If Professional Investors Missed This...

In addition to having a lot more on the line, other reasons to expect better of ourselves:

• EA had (at least potential) access to a lot of information that investors may not have, in particular about Alameda's early exodus in 2018.
• EA had much more time to investigate and vet SBF—there's typically a very large premium for investors to move fast during fundraising, to minimize distraction for the CEO/team.

Because of the second point, many professional investors do surprisingly little vetting. For example, SoftBank is pretty widely reputed to be "dumb money;" IIRC they shook hands on huge investments in Uber and WeWork on the basis of a single meeting, and their flagship Vision Fund lost 8% (~$8b) this past quarter alone. I don't know about OTPP but I imagine they could be similarly diligence-light given their relatively short history as a venture investor. Sequoia is less famously dumb than those two, but still may not have done much vetting if FTX was perceived to be a "hot" deal with lots of time pressure.

Jeff - this is a useful perspective, and I agree with some of it, but I think it's still loading a bit too much guilt onto EA people and organizations for being duped and betrayed by a major donor. 

EAs might have put a little bit too much epistemic trust in subject matter experts regarding SBF and FTX -- but how can we do otherwise, practically speaking?

In this case, I think there was a tacit, probably largely unconscious trust that if major VCs, investors, politicians, and journalists trusted SBF, then we can probably trust him too. This was not just a matter of large VC firms vetting SBF and giving him their seal of approval through massive investments (flawed and rushed though their vetting may have been.) 

It's also a matter of ordinary crypto investors, influencers, and journalists largely (though not uniformly) thinking FTX was OK, and trusting him with billions of dollars of their money, in an industry that is actually quite skeptical a lot of the time. And major politicians, political parties, and PACs who accepted millions in donations trusting that SBD's reputation would not suffer such a colossal downturn that they would be implicated. And journalists from leading national publications doing their own forms of due diligence and investigative journalism on their interview subjects. 

So, we have a collective failure of at least four industries outside EA -- venture capital, crypto experts, political fund-raisers, and mainstream journalists -- missing most of the alleged, post-hoc, red flags about SBF. The main difference between EA and those other four industries is that I see us doing a lot of healthy, open-minded, constructive, critical dialogue about what we could have done differently, and I don't see the other four industries doing much -- or any -- of that.

Let's consider an analogous situation in cause-area science rather than donor finance. Suppose EAs read some expert scientific literature about a potential cause area -- whether global catastrophic biological risks, nuclear containment, deworming efficacy, direct cash transfers, geoengineering, or any other domain. Suppose we convince each other, and donors, to spend billions on a particular cause area based on expert consensus about what will work to reduce suffering or risk. And then suppose that some of the key research that we used to recommend that cause area turns out to have been based on false data fabricated by a powerful sociopathic scientist and their lab -- but the data were published in major journals, peer-reviewed by leading scientists, cited by hundreds of other experts, informed public policy, etc. 

How much culpability would EA have in that situation? Should we have done our own peer review of the key evidence in the cause area? Should we have asked the key science labs for their original data? Should we have hired subject matter experts to do some forensic analysis of the peer-reviewed papers? That seems impractical. At a certain point, we just have to trust the peer-review process -- whether in science, or in finance, politics, and journalism -- with the grim understanding that we will sometimes be fooled and betrayed. 

The major disanalogy here would be if the key sociopathic scientist who faked the data was personally known to the leaders of a movement for many years, and was directly involved in the community. But even there, I don't think we should be too self-castigating. I have known several behavioral scientists more-or-less well, over the years, who turned out to be very bad actors who faked data, but who were widely trusted in their fields, who didn't raise any big red flags, and who left all of their colleagues scratching their heads afterwards, asking 'How on Earth did I miss the fact that this was a really shady researcher?' The answer usually turns out to be, the disgraced researcher allocated most of the time that other researchers would have put into collecting real data, into covering their tracks and duping their colleagues, and they were just very good at being deceptive and manipulative. 

Science relies on trust, so it's relatively vulnerable to intentionally bad, deceptive actors. EA also relies on trust in subject matter experts, so we're also relatively vulnerable to bad actors. But unless we want to replicate every due diligence process, every vetting process, every political 'opposition research' process, every peer review process, every investigative journalism process, then we will remain vulnerable to the occasional error -- and sometimes those errors will be very big and very harmful.

That might just be the price of admission when trying to do evidence-based good using finances from donors. 

Of course, there are lots of ways we could do better in the future, especially in doing somewhat deeper dives into key donors, the integrity of key organizations and leaders, and the epistemics around key cause areas. I'm just cautioning against over-correcting in the direction of distrust and paranoia.

