Michael Mauboussin — How Great Investors Make Decisions | The Tim Ferriss Podcast | Transcription

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Intro (00:00)

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I love macadamia oil as a very high smoke point We can use it for all sorts of things. It is perfect for cooking and salad dressings and much more. So that's code TIM20 for 20% off plus a free extra virgin cold pressed macadamia oil with every order. Visit houseofmacadamias.com/tim to discover some of the most delicious and nutritious nuts on the planet. One more time that's houseofmacadamias.com/tim This episode is brought to you by Shopify. Shopify is one of my favorite companies out there. One of my favorite platforms ever. And let's get into it. Shopify is a platform as I mentioned designed for anyone to sell anything anywhere. Giving entrepreneurs the resources once reserved for big business. So does that mean? That means in no time flat you can have a great looking online store that brings your ideas, products and so on to life and you can have the tools to manage your day-to-day business and drive sales. This is all possible without any coding or design experience whatsoever. 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Access powerful tools to help you find customers drive sales and manage your day-to-day. Gain knowledge and confidence with extensive resources to help you succeed and I've actually been involved with some of that way back in the day. Which was awesome. The build a business competition and other things. Plus with 24/7 support you're never alone. And let's face it being an entrepreneur can be lonely but you have support. You have resources. You don't need to feel alone in this case. More than a store Shopify grows with you and they never stop innovating, providing more and more tools to make your business better and your life easier. Go to Shopify.com/Tim to sign up for a $1 per month trial period. It is a great deal for a great service so I encourage you to check it out. Take your business to the next level today and learn more by visiting Shopify.com/Tim. One more time Shopify.com/Tim all lowercase. At this altitude I can run flat out for a half mile before my hands start shaking. Can I answer your question? Now we're the sit-and-click-pack-time. I'm a cybernetic organism living to show a metal empress color. Me, Tim, Paris, Show. Hello boys and girls ladies and germs. This is Tim Ferriss. Welcome to another episode of the Tim Ferriss Show. I'm going to keep my preamble short because I have many pages of notes in front of me and we're going to run out of time before I run out of questions. My guest today is Michael Mobison spelled M-A-U-B-O-U-S-S-I-N. You can find him on Twitter, M-J-Mobison. He is the head of the head of the consultant research on counterpoint global at Morgan Stanley Investment Management. Prior to joining Counterpoint Global, Michael was director of research at Blue Mountain Capital, head of global financial strategies at Credit Suisse and chief investment strategist at leg Mason Capital Man. Michael originally joined Credit Suisse in 1992 as a packaged food industry analyst. Some of you long-term listeners will perhaps recognize some of that from my conversation with Bill Gurley and was named chief U.S. investment strategist in 1999. Michael is the author of many books including the success equation, subtitle untangling, skill and luck in business, sports and investing. Think twice harnessing the power of counter intuition, which I've mentioned several times on this podcast. And more than you know, finding financial wisdom in unconventional places. More than you know is named one of the 100 best business books of all time by 800 CEO read, one of the best business books by Business Week and best economics book by strategy and business. That's in 2006. Michael is also co-author with Alfred Rappaport of Expectations Investing, reading stock prices for better returns. Michael has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbron Center for Graham and Dodd Investing. He received the Dean's Award for Teaching Excellence in 2009 and 2016 and the Graham and Dodd Murray Greenwald Prize for Value Investing in 2021. He earned an AB from Georgetown University and is chairman emeritus of the Board of Trustees of the Santa Fe Institute, a leading center for multidisciplinary research in complex systems theory. You can find all things Michael at MichaelMobeson.com. Michael, thank you for making the time. It's nice to see you again. Tim, it's awesome to see you. I thought we would start with some Latin.

Fundamentals And Principles Of Business Management And Investing

Latin roots. (07:12)

That's my favorite place to start. Especially as someone who knows very little about Latin. And I wanted to ask you about your course and its two unofficial mottos. Maybe you could just mention those mottos and explain why they are the unofficial mottos and what they mean. First of all, there are no official mottos. I made these up. These are an attempt to set a tone with the students, but it's not just the students in my course, but really broadly speaking in life. The first one, the Latin is Nellius and Verba, which is the motto of the Royal Society. The Royal Society is the oldest scientific society in the world and it's been around for 350 years, more than 350 years. Basically translated, it means take nobody's word for it. Kind of see for yourself. I really like this idea that a lot of the information that people use or even things that they're taught are things they take from authority. They don't go figure them out for themselves. This idea of constantly having an open mind and seeing for yourself and not working just on authority and questioning everything. That's the tone I want to set in the course. The second one is a quote from Carl Gauss and I'm not going to even try the Latin, but it basically the idea is notions, not notations. And the idea is don't focus on only equations. Computations obviously super important, but really the key is to grasp the intuitions, the underlying ideas, and then allow the computation to serve that rather than the other way around. Sometimes you can solve a problem computationally and then you have to go back and figure out what the intuition is to get you there. But that's the main thing. I think that's, for example, for business school students, it's a potential problem because from time to time, they'll run equations without thinking about what they're doing and they'll forget about the concepts behind them. So Charlie Munger, the Vice Chairman of Berkshire Hathaway, has got this line where he says, "People calculate too much and think too little." And I think that's what we're trying to fight against with that idea.

No business education? No problem! (09:14)

So Michael, this strikes me as the perfect segue to ask a question about some of your earlier chapters. And specifically, I would love to know how your lack of business education was an asset on Wall Street when you first started out. By the way, I did take one business class. My father strongly encouraged me to take accounting for basically non-business majors when I was a senior. And out of the complete generosity of the professor's heart, I got a C plus, a gentleman C plus, and knew nothing about what was going on at all. I will say that I was in a wonderful training program and there's a lot of remedial work. So folks like me could learn, get up to speed on some of the basic issues. But Tim, I think the answer is that I went in kind of wondering about and thinking about and being open to understanding things from first principles. And Wall Street, even to this day, is replete with lots of rules of thumb and sort of old wives' tales and, you know, short hands for how to do things. And some of these things when I would sit there and listen to them and try to cobble it all together just didn't make sense. And so for me, it was this idea of sort of the beginner's mind and really saying like, "How does this stuff really work?" And, you know, I had a, for me, a clear professional epiphany. It was a two by four across the forehead. Guy in my training program gave me a copy of Al Rapaboard's book called Creating Shoulder Value, which was published in 1986. So this is probably a year and a half or two years after that book was out. And it gave it to me for a completely different reason. It had nothing to do with the basic concept. But I read that book and, you know, like the light bulbs all went off for me personally. And I very much connected with that whole way of thinking about things. And I guess I'll summarize there were sort of three things that he talked about that have really remained in the cornerstone of how I think about everything since. One is it's not about accounting numbers, but about cash. And I want to get too much down the finance he wrote. But basically accounting doesn't always represent the underlying economics of businesses that effectively. And he was one of the people who really emphasized understanding value and how value is created. Second thing, which I think is really interesting is that valuation and strategy sort of go together. So when you're thinking about as a business person trying to build a business, you have to make a bunch of strategic choices, but a good strategy is one that creates value. And to do a valuation of a business, you have to understand the competitive position of the company and the industry and so forth. So the idea that those are really jointed to hip and, you know, going back to even business schools, we tend to teach these things separately, but they really do go together. And then the third and final point, which end up being the collaboration of the book we did together, is that stock prices reflect a set of expectations. And it's very like obvious when you say that any asset price, right? What has to happen in the world for that thing to make sense? His target audience was corporate executives, but clearly that was relevant for investors as well. So from there, Tim, I would just say that I was sort of open to that. And I think that to me was a good set of ideas to work with. And yeah, that's why I think I was unencumbered with any knowledge to be open to thinking about the world that way. I came across something and doing research for this conversation.

The best food industry analyst. (12:15)

This was from Farnham Street. So FSTOP blog, this was a transcript of an interview that you did over yonder. And there was a line in passing that I wanted to revisit. And this is from your earlier chapters yet again. In the early to mid 1980s, Drexel, that's Drexel Burnham Lambert from pronouncing that correctly. Drexel had a great food industry analyst. To this day, I believe he's the best analyst I've ever seen. So I naturally followed him closely and then it goes on shortly after I left Drexel, etc, etc, etc. But I wanted to double click on that comment. So if it's still true, or maybe even if it was just true then, when you said it, I believe he's the best analyst I've ever seen. What made this person such a good analyst? Tim, that's a great question. And I'm going to tie a bunch of ideas here together. The first thing I'll say is my first job was with Drexel Burnham Lambert in 1980. That's where that training program was. And I just think that there's a big professional imprint on the first job. And so Drexel at the time, this is when Michael Milken, Hyel Bonds, the firm was really hot. It ended up getting in trouble and then there was a crash from 1987. So things unwound and the firm ended up going bankrupt. But at the time it was quite hot and they had an equity research department. I should back up and say one thing on our training program, we first did some classroom work and then we rotated through different departments in the firm. So we really got exposed to all different aspects. And indeed, there's this one analyst that followed the package food companies. His name was Alan Gretider, who was extraordinary. And what made him great was he had a very different view of things than traditional. So he was very focused on, for example, financial cash flows versus simple accounting numbers. Some of the things I was just talking about, he was very focused on things like share buybacks before those were a big deal, understanding asset values. And then he had the ear of management teams. So he was able to talk to those management teams and understand how they were thinking about things. And so he was just the complete package. And interestingly, here's the connection to sort of my own career path. One is, I mentioned my training colleague gave me a copy of Creating Shrew was there was a case study in the back of the book about Quaker Wrote's acquisition of Stokely Van Camp. It seems completely remote. You've never heard of Stokely Van Camp, but you probably have heard of their most famous product, which was Gatorade. Oh, yeah. And it turns out there's this little jewel and it ended up being a really great acquisition. But in part, because they found this little jewel and built it into this incredible brand. That's the reason he drew my attention to this book in the first place, actually about this Quaker Wrote Stokely Van Camp thing. So I ended up learning a lot about that industry, again, by following this particular individual. And then when it became time for me to become an analyst, one of the areas that I was drawn to logically was the food industry. So literally the reason I was a food analyst is because this guy was so good and because I learned, and by the way, I was nobody or the little pea-hot training in a training program. So he had no idea who I was, but it just gives you a sense of like how these little things happen that almost like set the trajectory. So it was both his analytical prowess and so happened to be applied in this particular industry, which is why I became an analyst in that particular industry. Now, harkening back to my conversation with Bill Gurley not long ago, friend of yours, and he invoked your name as someone who is able to connect ideas, principles, best practices from disparate areas.

