I don't understand how to set up the automoton

the book says to set up per the diagram, which shows 2 intown deeds, one out of town. 1 dude at each intown dead and 2 in town square. is that correct?

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The diagram is correct to my knowledge.

There’s some good references on this thread as well

The diagram is an example of how a game in progress might look. You basically set up the Automaton like a normal player facing you, with the addition of the top row consisting of deck, hand and discard, which cards flow through as the game progresses.
So at the start of the game, the Automaton side of the table would consist of this row, plus a street with just the home and the whole Automaton starting gang there (plus a core deed, if one is used).