of dollars a quarter in profit? Not to mention the parasitic nature of Alameda Research, which was sucking bips out of every FTX customer for years- all of which ultimately flowed to Sam.
Sam Bankman-Fried, like the majority of his inner circle, was a fantastically intelligent individual. Both of his parents were Stanford lawyers, and SBF went on to graduate the even more prestigious Massachusetts Institute of Technology in 2014. It is well known that SBF then worked at Jane Street (as did Caroline, CEO of Alameda in late 2022), though it is somewhat less known that he spent a year as the director of a non-profit organization called “the Center for Effective Altruism” in 2017.
Effective Altruism is a modern religion, and like any good religion it looks completely insane to a non-believer. However, I believe that that SBF and his inner circle were truly devout Effective Altruists. In it’s early years Alameda Research mandated that employees donate a certain percentage of their income, and a majority of Alameda’s founding members were Effective Altruists. SBF was a utiliatrian since he was a teenager, and Caroline, SBF’s partner, is a good example of the “true believer” nature of Alameda’s members. She was a member of the Stanford Effective Altruism society in her undergraduate years, well before she would have met SBF and joined Alameda.
I believe that a lifetime of solving formulas and maximizing EV led Alameda and FTX to develop a deep messiah complex that was bouyed by the neo-religion of Effective Altruism. Imagine what the conversations between Caroline and SBF must have sounded like. Nearly manic, “we flip this coin and 60% chance we win”… the additional EV of us gambling vs not gambling is nearly a billion dollars… that’s literally 100,000 peoples lives. Vulnerable peoples lives. Not middle class FTX depositors, but the truly downtrodden.
This conclusion is also supported by SBF’s tweets in late 2020, in which he essentially argued that the notoriously degen/aggressive but “optimal” kelly criterion actually underestimates the amount of risk you should take:
They were profitable and talented enough to make billions, and they truly believed that earning more money was the only way to improve the world. They consquently embarked on the most ambitious taming of risk in the history of financial markets, with predictable results despite their thrilling riding of the tiger in 2020-2021. In a deeply sad and ironic manner, Alameda Research and FTX destroyed itself in the pursuit of this moral quest, quite literally risking it all and the name of their religion in the process.