Consilience. (15:36)

And I thought this might be an appropriate time to grab a word from your bio. In fact, it's in the first line, head of conciliate research, and maybe just define some terms, conciliance. What is conciliance? It's probably not a good thing when your job title, you have to explain it to everybody. And that's really the case. So I was very taken in the late 1990s by a book called "Consilience" by E.O. Wilson. So we'll talk about that book in a moment, but "Consilience" itself is a fairly, well, not that old, but 1850s, probably is when that word was coined. And it's really about the unification of knowledge, right? This idea of bringing ideas together. So E.O. Wilson wrote this book. He was a Harvard biologist. He's most renowned for his work on ants, so he's sort of the ant guy. He is also famous for his early work on evolutionary biology, and there were some incidents he wrote a book about sociobiology in the 1970s, and that was very controversial at the time at least. But in this book, "Consilience," Wilson argued, hey, we've made enormous strides as a world in using reductionism, scientific reductionism, right? So we're breaking things into their components. We're understanding how those components work, and if you look around you, many of the marvels you see are the result of that extraordinary capability. But he said, as we look forward, many of the most vexing and difficult challenges and problems in the world are actually at the intersections of disciplines, and we're going to need to bring these different ideas together from different disciplines to really tackle these big problems. And so, of course, that idea very much resonated with me. So I'll just mention the so conciliant would be the verb for that. And then this is probably about 2000 or something like that. And I was just one of those guys who I published from time to time, but I wasn't publishing on a sort of set schedule. And I'm one of those guys I'm reading an article or watching a television show, and I'm talking back to it like, oh, no, that guy should be doing it this way, or here's an insight that they should be having. So I was like, you know what, instead of me muttering to myself, maybe I should start to write about this stuff. And so I launched a newsletter called the "conceliant observer." And the idea was, let's look at different topics and see if we can shine a sort of shine a different light on it, look at it through a different type of lens. And so that the "conceliant observer" series ended up when you mentioned a moment ago more than you know the book. That was sort of the greatest hits of the "conceliant observer." And those were all sort of 1500 word essays, so they were short, kind of pithy. It was hard to get really into ideas, but they were all over the place. And as a consequence, I think they were somewhat fun for the audience to read. So that's where that word "conceliant" comes from. And that's, you know, again, a big, as I think about the world, you know, this idea of being able to draw from various disciplines to thoughtfully address the problem or problems that you're thinking about. Wheels on luggage. Bam! How did it take so long for somebody to figure that out? I'm giving perhaps a silly example, although there's a lot of utility there. Question. Can I tell you, Tim? I said to my wife, I actually think that Wheels on luggage is like the indication of the decline of western civilization. Okay. And the reason is because it used to be like you'd have to lift your luggage, like carry it around, like a little bit of effort. And now it's like everybody's wheels over the around. Now we're two steps away from Wally, if you remember the super big gulps in the floating on the reclining chairs. And you get some of these things that are like tiny little bags with wheels. I'm like, all right, come on. You got to have that one. Anyway, sorry about that. No problem. So E.O. Wilson also for people who don't recognize the name, chances are you have latched on at some point to a quote from E.O. Wilson without even realizing perhaps the attribution and this person's background. He is one of the most quotable writers in my mind of the last 100 years. It's just remarkable how punchy and memorable so much of E.O. Wilson's writing is, do you have any examples from natural systems or biology that you have translated to business or evaluating companies or understanding markets in some fashion?

Complex adaptive systems. (19:58)

One is, and this is really, I think probably one of the more common threads through the research that's being done at the Santa Fe Institute is a study of complex adaptive systems. So complex means lots of agents, those could be neurons near brain, ants in an anacony, people in a city, whatever it is. Adaptive means that those agents operate with decision rules. They think about how the world works and so they go out there and try to do their thing. And as the environment changes, they change the decision rules. So that's the adaptive part. They're decision rules that are attempting to be appropriate for the environment. And then system is the whole is greater than the sum of the parts. It's very difficult to understand how an emergent system works by looking at the underlying components. Two or three obvious examples. One would be something like consciousness, conscious. It's very likely an emergent phenomenon. We have these neurons, we have this physical genesis, but the system is more complex than the underlying neurons themselves or ants in an ant colony. If you study an ant colony, it's almost like an organism in and of itself. It has a life cycle. It's pretty smart about when it forages. They fight each other, some of our more docile. I mean, the whole thing. So understanding markets as complex adaptive systems to me has been an extraordinary insight. So the classic ways to get to kind of efficient markets is that people are really smart. They're rational. So they understand all the information they know to do with it and they reflect that in prices. Now, nobody really believes that, but that might be the starting point. And then the second way economists would talk about this is this idea of no arbitrage. In other words, you don't need everybody to be super smart. You just need a subset of people to be super smart. And when there are gaps between price and value, these super smart people come in and they buy what's inexpensive and sell what's expensive and close the gaps. And so in their wake, the rest of us can benefit from these efficient prices. Problem is here again, they're just famous episodes where these arbitrage viewers fail to do their jobs. The third way to think about things is complex adaptive systems. And I think that the way that's most is easiest to understand this is using some of the language from Jim Sir Wiggy's great book, The Wisdom of Crowds, which came out probably in 2004, 2005. And the wisdom of crowd says crowds are wise when three conditions are in place. A, we have diversity of the underlying agents or heterogeneity. So this is one of the reasons diversity is so important is because we need different points of view and different decision rules represented. Second is an appropriate aggregation mechanism. You can have all the information in the world and the heads of people sitting around your boardroom. But if you're not extracting it and aggregating it is of no value, right? And then the third is incentives, which are rewards for being right and penalties for being wrong in markets. That's money, but it doesn't have to be money. It can be reputation. It could be fitness for a species or other measures of incentives that allow you to propagate. So to me, thinking about markets as complex systems is very powerful. And in The Wisdom of Crowds, why are crowds smart? And the answer is when those conditions are in place. And then why do they go haywire periodically, which we know that they do? And the answer is that one or more of those conditions are violated. And by far, the most likely to be violated is diversity. So rather than you and I, Tim, thinking independently, we sort of correlate our views and we become uniformly positive or uniformly negative in this consequence that reflects an asset prices. So that would be one example. May pause just for one second to say, I think the second comment after diversity that you made earlier is really important, which is representing different decision rules.

Diversity. (23:26)

Because you could have, for instance, people who are every possible gender, every possible color, but if they're all econ majors from Yale, who took exactly the same classes, they may actually represent the same decision rules or similar decision rules. Or how do you think about that? Maybe I'm misreading. You are absolutely right. And I think that the way I would think about that and the way I read that literature is there are really three types of diversity that we care about. The first is social category diversity, which is what you just sort of described, right? That people look different, but they have the same sort of way of thinking about the world. When most organizations talk about diversity, they're almost always talking about social category diversity. And one benefit to that is because we can count, right? We can see how many women there are versus men and so forth. The second kind of diversity is cognitive diversity. That's what you just described. And that's really perspective, point of view is mental models, training, personalities, and so forth. Nearly all the literature I've seen suggests that it is cognitive diversity. That is the key to solving problems. To your point, it's possible to have people that look the same and think very differently or people that look very different but think the same. That's not likely, right? So there's some correlation between social category diversity and cognitive diversity, but cognitive diversity is sort of what we're after. And then the third thing is values diversity. And you could rephrase this as almost a sense of purpose. And here we want to be uniform, right? We want that kind of diversity to be low. So we'd like to really have people that have a common mission in any sort of organization. That would be the case. And I'll just mention that my favorite researcher on this topic is Scott E. Page at University of Michigan. And Scott's written a number of great books. The difference is his big book on this. And he wrote a small book called The Diversity Bonus, which is in a shorter treatment of the same topic. But the reason I write, I like Scott's work so much, is that it's not about hand waving or feeling good. It's actually mathematical. And he can demonstrate mathematically why precisely this idea of cognitive diversity adds value. And so it is the cognitive component that seems to be that that diversity seems to be, you know, so you want smart people and you want diverse people and both of them are important contributors to solving problems for corporate success. I'm glad you picked up on that because that's actually a very interesting and important point. And I'll just mention back in, you know, this is probably now 20 years ago, but when I was at Credit Suisse, well, it was the time CS First Boston, the guy that ran the business asked me to co-chair the Diversity Advisory Board. So we were setting the Diversity Policy for 20,000 employees. And you know, you sort of say, like, why would you want a straight white guy to do that? And it was because that CEO thought that this cognitive diversity argument should be heard and should be part of every dialogue as we think about, you know, who we hire, who we promote, how we assess people and so forth. I want to double click for whatever reason this double clicking metaphor has been on my mind.

The wisdom of crowds. (26:23)

So I apologize if I use it another 47 times, but I'd like to double click on two components of what we've been discussing. So the first that I suppose we could touch on is the wisdom of crowds or the stupidity of crowds, depending on how many checkboxes are checked. And one example, real world example sort of a classroom demo, hopped at me when I was watching your 20th year tribute video, which included many of your students. And there was a jelly bean guessing exercise that you had them perform. I don't know if this is still the case, but could you just describe that? And then I have a follow up question related to my own audience. I believe the wisdom of crowds book opens with a story of Francis Galton, who's a Victorian polymath cousin of Charles Darwin, by the way, who invented a number of important concepts and statistics. But Galton, toward the end of his life, went to a fair, there's a contest to guess the weight of an ox. And you had to pay a little fee and about 800 people participated. A few of them had a legible handwriting. So I think he's had 787 contestants. And Galton was fully expecting to show how foolish this crowd was. And by the way, he's got a really interesting, it's a nature magazine. He sort of says, you know, some of these people are butchers or whatever, you know, so they would know they have a sense of this, but you know, some of these people were sort of operating on with their own fancies, you know, I'm in a good mood. Here's what I'm thinking about. And when he telled up the results, it came out to be very different than what he anticipated, essentially the collective. So the average or the median of all the guesses were within 1% of the actual weight of the ox. Right. So this sort of extraordinary illustration of that point. And so that was picked up. There's a really interesting article by Jack Trainer, T-R-E-Y-N-O-R. And Jack was a very famous guy in the world of finance. He died a few years ago. And the article was called this from the late in 1980s, I think it was called the Jelly Bean jar and market efficiency. It's a short little article, but he described this experiment he did with Jelly Beans. I think they were actually not Jelly Beans. I think they were like actual beans. And he did that. And he came up with a very similar type of result. So he was trying to explain market efficiency through this wisdom of crowds that that name wasn't being used yet, but through this idea. By the way, as a funny side story, many years later, I was presenting at a conference and lo and behold, in the front row was Jack Trainer. So I'm like, you know, I had to give the nod to the man, right? The OG on this thing. So he was totally quill about it. So I had the slide. I actually had a copy of my own slides. And I'm like, Mr. Trainer, would you sign this? I have an autographed copy of a picture of a Jelly Bean jar autographed by Jack Trainer. By the way, one other weird thing is that I also talked about that day. There's a famous social psychology experiment by Solomon Ash. Do you know the Ash experiment with the three lines? You know, you probably do. It's pretty famous. But very quickly, Solomon Ash was a psychologist and social psychologist. And he won't understand the idea of conformity. So the setup is you have, and they did in different ways, but say you have eight people around the table, seven are in on the experiment with ash, and the eighth person is the subject. And the task is very trivial. It's you have three lines, A, B, and C, and then you have X. And the question is, which lines, which are the A, B, and C lines, of the same length as X. It's actually a very easy visual task. And in controls, people get, you know, they start with controls. People get like 95% plus, right? So this is not a hard task. And then the experiment started for real, which was Ash signaled his Confederates to give the wrong answer. And now instead of it being C, which is the correct answer, everyone says, A, A, A, and they put the subject in the last seat. And so by the time it comes around to you, the question is, how do you answer? Because you're thinking, like, am I insane? Like, I see this as being answer C, and everyone's answering A. And it turns out the reason we still talk about this today is about a third of the people actually, most of the people actually at some point go with the majority. And so they just basically override their own senses. And Ash talked about why this was the case, but this is this idea of social conformity and how important it is in going with the crowd and so forth. And this goes back to our stuff on diversity. So I'm describing this experiment and trainer raises his hand again, like this is two for right. He goes, I was at Swarthmore College in like whatever is in 1940s. And I was a subject in this thing. And he said, I just want to tell you that I remained independent. I didn't listen to anybody else. So I was like, Oh man, that's really cool. So the Jack trainer was like, obviously, he was a super important guy in the world of finance. But there are two little touch points that tie back to our two stories. One is sort of that he made that connection to the jelly bean jars in the world of finance and why I was important to understand how markets work. I think Jim obviously came along. I mean, Jim, sir, the idea of the wisdom of crowds had been around, obviously, to some degree. But Jim, I think did an incredible job of putting a name to that and really being careful about saying, as you said, like what conditions are crowds wise and are on what conditions do they go mad. And we know that both happen from time to time. My understanding, tell me if I'm flubbing on this is that you replicated this experiment in class where there's a high degree of variance. But among your business school students, ultimately, at the end, they were within, say, one to 2% of the actual count. Am I getting that? Yeah, no, we do it every year. And we do it every year. It's like my little parlor trick. And it vacillates. So in the last, because I did it, you know, my course started in January and we just did it in January. It's usually somewhere between two and 10%. I've done times where it's been almost perfect, but it's usually two to 10%. And then the other thing is, let's just pick 10% as sort of a non uncommon number. What's interesting is if you pick any person within the group at random, right? So you just close your eyes and pulled out somebody's guess, they're usually off by about 50%, 5, 0. Collectively, people are way better than they are individually, which is super interesting. And it's often the case, by the way, that the collective guess is better than any individual within the collective. It's automatically necessary, but that's often the case as well. So the group is smarter than any person in the group. My follow up to that is, what is the minimum effective dose of cognitive diversity?