Epistemic status of this comment: I'm slightly steel-manning a potential counter-argument against Jeff's original post, and I think I'm mostly right, but I could easily be persuaded otherwise.

To weigh in on a personal note: 

1. I had a reasonably close friend who, seven years ago, was unmasked as a compulsive liar and whose life turned out to be a house of cards. Watching it unravel was both upsetting and enchanting. Today, they are the CEO of a well-funded startup.
2. Around the same time, my advisor was involved in a very public academic scandal when it turned out that his co-author had 100% fabricated their study's data. Once that came to light, people started digging, and it turned out that the co-author had been making stuff up for a long time undetected. He only got caught when two other researchers tried to replicate his methods -- an enormous lift -- and couldn't. 
3. I think it was Agnes Callard who wrote that it's better to trust and to be taken advantage of sometimes than to be distrustful and close yourself off. In my personal life, I try to live by this.  It's too easy to let scar tissue accumulate and find yourself immobilized. 
4. But when large sums of money -- particularly other people's money -- are involved, we have to hold ourselves to higher standards, even/especially when it causes social friction.
5. What's the opposite of "isolated demands for rigor," motivated reasoning? Sam came in with big money and big talk and I get why we fell for it -- I myself filled out the form to "come hang out in the Bahamas" with them earlier this year.
6. I agree very much with Jeff's point that more clarity about who's doing what in the movement would be a great thing to build from this.

It's not just investors. A number of FTX employees had much of their life savings "invested" in and on FTX. They had a huge (to them) financial risk on the line, plus access. The legal and compliance people seem not to have known, as evidenced by their mass resignations. They had huge (to them) reputational risk on the line, plus access. As far as we know, none of the invested employees nor the professionals detected the high risk of fraud.

Just a quick addition that I think there's been too much focus on VCs in these discussions. FTX was initially aimed as a platform for professional crypto traders. If FTX went down, these traders using the platform stood to lose a large fraction of their capital, and if they'd taken external money, to go out of business. So I think they did have very large incentives to understand the downside risks (unlike VCs who are mainly concerned with potential upside).

and unlike typical financial investments reputational investments can go negative.

This is true; but the way more significant contributing factor of this sort is that impact on the world can go negative. We had more at stake because we think that defrauding customers is a huge harm to the world, and the purpose of investing in SBF is to create positive impact on the world. The market for FTX/FTT doesn't price in negative impact on humankind.

There's some discussion of whether implementing impact certificate markets—which might be more of an academic curiosity at this point—would have similar problems, where translating a utility function that goes negative (impact on the world) into one with a lower bound of zero (financial) would incentivize negative projects. As far as I can tell, cash prizes for positive impact projects have the same fundamental problem, though I'd love to be corrected here if I'm missing something. One way around this would be requiring a form of insurance (prior to entering impact markets, prize competitions,  earning-to-give careers, AI-capabilities-research-in-the-interest-of-alignment, etc), though I think there are a lot of both practical and and incentive-flavored barriers to these emerging any time soon.

I'm curious whether there are other areas in EA where we systematically miss the necessity of oversight for protection against negative outcomes that we care about, where markets / regulatory and legal systems / social norms will be predictably insufficient watchdogs. 

edited

Seems relevant to think about this in relation to our other big donors. ie is there someone who's job it is to ask hard questions of Moskovitz and Tuna's financials? 

There’s a big difference between “we should have seen this coming” and “we should have taken steps to mitigate possible disaster.”

The fact that EA had more to lose in some ways from the FTX bust in no way provided information to predict that bust. “If professional investors missed this…” holds true whether EA had $1 or $1 billion on the line.

But there are steps EA could have taken to mitigate the fallout even without having been able to predict fraud.

For example, we could have invested in legal clarity and contingency plans in case of FTX going bankrupt or being revealed as fraudulent. It’s like wearing your seatbelt. Nobody wears a seatbelt because they predict they’re going to get in a crash. They do it because it’s a cheap and potent form of risk mitigation, without making any effort to predict the outcome on their specific trip. EA risk management should look like installing seatbelts for the movement.

I agree that we should have taken this risk more seriously. I think "is SBF doing fraud" was worth at least 1 person thinking about it full time.

I don't know if you intend to imply that because it mattered more to us that we ought to have spotted it, I disagree. People holding FTT (FTX's coin) or shorting it had huge amounts on the line. And they understood crypto. I guess I expected us to beat them to it, but that we didn't doesn't downgrade our general competence much.