The minimum effective dose of cognitive diversity. (32:42)

And if we find slice it, are there particular types of cognitive diversity that are more valuable for this type of wisdom of crowds than others? Because in the state fair example, you have butchers, you probably have painters, you have a very broad swath of society with very, very obviously different people in different professions, perhaps different levels of education. In your business school class, I would think there is a higher degree of uniformity of thinking. Maybe that's very unfair, but similar age ranges, probably similar priorities. They've chosen to apply to your class or to join your class. So I'm wondering, I suppose just to restate the question, how much cognitive diversity you need and are there different types of cognitive diversity that are more valuable than others for this type, harnessing this type of wisdom of crowds? I mentioned Scott Page a moment ago and sort of one of the ideas he's promoted is an equation called the diversity prediction theorem. And I'm not going to go through the math, but basically says collective error. So how smart the group is is a function of the smarts of the group. So how accurate each individual is minus cognitive diversity. So what you get is the collective accuracy is a function of both smarts and diversity. So I just want to say one thing just to be super clear that there are many tasks where having a smart person is better than having a crowd. So if you have a leaky toilet or need a really hard math problem solved, by all means get a plumber or a mathematician, don't bring in like an astrophysicist and a poet and whatever. So that's the first thing to say is that we want to think almost like a taxonomy of types of problems and there are some problems where just the right person will answer it much more efficiently than any of these kinds of things. But I think Tim, it turns out that and this is why Scott's thing is interesting is it just ends up being a mathematical problem that whenever models people are using and you might think about it this way, it's not exactly right, but you might want to think about this way. Let's say there is a truth, there is a number of beans in the jar, right? And I'm the God, G-O-D, I know that number. You might imagine what happens is people, and like you said, even the business school students, and I give them some tips like, you know, here's some ways to think about this. You might think they're going to have almost some sort of sense of the answer, some sort of sense of the truth with an error term. And those errors might go too low or too high and you could think about it almost like a normal or bell-shaped distribution, where the mean is the actual answer. And that's what Jack Trainer was trying to know how he was explaining it, which is you have this distribution of outcomes. And by the way, the standard error goes down, I mean, I want to get too fancy, but the standard error goes down as a function of the square root of n, of the number of people are guessing. So it's actually less about, again, if they're all skewed, that's going to be really bad and that's going to be the matter of the crowd. You want them to have different guesses, right, based on their models, their representations, but a bigger problem would be if there are too few people doing it, right? So it's a sample size growth. And so, you know, I have my classes probably out of no 60 or 70 people doing it, Golden had, you know, close to 800. So as you get that sample size larger, the number of people participating greater at homes and on the answer more accurately, typically. So this is leading to a very self-interested question that I wonder a lot, which is what fun or useful things could I do with my audience?

Designing experiments. (36:02)

Because in this particular case, the n is quite large and depending on the means of accessing them, but if we're talking about social podcasts and newsletter, I mean, it's 10 to 20 million people a month. It's hard to dedupe the people who are overlapping or appearing more than once in those categories, let's just say, but nonetheless, it's a large n for a lot of purposes. Do you have any thoughts? And I would also say that politically, geographically, from a gender perspective, quite a high level of what I would consider diversity. And I think psychographically, from an education perspective, probably a little less, perhaps on the education side, I'd say my listeners tend to be pretty well educated. But do you have any thoughts on how to perhaps design experiments for doing interesting, fun, or valuable things with my audience? I know that's a very broad question. These kinds of problems might be fun. It depends a little bit of what your goal is, right? If your goal is simply to demonstrate how some of these principles work and to use your audience as the way to show that, it would be super fun. And even something like a jellybean jar thing would be cool. I'll mention, we're going to do this in class. I think the Academy Awards is mid-March, and we also do an experiment with Academy Awards. And I say this, dude, I give them 12 categories. The front page is the best actor, best actress, best film, things you might have a shot at getting, and then the back is best costume design or something like that. Things that are going to be much less front and center. And I say this, dude, don't tell me who you think should win. Tell me who you think will win by popular vote. Again, the winner in each category is the modal, so the most popular selection. And once again, the Academy Awards, the group does vastly better than any person in the group. So there's an example that might be, that would be a fun one. There's another one I've always found interesting, and I think the Financial Times and newspaper did a version of this 15 or 20 years ago. Do you know about the two-thirds game? Have you heard of this before? I don't. So here's the setup. So one of the things is interesting in markets, but it's interesting a lot of games, generally speaking, is there are sort of orders of thinking, right? First order, second order, third order. And this is an attempt to capture how many orders of thinking they actually go through. So here's the setup. You ask people to, I typically ask for a whole number from zero to 100, then you hold that thought. And then you say the person who's going to win this contest is the person whose guess is closest to two-thirds of the average of everybody else's guesses. So you follow that? So everybody writes down their number, and then you as the MC of this thing take two-thirds of that value, and then whoever's closest to that number wins. You're probably already thinking about how would you go through this, right, mentally, because you know, you sort of say it was zero to 100, it started 50, two-thirds of 50 is 33, but you know, people are going to go that level, especially your educated audience. Well, two-thirds of 33 is roughly 22, but maybe they'll go that far, two-thirds of 22, and so forth, right, so you keep iterating down. Now this is a problem that has an equilibrium solution, and that's the answer is zero, because it iterates just down to zero. The problem is, and zero, by the way, is it often a common answer in my course when I do this. And I say to students, like, you're real smarty pants, right? You found the equilibrium solution, but you're not making any money, right? Because if anybody writes an answer, a number, you're not going to win. So the question is, how do you integrate other people's decision-making? And I'll tell you one other story about this, which is interesting. So when I was at Credit Suisse, I was part of a research group, and it had a number very prominent, you know, kind of world leaders, you know, former president of Mexico, one of the prime ministers from the UK prominent economists. I mean, this is like a really erudite group of folks, and we were appropriately having a meeting in Switzerland, and we had a behavioral economist, leading a session on risk. And this guy decides to do the two-thirds game. And I'm thinking, now, this is going to be interesting, right? Because we have, like, literally world leaders who probably negotiated these high-powered, you know, and they were absolutely horrible at it. It was like embarrassingly bad. So I was like, oh, my God, I'm glad they're all retired now. But I'm like, this is not interesting, like, I don't know if they didn't get the setup, but they just hadn't thought through those levels. And so, you know, as you know, in negotiation, but most things in life, understanding the position of somebody else is really important, you know, whether it's the basic concept of empathy is super important, right? And so it's really, I thought that was a really interesting little side note, but that might be another fun taking it back to your broader question. That might be a fun exercise just to demonstrate these principles rather than come up with some sort of a dashing solution to a problem. I like the idea of attempting some type of prediction through experimenting with my audience. And maybe I make it explicit. Maybe I don't, right? Maybe it's couched in some other way, but I do love that idea. So we can table that for now. Here's one other thought. You know, you're probably familiar with a little bit of this literature. So Phil Tutt-Lach and some of his members of his team at the University of Pennsylvania have done these forecasting tournaments. And, you know, they're the big thing, of course, is this idea of super forecasters. So the question is, would the Tim Ferriss audience be a super forecaster, right? And so if you gave him, you know, geopolitical or economic events, you know, in six months, we'll interest rates be X. You know, in 12 months, we'll try to do X, Y, or Z. Have the super interesting to see. And now the problem is, again, that you're getting one answer from a large group and so forth. So how easy to update, because the super forecasters actually update their probabilities as things change and so forth. But that might be another fun way to, but then again, that's what markets do, right? So to some degree, there are prediction markets, that's what they're trying to do as well. Well, I will allow that to just state because there are, I would just love to run more experiments and then share the results of those experiments with the people who participated. I think it would be a lot of fun. So TBD, TBD. But I will certainly come back to that at some point. Just a quick thanks to one of our sponsors and we'll be right back to the show. This episode is brought to you by AG1 by Athletic Greens. I get asked all the time what I would take if I could only take one supplement. The answer is invariably AG1. I view it as my all in one nutritional insurance. I recommended it long ago in my 2010, number one New York Times bestseller, The Four Hour Body, and I did not get paid to do so. With approximately 75 vitamins, minerals, and whole food source ingredients, you'd be very hard pressed to find a more nutrient dense formula on the market. It has a multivitamin, a multi mineral greens complex, probiotics and prebiotics for gut health, an immune support formula, digestive enzymes and adaptogens. AG1 makes it easy to get a lot of nutrition when good whole foods simply aren't at hand or when you just want to ensure you are covering your bases. AG1 is the ultimate all in one nutritional supplement bundle in one easy scoop and Athletic Greens is giving you a free one year supply of vitamin D and five free travel packs with your first subscription purchase. Go to athleticgreens.com/tim. You can check it out athleticgreens.com/tim. They also offer a 90 day money back guarantee if you are not 100% satisfied. Learn more try it out athleticgreens.com/tim. Now in addition to the wisdom of crowds there are a number of books that came up in the process of doing research for this conversation that you have mentioned and I don't mean to imply that we need to spend a ton of time on all of these but I would love to at least get your take on two that have popped up and there may be one or two more but I'll mention two.

Against the Gods and Complexity. (43:49)

One is against the gods the remarkable story of risk and this came to mind because you just mentioned risk in the context of Switzerland and the other is complexity by Mitchell Waldrup from getting that pronunciation right. Why are either or both of these books meaningful or must reads or important in any way? So let's start with against the gods is written by Peter Bernstein who was a brilliant economist and historian and it is the history of human understanding of risk. So it's a fascinating thing. Now I'll just say that broadly speaking I think understanding the history of ideas is incredibly valuable and pedagogy generally speaking right. So if I'm talking about an idea or I'm using an idea today I think it's very helpful to understand where it came from, who were the propagators, what were their blind spots, where did they take a turn one direction where they could have gone a different direction and so forth and so Bernstein just brilliantly lays this out in against the gods and he was a wonderful writer. It's a very interesting book by the way he also wrote a book called Capital Ideas which basically does the same thing for the history of finance. So Peter Bernstein that is money and if anybody's interested in the idea of how we understand risk and this goes back to the Bernoulli's in the 1700s up to relatively modern times it's a fabulous book. I'll give one other backup one little step on this which is it's a book I almost never talk about but one day when I was a food analyst I was visiting a money management firm it was actually the state of Michigan the pension fund state of Michigan and I was in the waiting room literally waiting for my meeting they had a bunch of books and I just rolled over there and I picked up a book called Bionomics by a guy named Michael Rothschild I don't think anybody's I mean I think it's a somewhat obscure book but as a name would indicate you know and this book was written I think originally in 1990 as a name would indicate you know what he was saying was the way to understand economics is really through biology and you know starting really in the late 1800s but into the early 20th century economics became very mathematically and in fact there's a wonderful book called More Heat than Light by a professor named Phil Murrowski which documents how economists literally and I mean literally mapped over equations from Newtonian physics to basically give economic street cred so economics and finance went sort of this mathematical slash physics envy route versus going more biological and you know I think that you in retrospect you could sort of say that biological way would have been a very logical way to go or as logical albeit not as mathematically straightforward or tractable so I've read this book by an ommix and I'm like this is like so cool and the guy sort of opens the book by saying hey you can't really understand economies unless you understand sort of evolution and and so forth so I was very drawn to all that so that's the backdrop I'm like sort of primed I'm thinking about this idea and then along comes Waldrop's book complexity and this is really the story of the founding of the Santa Fe Institute and by way of background these two was founded in 1984 by a number of scientists who felt and very prominent scientists many Nobel Prize winners who felt that academia had become too siloed right so the physicists hung out with the physicists and the economists with economists and the chemists with the chemists but again most of the interesting problems in the world were really at intersections of these disciplines and gee wouldn't it be awesome if we got these different scientists to hang out and talk to one another and so this is how this thing got going and some of the early conferences for example one of them was the economy is a complex adaptive system right so the idea of economics being in there early on was early days and so why this book is so I think still to this day kind of exhilarating is because you read about these scientists and how they were coming up with ideas that were far from the mainstream and when we look back on them now many of them have become much more mainstream ideas but it's just it was super cool and so one of the main protagonists I think the book does open with a story is Brian Arthur who's an economist now and you know Brian was promoting this idea of increasing returns now if you've taken economics microeconomics at any point you learn about decreasing returns right so if Tim's lemonade stands super profitable Michael will open up a letter may stand right next door charge slightly lower prices and so you'll become less possible and then you'll have to match my prices and so forth and we'll compete our way down to less profitability so decreasing returns and Brian pointed out that under certain circumstances there were these increasing returns there were sort of these winner take all effects this is now again he was writing about this in the 80s and 90s completely heretical and by the way like basically the mainstream economists wanted nothing to do with it wall drip and I think in a very engaging way describes how all these ideas developed and so if you said the Santa Fe Institute is there a unifying theme maybe sort of this idea of a complex adapting evolving system is a way of thinking about it so those would be my answers those are two wonderful things and you know my oldest son before he went off to college he did a gap year and I thought you know like what would be a list of books that would be really great for him to to read and internalize and you know I think we had a list of 15 or 20 books but these were both on that list because I just think it's super cool to understand the history of ideas and as far as a teacher if you're ever teaching something I think it's just super helpful to know where it came from like what is the genesis of this by the way there there are a couple things that I'm actually trying to track down now these are specific finance type of things and I'm having a hard time finding the first person that come up with it so it's kind of cool right to sort of go on these little wild goose chases so I'm going to definitely come back to the Santa Fe Institute and I'll see my question now so it can marinate over on your side but I'm going to take the conversation in a different direction then we'll come

Value investing and the Santa Fe Institute. (49:56)

back to it which is it seems like value investing and value investors pop up a lot around the Santa Fe Institute it seems like Bill Miller value investor introduced you to the Santa Fe Institute and I guess the 1990s and then I've seen a number of other mentions so this could be just a misread but I wonder why maybe we can just tackle this now why not why it seems that value investors seem to gravitate towards or be involved with the Santa Fe Institute and I suppose for a definition of terms if if you wouldn't mind just defining value investing for folks as well I'm not sure that's the wrapper I would use but let me just say what value investing is and one very specific distinction here often when you hear people say value investing they think about buying things that are statistically cheap low price to earnings ratio or low price to book ratio and that way of thinking was founded by Ben Graham who taught at Columbia Business School and many of the Graham acolytes were sort of these low P low price to book folks and they were just buying you know against statistically cheap stocks I think the the modern manifestation of value investing is simply buying something for less than what it's worth so it seems like all investing should be value investing right if it's done intelligently so I think that's the distinction but to your point I think that the Santa Fe Institute I mean there are two reasons that I've always found it so exciting one is the idea is to come out of it and the second is and perhaps even more important from my point of view is the type of people that tend to be drawn there many academics are perfectly happy to stay in their lanes right and in fact much of academia is aligned to encourage you to do that for promotion and and recognition and so forth and so the type of people that go to Santa Fe are massively self-selected to be interested have polymath type tendencies and by the way investors are a really fun group as you know investors are a fun group to hang out with in part because they tend to be curious people and I think curious is the main the main adjective I would use to describe most of the great investors that I know and they're learners right so they almost all the people read a lot and try to think about things so you know Bill Miller is a great example Bill's been extraordinary in my life you think about different people along the way that have been really important he's certainly been that for me he introduced me to the Institute as you pointed out in the 1990s we're at a baseball game we're sitting there and he talked about it but that's a guy that you know reads all over the place reads very widely reads different disciplines and thinks a lot about how those ideas might apply how he might be to apply those ideas to areas of markets you mentioned Bill Girly we'll go to the venture capitalist right you wouldn't really call venture capitalists the value investor in the classic sense but you certainly would say they're trying to buy things for less than what they're worth and and cultivate them to some degree and he got all these ideas, got all these ideas and as well Josh Wolf is on our board you know so we have a lot of really I think the connection between all these folks the thread is is this idea of intellectual curiosity and a willingness to pursue that curiosity by by immersing yourself in that type of an environment. I'll add one thing to the investor comment which is part of the reason I enjoy if not spending time with at least observing and studying investors because they also have a report card in a lot of cases right so they are placing bets based on their thinking so it's not simply opinion versus opinion you can look at the returns at least for some of them which I find very very refreshing I also really appreciate that aspect of interacting with or at least studying a lot of investors and in preparation for this conversation I also shut texts to two mutual acquaintances both thinkers I respect greatly Josh Waidskin and Patrick O'Shaughnessy so I wanted to actually grab a few of the possible questions that Patrick had forwarded also great podcast or I recommend people check out Patrick's podcast and you can feel free to decline, divert or transmogrify this however you like but he sent me quite a few things and we'll probably dig into a number of them but I thought one that would be fun for listeners and I include myself in that group is the following an asset class tour with him could be really fun in other words how do you think about private

A brief 21st-century asset class tour. (53:57)

equity venture credit public equity cash gold real estate and what they do for you when done well in the role they can play is that a sandbox you're willing to hop into for a little bit well I mean it's just something I don't I actually don't know that much about but I could probably make one or two comments one of my covid projects was in 2020 was to do a big piece on public to private equity and we needed to find a bunch of things just get out of the way so public equities are just stocks of trade in the United States today there around 3,500 of them roughly speaking what's fascinating is there are about as half as many companies that trade public companies that trade today as there were in the mid 1990s and they're in fact less than they were in the 1970s so obviously our economy is bigger population is bigger right you would expect the number of public companies to roughly grow in line with all those other metrics but that has not been the case so that's an interesting thing like in and of itself why is that and at the same time we've seen the emergence of private equity now private equity is a a wrapper that really covers two different areas one is buyouts and in a buyout typically a sponsor will buy a company usually using leverage and then own it for typically five years or so and then try to sell it for a profit but the key there is that they buy stable businesses typically with lots of cash flow venture capital is the other side of that which is buying very young companies often when they're just getting going and actually playing a very important role in fostering that development so being on the board giving guidance and so on so forth right so a couple observations that come out of that that are interesting one is why are there fewer companies and basically the simple answer is there have been lots of mergers and acquisitions and not a lot of IPO so part of it's the cost of IPOs have gone up and so there are simply fewer public companies and there used to be the flip side is they're much bigger now and more profitable on average and so forth so that's interesting and then the second thing i'll just say Tim this is just me sort of speculating a bit which is roughly speaking at last say since 1980 so it's called the last 40 years or so there's been roughly maybe we've reversed this in the last year or two but roughly a steady decline in interest rates that means your expected returns basically go down right because you put money in the bank or invest in something you get lesser expected return and at the same time our liabilities are going up right if you have to put a get-through college or you think you're contemplating your own retirement right you're expected to live longer and so forth so your your liabilities aren't going down so if the expected returns are going down and the liabilities are going up like what do you do about that and the answer is typically you go out on the risk spectrum you take on more risk and how do you take on more risk the answer is there are two interesting ways to do that one is to use more financial leverage right more debt and that's what buyouts do specifically and the second is to buy young companies that are inherently risky or companies and that's venture capital so i think part of the answer of the emergence of those two segments those asset classes is precisely to accommodate that basic reality that returns in more public markets have been less exciting than they have been the past. Some of the other ones you mentioned like credit or or gold or whatever i don't really have much to say about those things. Okay well we can park those i would like to transition then to base rates so the power of base rates in life and business slash investing and the prompt that i got was something related to one of the famous triple crown horses if that is enough of a catalyst to get the party started then i'll let you know.