Does the EA community as a whole have the right to request SBF to show us the financials of FTX/Alameda and let us examine it though?

Grant receivers going at the grant provider, asking him to show accountability?

I've only had time to skim the comments, so apologies if this is elsewhere, but isn't the issue not so much that EA didn't have the skills to evaluate FTX; it's that it didn't have access to the information? 

The difference between EA and Sequoia capital is that Sequoia Capital could demand almost any financial information they wanted and FTX had a strong incentive to comply.

Let's consider another example: let's say you had suspicions that Open Phil or Longview were engaged in fraud. What would your next step be? If you sent an email demanding a lot of financial documents, I think they'd be unlikely to reply/send them, and if they did, you couldn't verify their authenticity.

So I take the point that we need to be more vigilant in the future, most especially about putting people on a pedestal and making them symbolic of EA; and it does sound like a lot of people knew SBF was unpleasant to work with and either weren't heard or didn't say anything. But I don't see how an amorphous movement of individuals could ever have subjected FTX to more scrutiny than someone invested $200m.

There are likely many things that would be worth it for "EA" to do that don't happen because it's not clear who would do them or even whether someone is already quietly doing the work. I hope building a better process for identifying and coordinating on this sort of work is one of the things that can come out of this collapse.

Agree. We should be better at funding and supporting these “public goods” that cut across multiple groups and individuals.

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This is spot on. The Sequoia letter makes the correct point that FTX accounted for something like <1% of the fund vehicles used to invest in FTX. Most startups fail and while the manner matters - I’m sure they are having some tough LP conversations - this does not remotely represent an existential risk to their business. This will be forgotten in due time.

EA had unique insight into SBF the person outside of FTX pitch meetings. As others mentioned, EA also had a view from the Alameda breakup. I have no idea if that information would/could have been helpful, it is meaningfully distinct from the information VCs had (although, lol at not getting the balance sheet for an investment in a financial services company…).

One more point: the reputational damage to EA here is going to be orders of magnitude worse than for their investors. How have potential donors/employees/partners changed their view on Insight Venture Partners as a result of FTX? No one cares. Has this meaningfully hurt EA’s public reputation? Undoubtedly especially given recent fanfare around WWOTF. I am worried about this and am not sure what to do about it.

Thanks for this take. This is one of the best takes on the issue I've read on here. I particularly agree with the point that 'investing' into FTX has significantly more risk for the EA community than for the institutional investors that did invest. One small thing to add on this point is that - while there were a group of investors that did invest in FTX - there were likely also various potential investors that decided not to invest after some due diligence, we just don't know of them.

Good piece: https://www.epsilontheory.com/the-macguffin-part-2-the-story-arc-of-sbf-and-ftx/#.Y3ehamoqN1A.twitter

One reaction I've seen in several places, mostly outside EA, is something like, "this was obviously a fraud from the start, look at all the red flags, how could EAs have been so credulous?" I think this is mostly wrong: the red flags they cite (size of FTX's claimed profits, located in the Bahamas, involved in crypto, relatively young founders, etc.) are not actually strong indicators here. Cause for scrutiny, sure, but short of anything obviously wrong.

I'm not sure there's a big difference between 'cause for scrutiny' and 'insufficient warning flags' here. It seems like there were many causes for scrutiny, all of which were basically ignored by the people who could have acted on them. Had those influential people been more diligent, presumably these concerns would have loomed larger, and this might have been foreseen.

The issue is, we had a lot more on the line than their investors did. 

Big +1 

FTX is like Enron exploding in the center of EA. 

One reaction I've seen in several places, mostly outside EA, is something like, "this was obviously a fraud from the start, look at all the red flags, how could EAs have been so credulous?" I think this is mostly wrong: the red flags they cite (size of FTX's claimed profits, located in the Bahamas, involved in crypto, relatively young founders, etc.) are not actually strong indicators here. Cause for scrutiny, sure, but short of anything obviously wrong.

To make money, you not only have to be right, but be right at the right time. Imagine you predicted  the COVID pandemic in 2018 and shorted the market starting in 2018. By 2020 you would be broke and have no more cash.

On the other hand, EA is not trying to make money. So, the EA community doesn't care about the timing as much as a trader does. EA cares about preparation. If we know that the COVID pandemic is going to happen in 2018, we start preparing in 2018, and when it does happen, in 2020, we are prepared. 

Thus, for the EA community, what was really more salient were articles such as this piece  by Paul Krugman:

stablecoins...resemble 19th-century banks,...when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

[this is a repost from a comment elsewhere]