Investment Strategies And Decision-Making

Base rates and horses. (57:47)

Yeah let's start the party let me just say Tim that if there were an idea that i could go back and tell my young self my 18 year old self it would be this idea of base rates i learned about this from Danny Kahneman he used slightly different language but we'll lay out the terms and go back and forth. So Kahneman used this idea of the inside versus the outside view and the outside view is base rates okay so here's the basic setup if i present you with a problem and it could be almost any kind of problem you know how long will it take you to remodel your kitchen and what will it cost when will you be done with your book manuscript you know your college student when will you be done with your term paper your problem set or whatever it is right the standard way to think about that is to gather a bunch of information right so to think about it combine it with your own inputs and then project and like left our own devices that's how we all do these things that's called the inside view the outside view or the base rates by contrast says i'm going to think about my problem as an instance of a larger reference class i'm going to ask a really simple question like what happened when other people were in this situation before and it's a very unnatural way to think about the world right for a couple reasons first is you have to leave aside like your own views and your own cherished information right which we tend to place a disproportionate amount of weight on and then second is you have to find an appeal to this base rate and it may not be your fingertips you may not even think about it that overtly but what psychologists have demonstrated it's not all one or the other but some thoughtful combination of the inside versus the outside view sort of your own analysis versus base rates tends to lead to better and more accurate predictions and this is the sort of is a real time i don't know what year this was 2008 2009 something like that there was a horse running for the triple crown so right the first race is the kentucky derby and it won the race by like four and a half lengths big brown this is the second leg is the preakness it's in baltimore it was stronger still i think it run by one by like five lengths or something so it's one race away from horse racing immortality which is pretty impressive now the last race is the bellmont it's the longest which is difficult so many horses are actually quite fast there's sprinters longer distances are more challenging for them but big brown was obviously sort of the favorite appropriately so and he went off it odds it suggested a 77 probability of winning the bell mod 77 so the question is like all right how likely is it that he's going to win at that probability and what you do is you look at base rates and you ask how many of the horses in a position to win the triple crown what percent actually did that there have been triple crown winners since this so this is the date at the time and at the time there had been i think there was like 28 or 29 horses that had tried 40 percent had succeeded so 40 percent were already lot lower than 77 but what's interesting is that eight of the nine horses that tried before 1950 succeeded and only three of the 20 since 1950 had succeeded so it was a 15 percent success rate since 1950 all right so you're like okay well that's an interesting data point he's going off at 77 now it's okay and then the second thing is maybe this is just like a wicked fast horse right maybe this is like the new secretariat and there's a way to measure that it's called a buyer speed figure and speed figures really haven't been kept accurately since the 19 they i think they started about 1990 so about 30 years call it at the time it's probably more like 20 years and this horse was actually the slowest by speed figures of the last seven contenders for the triple crown all of which that had failed so you know he's going off at 77 percent and of course he ran the race and was made the story sort of cap the story was the horse basically took the day off did jockey technically eased him but he came in last basically right so the next day they give my physical you know from his nose to his tail and they're like is he okay he's fine he was just fine so the guy was talking to about this guy named steven christ who's an awesome guy by the way fascinating guy and a famous handicapper and a brilliant writer so i'm like steven like what's up with this and he's like people don't seem to realize we're talking about horses here they just think so anyway the story was he was a favorite he was probably a 40 probability you know 45 percent if you're using all these data but at 77 percent he's a bad bet and this goes back to him to circle back around to our wisdom of crowds thing right so what happens is this is a diversity breakdown right so most people don't bet on horse races day and day out there are professional handicappers and people do it for fun but for the most part there's not a lot of volume and so forth however when there's a triple crown contender people get fired up in fact the bellmont i think the attendance doubles from the prior year even it was a really hot and steamy day and people pull out their wallets and they start plunking down their best right because you want that ticket that says i bet on the triple crown winner right and of course these are markets that are set by the dollars flowing in their pair of mutual markets right so the dollar flows are what dictate the odds so it's a classic example of a diversity there's a perfect sense and again it's like day in day out horse race results are actually incredibly efficient and they're certainly very hard to beat when you take out the track take for example the big they're obviously they're professional handicappers but not many and those who are doing it are very sophisticated and so forth but you know you and i like regular joe's we're not going to make money doing this anyway so there's a good that's a good example and it's hard to shore you could bet the field or something it's but it's hard to shore horse it seems a little bit unsporty to do that but anyway that's the big round but the broader lesson is that no matter what you're thinking of doing you know moving to a new city taking a new job anything you're thinking about doing is asking is there an appropriate reference class is there a base rate that i can look at to see if i can get some information about a little bit about my prospects when we spend a lot of time on this is for example things like corporate performance right so i know you do a little bit of investing as well but questions like you know if a company has sales of a billion dollars like what's the distribution of growth rates i should expect right let's look at history to figure out how good could it be how bad could it be what's the average and then where do i think my company is going to fall within this distribution and you know how optimistic or pessimistic it might be so i could ask a million questions about base rate but the one that's really sticking out for me is what on earth happened around 1950 with the horses was it anti-doping measures what what clicked in that that led to that might be the opposite right it could be the the ubiquity of doping the secret's out this is a fascinating conversation there people i'm way over my skis already but i want to tell you that for almost all the big races the kentucky derby you know because they've been run for a very long time under the same conditions right that i think the horses today run essentially the same speed as they did in the 1950s they're no faster so i think that thoroughbred horses are it's this topic is fat cinean of itself right because they've been bred from a very very narrow stock so they're a handful of horses that are essentially the ancestors of every horse that's around today so the genetics are really crazy and that's why there's such fragile animals but i think that they're at their physiological limits and they have been for a while secretary it was a freak literally a genetic freak and as you know you prior to stories when i don't they actually did this but apparently there's some sort of an autopsy and secretary's heart was much much larger than what's normal for a horse like that so secretary really was like one one in a multi-generation freak but yeah i think they're physiological and limit so that the horses all today are no faster than they were back in the day yeah certainly hasn't stopped people from doping horses i know that is you know of quite a few drugs that have made their way from research to race sources to body builders to the billionaires who want to live for a million years with six-pack abs so the race horses are have been a sort of test bed for a lot of drugs for a long time but it's interesting that as far as speeds go it seems that at least the top end i wonder if the averages have changed at all we can go look at all the numbers but i would imagine things like marathon times or 100 meter dash and so forth they're all i'm sure they're all faster right swimming times for sure they're all faster than they were in 1950 so it is interesting that this is one domain where they hit the wall but part of it is because this goes back to our thing on diversity right you have no diversity in the genetic pool so as a consequence you've sort of tapped it out so if you wanted to build a faster horse you would you'd have to shuffle some jeans around which has not been happening right by definition can't happen yeah i'm not going to become a handicapper but i may have to

Good vs. great investors. (01:06:16)

chat with steven christ and learn a bit more about this horse game i would like to jump though to discussing what separates good from great investors and there's a line here that i believe is your writing please fact check me if i'm not getting that but this is part of a larger piece but what separated the good from the great investors had little to do with their analytical tools but a great deal to do with how they made decisions and i suppose that's maybe a subset question of just in your experience in your studies in your practice what did you found most reliably separates good from great investors the analytical stuff is anti for the game right so you have to understand you know basic accounting and finance and so forth so there's no getting around that and that's you need to do that but i think that quote captures certainly what i think about this which is the key is making really good decisions and this is particularly difficult under a bunch of different circumstances that we could talk about but maybe the two or three biases i think are really difficult to circumvent the first is overconfidence we tend to think we understand the future better than we actually do and this is something we can test pretty well in sort of experiments and as a consequence people think about ranges of outcomes that are too narrow and that gets them into some trouble so overconfidence and the second one i think is even more difficult which is confirmation bias which is once we've made up our minds about something we tend to seek information that confirms our point of view and dismiss discount disavow information that does not and one of the vital things in investing is updating your views and if you're not constantly doing that and doing that honestly and objectively or as objectively as possible that's going to put you at a substantial disadvantage that's that decision making aspect now there's another aspect all this it's really important right which is you ultimately have to come up with a view that's different than other people and that view ultimately has to be correct and so there's a little bit of an anti-social component to all of investing like great investors are a little bit of an anti-social component to it you know some people i think do that better than others or more naturally than others but that ends up being decision making because at the end of day often you buy something and it goes down in your face even if your thesis is correct and you know do you have the fortitude to sort of stick with that position the third thing i mentioned Tim if you had robert sepolsky as one of your guests no i haven't actually no do you know robert sepolsky name you should probably remind me he'd be a fun guy for you to talk to on many levels he's a neurobio biologist and a primatologist at san friday university you know he wrote a book called behave in 2017 which is i would say probably the best book i've ever read on human nature it's not an easy read but it's very well written and very interesting he has a book coming out later this year i believe on the topic of free will so interesting guy but robert spent you know for years his obviously his academic years at stanford in his lab and then he would spend the summers in kenya studying baboons and if you ask him why do you study baboons he would say because they're physiologically like humans and like humans they spent three hours a day feeding themselves and the rest of the time tormenting another but what robert was interested in is a topic of stress and so he wrote a book called why zebras don't get ulcers in the mid-1990s which is it's a wonderful title and it's a wonderful book about the idea of stress so he's like a key guy in unchanging stress and so of course in these baboon troops what he can do is you know the questions he's asking is like hey who's stressed out here is the alpha male the beta male like you know the female like who's getting stressed out or the low ranking males and of course you can shoot a dart into the flank of a baboon and draw blood and measure cortisol so they're actually they can understand exactly what's going on at least this rough proxy for stress this is all a big wind up to sort of talk about how you know something is important for investors and in particular time horizon so sopulsky sort of asked this question like what stress is out an animal right here zebra hanging out in the savannah right pursuant to his title what stress you have the answer is a lion decide you're the target for lunch bad news right your structure response is going to kick in you're going to pump blood you're going to pump adrenaline and you're going to run really fast what's also important is you're turning off all your long-term oriented systems right you're turning off growth immune digestion reproductive systems these are caloric luxuries for another moment if you elude the lion you go back to your group and you reverse all those processes you go back to homeostasis right now the question is what stresses a human being and we have a clear we have episodic physical stressors and you've put yourself through more than your physical stressors and your different antics but for the most part our stressors are psychological you know it's the big deadline at work it's a relationship concern is something about money whatever it is and the point that he makes is those psychological stressors trigger the same physiological response your brain is not always so good at distinguishing between physical threat and a psychological threat and if you're constantly psychologically threat your body turns the stress system on or stress response on and never turns it off so if I said you know one of the symptoms of stress people you come up with a very familiar list of is they're sick all the time they have problems with their gut they have reproductive problems and extreme cases they don't grow properly and so forth so here's the punch line this is why I think this is so interesting when you turn on your stress response you tend to shorten your time horizon so you're the zebra running away from line you're not thinking about what am I going to be doing in two weeks right you're thinking like how am I going to survive 20 seconds likewise if you're human in your stress you pull in your time horizon and that's a really interesting issue for an investor because it can be the case that as markets for example are tumbling and one could argue that your opportunity set is becoming more attractive because you're getting the same asset at a lower price everything inside you're going to say man I need to survive now I don't need to worry about what's going to happen in two or three years and I actually lived through this I mean one of the big drawdowns of 0809 in the financial crisis we had certain you know some of our investors were recommending stocks to the portfolio manager and the portfolio manager would say like hey this seems like a great idea over three years but if I put this in my portfolio it goes down the next three months I'm going to be out of job right I'm going to be gone so this is another aspect of it is this equanimity right this ability is sort of keep your eyes on the horizon even when you're feeling the short-term stress because we all do and that leads obviously you know what should you be doing to do all the natural these stressors and so forth there's obviously a list of things we could talk about there but to me those are some of those qualities and because the other thing I just say overall I already mentioned it Tim but I'll just emphasize it again is that almost all the great investors I know are just incredibly intellectually curious and they want to understand how things work they're willing to listen and read and learn none of them think they figured it out right none of them think that the game has been mastered they're constantly trying to improve their ability their craft and so forth and that's why there's so much fun to be around right for the most part because they're they're typically very interesting people because they read a lot and think about how various ideas that are swirling around there might apply to what's going on the world today. I'd love to chat a bit about some of the content of your book Think Twice which for people who haven't read it I recommend and also has a great cover quote from Billy Bean the general manager of the Oakland A's who was or then general manager who was profiled and highlighted in moneyball so that one hell of a quote so congratulations for the cover quote as well my question relates to a component of the basic book description so I'll just read this in Think Twice Michael Mobison shows you how to recognize and avoid common mental missteps including one misunderstanding cause and effect linkages to aggregating micro level behavior to predict macro level behavior three this is the one I want to talk about not considering enough alternate possibilities in making a decision and for relying too much on experts not considering enough alternative possibilities in making a decision could you perhaps give some examples or just recommendations for how people can expand the number of alternative possibilities they can generate or consider in making decisions.

Expanding options when making decisions. (01:13:22)

You know by the way Think Twice just the premise of that is that when you're faced with certain types of situations those that you described your mind naturally wants to think about it one way when there is a better way to think about it so often a better way to think about it so this is an encouraging to say from time to time slow down Think Twice right so that's where that idea came from and you put your finger on something so important right which is again thinking about a wide range of alternate possibilities and wider than people typically think okay so what are the techniques to allow people to do that. I'll mention maybe three of them and I'll try to do this really quickly the first is what we've already talked about which is base rates right so let's just pick something specific you know you're trying to figure out the growth rate of a company or something something mundane like that you might say well if the world is consensus is going to grow five percent and if they kill it they're going to grow eight percent and they do really badly grow two percent right so you have this sort of fairly narrow band then you might say to yourself well okay let me look at other companies that were sort of in the same situation same size roughly same industries and look what their actual growth rates were and see if that's different and quite commonly they're going to have much bigger range of outcomes and that's going to open up your mind to say okay perhaps I should be thinking about something more expansive than what I'm doing now the second idea is concept called a premortum have you talked about this on the show before I think I discussed premortums well premortums and their opposite I think I discussed this with role of both of sequia and there are a few other folks but I think this is worth revisiting yeah and I'll be quick about it so we all know about post-mortar's right so post-mortem the patient has died and we sit around we say given the information we had the time could we or should we have done something differently to lead to a better outcome right so we learn from our mistakes if there are mistakes that were made and we're all familiar with forecasting so we're standing the present peering on to the future a premortum as the name sort of implies is actually a third exercise and by the way it's developed by a psychologist named Gary Klein so if you want to know more about premortums look up Gary Klein he wrote an HBR article Harvard Business Review article about this specifically that allow you to track this down so a premortum is that you're standing into the future you pretend like you made the decision now you're in the future say a year from now and this decision's turned out horribly it's embarrassing then each person individually and again going back to our concept of diversity each of us individually writes down why this decision turned out so poorly so essentially we're documenting the ways things can go bad and so what happens often in organizations is we all coalesce around making a decision that making a particular investment whatever is you know and we're kind of optimistic and we're sort of positive about it and the premortum again just draws out the possibilities of things not going well and perhaps there is the junior person in the room who didn't feel emboldened to talk about this downside scenario that no one seemed to be contemplating but when he or she has to write it out and we all read them that opens up our minds to some degree the last thing which is related to this is just red teaming so most people are familiar with this concept but comes from military strategy originally I think cybersecurity is a really good example of it today but the blue team defends the strategy the red team attacks so if you're a general laying out a strategy you say okay here's our strategy if we were to attack ourselves how would we do this so you're red teaming so in cybersecurity you develop your security and then you hire hackers essentially to hack yourself right to see how vulnerable you are so again it's just opening up your mind to other possibilities in a way that it might be difficult to do and one thing I want to mention I think that's related to this Tim that I think is so important and it was part of your conversation you had with Neil Ferguson and that was this idea of counterfactuals and you know I think he said something which is correct which is historians don't really like counterfactuals there are some psychologists to talk a bit about counterfactuals but a counterfactual again is what didn't happen that could have happened and I think it's just an really important thing that once we all understand that the future is pulsing with possibilities and we even if we do lay out these ranges of possibilities we know that their different paths the world can take but once things happen you know it's like we forget about all the other possibilities right and there are two things one is called hindsight bias we started to think we knew it was going to happen with a greater probability than we actually did and the others called creeping determinism we started to think that what happened was the only thing that could have happened and those are both very dangerous things to fall into as well so it's this idea of always keeping your mind open you say okay this turned out this way but we understand there was a counterfactual and things could have turned out differently building off of learning from failures and just pre-mortem post-mortem all these wrappers we can put around mistakes and what we can sort of learn or attempt to learn ahead of time in terms of expanding possibilities but also learning afterwards it's very clumsy way to lead into a very simple question which is do you have any favorite failures of your own so these could be

Favorite failures. (01:18:56)

failures that ultimately seeded later successes things that taught you disproportionate amount compared to perhaps other mistakes or failures you've experienced do you have any favorite failures so I you know mentioned Drexel Burnham-Lombaire in this training program and all the positive things that came out of it and by the way you know David Epstein why is it not David Epstein talked about it but I I'm sure the idea has been around is this idea of skill matching which is you know you figure out what you're likely to be okay at where you can add some value that benefit happened there but that job at Drexel Burnham ultimately led to being a stock broker you know today to be a financial advisor and Tim I was just an abject failure at this job and you know I resigned in quotation marks right but effectively I was fired you know it was pretty bad right like in other words I was doing something I wasn't good at I wasn't happy doing I was getting negative feedback on that and so that was I would call that a failure and that was the culminating point of the training program by the way other kids other people in my training program went on to be quite successful so it was me not others and what I took away from that was I'm probably not doing what I should be doing and I should think more about what kinds of things I could be where I could be more valuable more useful and try to pivot my activities in that direction. I could move back to think twice over reliance on experts I'd love to hear you expand on that and maybe just defining experts as compared to say people with experience we could do first but I would love to know how people can counteract or how they should think about over reliance on experts.

Counteracting overreliance on experts. (01:20:35)

The psychologist Greg Northcraft has this great distinction between experience and expertise he says an expert is someone who has a predictive model that actually works right and this is like a super big deal in the world of investing so there are a lot of people who have been around for a long time they sort of gotten through maybe a couple good breaks along the way and they're experienced but they don't necessarily have predictive models at work whereas a really a true expert has a predictive model that works. I'm increasingly skeptical about experts and I think the pressure on experts is coming from two different directions. The first is algorithms and you know this goes back to some famous work by Paul Meale from the 1950s on clinical psychologists but just demonstrating that it's almost always the case that algorithms so basically rules that we write down outperform many experts in many different fields. By the way it's actually even more interesting than that because sometimes you can go to somebody and say tell me how you do this tell me how you think about what you're doing and you can actually write out a bunch of rules and they're telling you the rules right and then if you actually compare the person with the model that the person created the model does better the person themselves right so it's not the the slippage is not the way that they're thinking about the world the slippages are not executing right and this is the law that work on the checklist and so on and so forth but anyway so that's the first thing is there can be algorithms and I think what we're seeing in our world is more and more of these now they're they're downsized algorithms but more and more of these algorithms and then the other one Tim is what we've very talked about which is in the complex domains I think in many instances there's a lot of evidence that crowds the wisdom of crowds is better than in than experts in quotes and this goes back to we talked about Phil Tettlock and the work on super forecasting a few moments ago you know Phil Tettlock's the first book I read of his was in the mid I think 2006 or 2007 called expert political judgment and there he actually took about 400 experts asked him to make very specific and probably these are masters Ph.D. level people right at the top of their field and asked him to make very specific predictions and economic political and social domains and then kept track and found that they were you know not much better than chance in making their predictions and by the way they're like you and me when they get something wrong they have a litany of excuses right like oh you know you just wait or you know oh had this happened I would have been right about this one of my favorites is somebody said like my prediction was so important it changed the course of world events okay so that's an interesting one that's also interesting so I think that the wisdom of crowds can outperform and so I think that's leading to this idea called the expert squeeze but in certain domains again you should listen to experts one of ways that you can figure this out is to say like okay if I appeal to a bunch of different experts are they going to basically give me the same answer right and so tomorrow you want to say hey how's the weather gonna be tomorrow you can turn on various tv channels probably a couple internet sources and you're gonna get roughly the same thing right so those experts are going to converge on the same solution by contrast if you say again geopolitical stuff or you know what will the price of oil be and whatever you can get some very well qualified and credentialed experts with different views they're going to say things that can be potentially wildly different and so you know one example for instance where this is a really big deal today is stuff like climate change so even if you and I agree on the inputs and we're both experts you know we may both build models that are on some level credible but they may generate very different outcomes and so what do you do with that so that's an area where you just we're experts where you have to put the question there's supposed a lot of folks rely on experts in many many different domains and on the let's just say if they're trying to look at some

Intuition. (01:24:34)

way of analytically chewing on all the data from experts to make a decision or from one or two select experts on the opposite end of the spectrum there's this term that gets used by many people I think very haphazardly which is intuition however one of the questions that I suppose broad questions I had that I want to explore with you was how you think about intuition question mark end of question and broadly here's one from Josh which is how can an awareness of cognitive biases be internalized into intuition and then he added to that and semantically accessed but we can potentially hit pause on that you and I both know Josh but how do you think about it yeah it's an absolutely fascinating topic and here again by the way I'll mention Gary Klein the pre-mortem guy has been you know pretty strong advocate for something called naturalistic decision-making which relies a lot on intuition Danny Kahneman who won the Nobel Prize in economics as a psychologist has been one who's pointed out the heuristics and biases and things like prospect theory and so forth so they were sort of on opposite ends of this and interestingly they did an adversarial collaboration in 2009 they published a paper called a failure to disagree so that's interesting Kahneman and Klein so Tim I would take one step back and say using some language from psychology this is brilliant branding by the way there are two systems of the mind system one and system two it's just like inside outside views like those guys need marketing they need a marketing department over those psychology departments so system one as you know people talked a lot about this it's your experiential system so it's fast it's automatic it's difficult to train but it basically runs your life for the most part system two is slow it's purposeful it's deliberate it's costly right you have to recruit it often it's lazy doesn't really want to do much work and I would say that intuition is a situation where you've trained your system one in a particular domain to be very effective for that to work I would argue that you need to have a system so this is the system level that it's fairly linear and stable so linear in that sense I mean really the cause and effect are pretty clear and stable means the basic rules of the game don't change all that much so if you have those conditions and by the way even driving your car you've got some intuitions about how that works you can get around that's fine if I put you in a stressful driving situation of course like bad weather or certain speeds whatever you're what you know to do is gonna not be sufficient to get the job done so um I had this interesting conversation with Josh about this specifically by the way the art of learning is fabulous I'm a huge fan and by the way just in awe of his accomplishments all its accomplishments but certainly when you think about two domains chess and martial arts for instance and he was you know working with different investors and he would say to him he told me he's like I would tell him like rely on your intuition and I was like dude I don't know if that's good advice right and the reason is I'm like for you Josh you happen to excel and become world-class in two domains that were linear and stable chess is a perfect example it's almost like the canonical example where you know experts exist they're grandmasters they chunk I mean all that kind of stuff you know they're just operating at a different level than certainly I am and then he go to the martial arts and I just remember reading in the art of learning he's got this interesting section toward the end where I think he was in so like world championships for Tai Chi and it was in Taiwan and and so he goes there and I don't know enough about how all this works but I hope I get this roughly right is apparently they decided change the rules to change that like a starting position for engagement and the size of the ring which seemed like a really big deal so he's been training using these other things and all of a sudden essentially my my system didn't be became unstable right likewise by the way if you said chess you know we're gonna make the board now 10 by 10 and the pieces move differently right all the expertise of the grandmasters would go out the window so I think that intuition tends to be way because we all feel it by the way we all have that sensation of an automatic answer that comes to us but I think it tends to be way over weighted and you know the other thing we have another problem of intuition is a big sampling about bias problem which is like people say like how did you come up with this idea and like I just came to me in a flash I get intuitively right and we forget about all the dumb ideas that came to people they don't talk about right so there's a sampling problem as well so that that to me would be the thing on intuition that I think is really important so it's not that it doesn't exist it absolutely does it can be through this training now this goes back I mean Josh's question is a little bit another level right which is how do you eradicate bias from this and I do think that's almost part and parcel of the system right because if you're learning in one of these stable and linear systems your failures become it's much more it's easier to point out your failures I think or your mistakes or your errors than it is perhaps in other systems so I think they kind of get weeded out to some degree we obviously I have these also I've mentioned before like overconfidence and and confirmation bias we have biases and all sorts of other things but those tend to be more relevant for for more open domains for saying by the way I should ask you Tim so would you say like when you think about your experience as a wrestler let's just focus on like wrestling perhaps or even dancing but wrestling do you feel like you trained yourself in such a way that you not to say it was perfectly automatic you may have had a little dialogue in your head but but you sort of knew what you were doing and how to do it fast and hard and accurately not would you would you say that I would say that probably even more so in judo but I I I I do think I went from say unconscious incompetence to conscious incompetence to conscious competence to unconscious or kind of automatic competence which is part and parcel of competing in probably I would have to imagine most sports not all but speed is a deciding factor so I do feel like I got there yeah I think that's and that's a good example where and again like I don't know exactly how the rules are judo but again if I change the rules somehow or even in all in any sports you watch popular sports like you know basketball or ice hockey or football whatever if you change the rules it does change you know it takes people time to adapt and and in quotes retrain in order to internalize and like you said you go from that awkward phase of like I'm thinking about what I'm doing to sort of being automatic and I it should provide maybe a little bit more context to you for why I'm asking about intuition certainly I'm asking because I wanted to build off of what Josh had put forth and I know he thinks very deeply about different systems of thinking and is is truly a spectacular competitor and is almost just beyond comparison for me and his ability to systematically deconstruct and become world-class in different domains I mean he's doing it with foilboarding right now and to watch his progress over the last few years has just been astonishing quite frankly I've also started to ask other podcast guests and friends in different domains about intuition not because I'm looking to justify it in any kind of new age way or overweight it but I'm curious how perhaps put a different way they utilize different systems of thinking in their own lives and so had for instance John Vervake who is a professor of a few different things cognitive science among them at the University of Toronto and he talked about intuition as implicit learning so pattern recognition and how that can be well shaped or poorly shaped I'm using my words and not his I am this isn't a question I suppose more of a confession of context which is just to say I am increasingly interested though in very fast decision making understanding that there is a sampling bias right it's very easy to remember the handful of times where you come up with something brilliant very quickly and subconsciously or consciously dismiss all the stupid things that you came up with but nonetheless an area of interest I guess partially because I've just focused so much on the analytical side and the more laborious forms of arriving at answers that that's something I'm deeply interested in but I do think I mean even your point on implicit I don't know what your exact phrase was but implicit it certainly would fit what I would believe about this which is again often experts if you ask them how they're conceptualizing things they're I'm not sure they're completely aware of how they're doing it right even things like chunking you know chunking was something that was observed by psychologists looking at chess players I don't know the players themselves were saying this is how I'm doing it so it's super interesting yeah no I think it's super interesting how the mind works and experts they definitely work in a different way than the rest of us but I'll just say like the world of investing you know investors often talk about the side of pattern recognition and again pattern recognition if your system has certain characteristics I think works great the question again is in investing is how do I parse what I think would be lend itself to where pattern recognition will be effective versus where it's unlikely to be effective and that's that's the interesting question that's the line I'm interested in in understanding I'm similarly interested well let me bring up maybe just one or two final questions and we can certainly go anywhere else that you might like to go but this one is less conceptual more personal so this is something that came to mind for me

Lessons From Complex Adaptive Systems And Personal Growth

Time management tenets. (01:34:15)

but also came up with some of your students in your tribute video and that is time management so you have jobs you write books you read a lot of books you have five kids the list goes on and on and I would love to hear any advice or tenets or rules you have for time management maybe that's the wrong term to use life management perhaps you mentioned one of them before we started recording which was being religious about sleep I don't know if that's one of the pillars but how on earth do you juggle all of these things and still seem to have a reservoir of energy left over it's pretty staggering to me yeah it's certainly not as impressive as it looks but let me just say that I'll start with my life partner my wife you know and I really mean a partner and I've always thought this is at least my own view I don't know people have talked about this so this is how they feel but it's almost like an amplifier and if you have a really good relationship and someone that works well with you and you're compatible and you have you know so same sort of sets of goals it just amplifies everything and makes everything better and I've had that so we've been married you know 30 plus years and that is the number one single factor I would have to say just being with a partner who's really supportive and understanding and you know even like for years when we go off on vacation she would always allow me a couple hours to go off and read stuff and something like that so just being thoughtful about that so that is first and foremost and dealing with a lot of stuff including with the kids and so forth the second thing is I don't know like I just been doing that I've been doing this for a very long time right so it sounds like you're reading up all these things it's just it's over a very long period of time I would just say that I enjoy a lot of this stuff so I really enjoy learning things I enjoy reading things I enjoy trying to understand things at first principles I enjoy trying to track ideas down to their genesis to understand where they came from and how they got to where they are today I also enjoy writing I'm not that good at it but I need to keep working on that by the way was John McVear professor at Princey was and I still much like some of your students were saying that their friend took your course 15 years before and kept all the notes I still have all of my notes from John McVee's seminar at Princeton well I read I mean I just read I'm embarrassed to say I got too late but I read draft number four last year and I was just like it's so on something that looks like brilliant and not a lot it's like so discouraging it's like this guy is like so off the charts so good right or you read Michael another Princeton guy Michael Lewis or you read these guys you're like oh my god it's spectacular right but I think this idea of organizing your thoughts and trying to communicate them effectively that's also very motivating I will say this and this is something I share with my students and I try to embody this to the best of my ability but sort of the foundation you know I use the lame term but like a mental athlete but like if I were trying to compete at a high level as an athlete what kinds of things would I do and I would practice and I would make sure I was getting my rest I would recover I would make sure I'm eating properly and so forth so like what would that be for cognitive tasks for me and by the way I really appreciate that you spent so much time with Matthew Walker and brought his ideas to the world because I think his stuff is really really powerful and in particular just to zoom in on this idea of the cognitive performance well let's just say negatively the cognitive degradation if you're not sleeping properly is just staggering right so to me the cornerstone is sleep and I really do try to focus on that pretty religious about the sleep thing and I'm an eight hour guy that really does make a difference for me and then for me what follows this exercise I've always been a lifelong athlete so I've always enjoyed movement but for me that's really important to be able to move every day and be very active and I don't know that I do everything Tim that you're telling me I should do but I do you know I lift and I could mix it up a little bit more and then for me actually diet and I try to be very careful with diet too but but that is actually falls if the first two are in shape like the last one seems to go pretty much it's like if I'm not sleeping or exercising the emails goes to hell in a hand basket for me personally so those are the things so that that allows me to perform I think to operate at a fairly high level for me now I'll just one quick story on this is that in the late 1990s I was at Credit Suisse as you mentioned and I had a brief stint as the job called the product manager which meant I ran the morning research meeting which started 730 in the morning which meant I had to get in there a little bit earlier we live in Connecticut so I had to commute in so I was getting up really early every day and with five kids it's hard to go to bed super early right so I was just massively sleep deprived and I signed a book without rapport to write the first edition of expectations investing so I was like all right I'm gonna do this I got clears for my boss I'm like I'm gonna work from home you know like three days a week this back you know whatever this is like 1999-2000 and so what did I do right I slept an hour more spent an hour more of my time but I slept an hour more I'm like oh my god this is how I'm supposed to feel like at three o'clock in the afternoon I'm still productive like for years for years literally like after noon I was like a basket case right I would I could talk to people but I could certainly not do any hard lifting cognitive work whereas correcting all that is really made a huge difference so that works for me now I would just say the other thing is you know because people often comment like how much I read and whatever I actually don't do a lot of other things too so I don't I've never seen Game of Thrones you know for instance I'm not proud of that so it's these are there's some trade-offs right just to be clear about all these things so people focus on one aspect of something without looking at the deficits in other categories it's very important to balance all that up what are other things on your not to do list for you personally okay so for me the things that I try to avoid so first of all I just would say that this by constitution this is just the keys that were handed to me I don't have an addictive behavior so that really helps a lot in things and I just so I'm not for example a drinker a big drinker very light social drinker so I think alcohol itself is a huge thing and I would not do more of it so that's one big one yeah the other one is just it would be time allocation and just be like how I'm spending time again it's not good because I'm not up on all the things in pop culture and so forth but I think it'd be fine yeah yeah I don't know yeah I hope so five kids any resources you recommend or thoughts on parenting that you'd like to share with people who are in earlier innings people often ask this question like if you change your mind about anything the one thing I don't know that I completely changed my mind but the one thing that

Parental resources. (01:40:59)

I found to be really interesting and to some degree liberating is the work of Judith Rich Harris I don't Judith Rich Harris's work and her first book is called The Nurture Assumption and then I think she wrote a second book called No To A Like she passed away a few years ago at first of all her background is very interesting because she was sort of shunned from a PhD program in psychology but went on to like write textbooks and was basically an independent scholar you know one of the premises I think most people operate with is that parents are really important and how their children turn out and I think what her work shows and by the way the fascinating literature in twin studies right twin separated at birth I think just demonstrates for the most part that you obviously you need to put a roof over a kid's head and love them and feed them and do all those good things but for the most part there's a big chunk of nature that's important and how people turn out that to me was a really interesting one because when you have five kids you have under one roof you have a lot of diversity and their own interests and capabilities and so on so forth and then the other one I this is probably totally pop but I always like this book called Parent Effectiveness Training P.T. and what I liked about it was that the guy I hope I'm getting this accurate and presenting this accurately but but the author argues like you know you should think about and this is not when they're babies but when they're a little older you know you should argue like when are the problems your problems and when are the problems the kids problems by the way this is a little bit of the Jonathan height work incidentally it's sort of free range kid thing right so when is it your problem when is it the kids problem if it's your problem then you say to the kid listen I need you to help me to get this thing solved so that you're asking for the help from the kid but it's your problem if it's the kids problem the natural inclination of parents is to solve the problem because you know how to do it rather than let the kids solve the problem for themselves and you might say something like this is your problem I need you to solve it I'm here to help you if you'd like but you can do this kid with five years old right I'm here to help you if you need help but I want you to figure this out on your own so this idea of again taking the initiative thinking about alternatives for yourself as a little kid even I just always like that distinction that's another and there's a lot of other stuff in the book but that that to me is one idea I've always thought about is just my problems it's the kids problems the kids problem let me make sure that I let him or her solve the problem me to help if they need it but only playing that secondary role well thank you for answering that as much

Perspectives gained by learning about complex adaptive systems. (01:43:42)

as you dislike talking about yourself I may force you to do it one or two more times complex adaptive systems I'm curious to know outside of business and investing how being exposed to the Santa Fe Institute and or complex adaptive systems and learning more about such systems has just changed how you look at the world or experience the world unbelievable totally changes your point of view on everything I think it makes you much more circumspect right you know I think you recently were talking to Jonathan Heit and I think he kept talking about this basic concept of when you're messing with a complex system I think the big point and there's a chapter about this and think twice I think we use the example of Yellowstone National Park is that it's very difficult to manage a complex adaptive system right so in other words the perturbations the outcomes are not corresponding always with the size of the perturbation which is really hard for people so classic examples ecosystems economies all the climate issues these are all complex adaptive systems and they're just very difficult to think through and manage and even to model to some degree so yeah I think once you have that framework in your mind and by the way for me just professionally this is I think the best way to think about markets specifically and why again markets are hard to beat which they are but why they periodically go haywire which they do I think it's just a lens through which to see a lot of different things in life in a way that's I think more representative now I think the downside is that the recognition I think it makes you feel like you have less control which is I think fundamentally correct but I think that's in some ways liberating and so as you look at these systems and you try to improve the world and people always talk about you know unintended consequences but if I make if I have an intervention or I try to engineer an invention what is the unintended consequence can I think about those things and understanding if you're messing with a complex adaptive system that's a nonlinear system it's just gonna it's gonna happen and so you find that freeing because you're not grasping too tightly to the missfounded belief that you can control these things precisely yeah precisely precisely it's interesting if you're trying to understand a system is it useful to be able to describe it in terms that seem to be reflective of what's going on and I think that's probably right so I think this is just a better description of a lot of systems that we deal with and we don't necessarily describe things properly so I think this I think this helps in that regard to I'm ready to dig in after being water boarded with all the value of studying complex adaptive systems from dr. Bill Gurley and yourself I'm sold so I need to sounds like well I don't know what if I wanted to read about complex adaptive

systems is let's see I'm trying to find the title of the book complexity that came up earlier is that the place to start or are there other books you'd suggest starting with there's a book by Melanie Mitchell who is now resident faculty at the Santa Fe Institute called complexity a guided tour and it's more than just the narrow concept of complex adaptive systems but there's tons of stuff in there that's absolutely fascinating and I would just say like every thinking person certainly scientifically literate person if you can grasp the ideas in Melanie Mitchell's book complexity that would be a great start there are a lot of resources on the website at the Santa Fe Institute so that is Santa Fe .edu so I would check that out as well but if you really just go to a bookstore go to Amazon and type in complexity or complex adaptive systems a bunch of stuff will show up Melanie by the way one of her one of the people she worked with was John Holland and John Holland he may have coined the term complex adaptive system but John Holland is also like another he's also passed away but a titan in this whole area as well so I wanted to perhaps

Michael’s billboard. (01:47:32)

wrap with the question of the metaphorical billboard and I'll put this in context and if this is a dead end I'll take the blame for it and the questions is this suppose pretty simple it's simple to ask which is if you had a billboard on which you could put anything metaphorically speaking to get a message you quote a question an image anything out to billions of people ideally non-commercial what might you put on that billboard does anything come to mind one thing that comes to mind is there's a quote from Phil Tutlock's book Phil and Dan Gardner super forecasting there's just a quote which I love and I find myself repeating it often and it says beliefs are hypotheses to be tested not treasures to be protected oh I love that that's great beliefs are hypotheses to be tested not treasures to be protected now we all have treasured beliefs right to some degree but to the degree to which we can really like you said sort of have a light touch on our beliefs a light hold on our beliefs I think that's a great way to try to go through the world so I love that and I think that would be great for people can I mention in our one again this might this is too wordy but there's a there's a really interesting book called the psychology of intelligence analysis do you know that you probably don't look by Richard's humor it's called the psychology of intelligence analysis and the author's Richard's humor and there's actually a PDF of it which you can get through the CIA website so if you just do you go you know humor h e u e r the psychology of intelligence analysis and then CIA it'll it'll pop up some more and I'm going to paraphrase this it's toward the beginning of the book but I'd always love this too and it goes along these lines he says analysts who know the most about a situation have the most to unlearn when the world changes it's kind of a related theme right which is phil tatlock talked a lot about this in expert political judgment you know you're an expert on the cold war and you've been studying you know u.s. soviet relations for a long time and all of a sudden the Berlin wall comes down and there's a whole new reality what are you gonna do right you have to unlearn all the stuff that you know and start anew and that's just really difficult for people to do so one of my takeaways in that latter why I think that one's interesting is that's why the beginner's mind is so important and as I always like to say in organizations what's bad about young people is they don't know anything and what's good about young people is they don't know anything right so this idea can we have people around us can we surround ourselves with people who are willing to ask the naive question or willing to have fresh eyes or willing to not carry around baggage perhaps and that baggage may have been very helpful for us at some juncture but to not have that baggage and so that to me would be another you know this idea of trying to avoid this situation where you fail to unlearn based on your past what a great place to begin to wind to a close so michael people can find you on twitter @mjmobison that's m-a-u-b-o-u-s-s-i-n your website michaelmobison.com where should people start with respect to your books if they are a layperson not focused on investing but would like to become better thinkers where would you suggest they start and then for professional investors


Parting thoughts. (01:50:33)

who are new to your work or people who would like to become better investors where should they start for decision making so the more fun ones would be think twice and the success equation which is about specifically the topic of luck and skill so there is investing stuff in there but there's a lot of sports stuff and business stuff now what's interesting i'll tell you these are all these little backstories so i wrote think twice and i had a chapter about luck there's a chapter about luck and skill toward the end but i had it as chapter two and my editor goes oh you know i don't know like this seems like a little bit boring like no one's gonna really care about this like you can keep it but like put it at the end you know nobody reads a whole book okay so so i put it at the end and then i sent out the book and a bunch of friends contacted me people i like and of course they're gonna say nice things but there's a bunch of people like a bunch of people said to me like you know that was fine it was all good but boy that luck and skill stuff i wish i talked more about that so i was like oh man i knew that was good right because the big brown story we did lead the book with a big brown story and so that got me thinking more about what can we do with with that luck and skill topic now not seem to have brought a book called a full by randomness in 2001 and i have to say you know michael lewis's book money ball i was a cross player player across the college so like i was never like a big baseball guy but i read that book in the hands of michael lewis that topic was absolutely fascinating and got me very excited about thinking more about sports analytics so i delved into that community a little bit and you know there's a ton because it's obviously a very there's a lot of data and more constrained systems a lot those guys can talk about with luck and skill so that end up being the success equation which is a book about luck and skill so if you're broader decision making think twice if you're interested in luck and skill particularly as a topic the success equation i mentioned already more than you know which one of the greatest hits of the concealed observer that one is going to be it's a little bit all over it was the most commercially successful of my books but it's a little bit like all over the place so if you like just picking up a book and reading a random chapter without a lot of structure because i end up putting it just in sections but that's the book to read so these are 1500 word chapters that you're not going to get bogged down by anything you repeat the title one more time yeah more than you know got it yep yep and then the final one is expectations of asking there are two versions of it by the way think about this tim this is amazing the first we signed the contract for this book in 1999 right the stock markets were roaring the economy's doing great the book came out September ninth no september 10th 2001 so the day before national tragedy which happened to be in the middle of a three-year bear market and stop because it sounds like timing is horrible anyway expectations of asking and so we did another version of it 20 years later and that came out in the fall of 2021 so expectations revised and so if you're a serious investor and by the way there's a website that goes with that called expectations of asking calm which also includes a bunch of downloadable excel tutorials that brings those ideas to life and i'll just mention i already mentioned i'll wrap port and create a shorter value he's an extraordinary guy he's now in his 90s i talked him very frequently he's fabulous his mind is going he's working on multiple projects his mind is going great it's been throughout my career knowing him for 30 plus years i complete the light working with him but uh it's not stopped it's been so much fun so i'll just say that was for the series yeah i mean what a gift to be and what a turn of fate to be introduced to his work and have it impact you so deeply when you're just getting started and then to get to the point where you're collaborating that's just incredible just wonderful you're absolutely right and again as we know we all have our lucky turns i met him first in may 1991 and i got to remember it somebody called me up and they're like professor wrap up or it's gonna be in New York he has 20 minutes to meet you like you could bow and i was like oh my god it's like i'm not worthy kind of seen and you know i hit it off with him and he invited me to join some executive programs at Kellogg in the early 1990s so i was a young guy i was in my 20s and i think it was you know kind of risky for him to do that and that's where that relationship got going so yeah it's been incredible and by the way as someone who's tried to teach i've now i'm on my 31st year Columbia business school but someone who tries to teach it's extraordinary because if i need how to explain something all i need to do is call him up and we talk it through and he he's just such a brilliant teacher you know he sort of helps me understand what i'm talking about and get to the right place anyway these are the kinds of relationships that are so valuable you know what a beautiful relationship michael this has been a lot of fun i've taken copious notes i have a lot to read and i really appreciate you taking the time is there anything that you would like to add any closing comments requests of the audience complaints that you'd like to lodge formally anything at all that comes to mind that you'd like to say i think we covered a lot of terrain Tim and i really appreciate first so i i want to say how much of a fan of of yours that i am and how much i've learned from your podcast over the years and there's so many things i admire about what you do in particular that i sometimes feel i am trying to contribute in a way to help people think better and work better especially in the domain of investing but i really appreciate that you're actually guy doing stuff all the time so i'll just say that as as a point of admiration and i leave this as sort of but the final thing i say say to my students but this idea that recognizing that if you're in a domain that's largely cognitive what would you do to try to improve your performance we talked about sleep and exercise and diet but i i just think that these are things people should take really seriously to be really good performers so that's what i probably would leave with is just to make sure that people to the best of their but we all you know you have kids running around things happen in life i totally get it but your ability to do those kinds of things that's really j awesome absolutely well thank you michael for saying that and for being so game to cover so much train and to everybody listening we'll have links to everything we discussed in the show notes as usual at tim.blog/podcast and if you can't spell mobison then just type in michael and chances are you'll find michael right away and until next time thanks for tuning in be just a bit kinder than necessary to other people and to yourself and remember if you're doing a lot of work cognitively you're a cognitive athlete and your brain is not separate from the rest of your body so you need to mind your p's and q's when it comes to the basics the fundamentals and that includes sleep so thank you for listening everyone and thank you michael and until next time this is tim perese signing off hey guys this is tim again just one more thing before you take off and that is five bullet friday would you enjoy getting a short email from me every friday that provides a little fun before the weekend between one and a half and two million people subscribe to my free newsletter my super short newsletter called five bullet friday easy to sign up easy to cancel it is basically a half page that i send out every friday to share the coolest things i've found or discovered or have started exploring over that week it's kind of like my diary of cool things it often includes articles i'm reading books i'm reading albums perhaps gadgets gizmos all sorts of tech tricks and so on that get sent to me by my friends including a lot of podcast guests and these strange esoteric things end up in my field and then i test them and then i share them with you so if that sounds fun again it's very short a little tiny bite of goodness before you head off for the weekend something to think about if you'd like to try it out just go to tim dot blog slash friday type that into your browser tim dot blog slash friday drop in your email and you'll get the very next one thanks for listening this episode is brought to you by shopify shopify is one of my favorite companies out there one of my favorite platforms ever and let's get into it shopify is a platform as i mentioned designed for anyone to sell anything anywhere giving entrepreneurs the resources once reserved for big business so what does that mean that means 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