#659: Michael Mauboussin — How Great Investors Make Decisions, Harnessing The Wisdom (vs. Madness) of Crowds, Lessons from Race Horses, and More

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Hello, boys and girls, ladies and germs. This is Tim Ferris. Welcome to another episode of the Tim Ferris 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-S-S-I-N. You can find him on Twitter. MJ Mobison. He is the head of concilient 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 Management. 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, subtitled Untangling Skill and Luck in Business, Sports and Investing, Think Twice Harnessing the power of counterintuition, which I've mentioned several times on this podcast, and More Than You Know, Finding Financial Wisdom in Unconventional Places. More than you know was named one of the 100 best business books of all time. 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 Heilbrunn 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 A B 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 Michael Mobison. dot 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. That's my favorite place to start. Especially as a someone who knows very little about Latin. And I wanted to ask you about your course and it's two unofficial models, so maybe you could just

Mention those motto and explain Why They are the unofficial motto and what they mean. So first of all there are no official motto, so I made these up. But 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. So the first one, I mean the Latin is nullius in verba, which is the motto of the Royal Society. So the Royal Society's the oldest

I think scientific society in the world and it's been around for Three hundred and fifty years. More than three and fifty years. And basically translated it means take nobody's word for it. kind of see for yourself. And I really like this idea that a lot of the information that people use

Or even things that they're taught or things they take from authority. And they don't go figure them out for themselves and so this idea of constantly having an open mind and seeing for yourself and not working just on authority and and questioning everything. That's the The second one is a quote from Carl Gauss, and I'm not gonna even try the Latin, but it basically the idea is notions, not notations.

And the idea is Don't focus on only equations. Computation's 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. Now sometimes you can solve a problem, you know, computationally, and then you have to go back and figure out what the intuition is to get you there. But but that's the main thing. So 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, you know, 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. 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

Start it 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 shorthands for how to do things. And some of these things when I would sit there and listen to them and try to

cobbled 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 it clear professional epiphany.

It was a two by four across the forehead. Guy in my training program gave me a copy of Al Rappaport's book called Creating Shoulder Value, which was published in nineteen eighty six. So this is probably a year and a half or two years after that book was out. And he gave it to me for a completely different reason. 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 summarise there were sort of three things that he talked about. That If really remained the cornerstone of how I think about everything since one is it's not about accounting numbers, but about cash and I don't want to get too much down the financy road, but but basically accounting doesn't always represent the underlying economics of businesses that effectively

And he was one of the people that 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 evaluation 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 joint at the 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 ended 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 in doing research for this conversation. This was from Farnum Street, so FS.blog. This is 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 nineteen eighties, Drexel, that's Drexel Burnham Lambert, if I'm 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. You know, shortly after I left Drexel, et cetera, et cetera, et cetera. But I wanted to double click. On

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 gonna tie a bunch of ideas here together. The first thing I'll say is

My first job was with Drexel Burnham Lombert. in nineteen eighties, 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, high yield bonds, the firm was really hot. It ended up getting in trouble and then there was a crash of nineteen eighty seven. So things unwound and the firm ended up going bankrupt. But At the time it was quite hot and you know, 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 filed the packaged food companies, his name was Alan Gredder, 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, you know, 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 many management teams. So he uh he was able to talk to those management teams and understand how they're 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 Crating Sure of Art and the reason was there was a s case study in the back of the book.

about Quaker Road's acquisition of Stokely Van Camp. 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 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. It's actually about this Quake Roads 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 you know, I was a nobody or the little peon right a training in a training programme. So he had no idea who I was, but 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 it so happened to be applied in this particular industry, which is why I became an analyst in that particular industry.

Now hearkening back to my conversation with Bill Gurley not long ago, friend of yours. And He invoked your name as someone who was able to connect. ideas, principles, best practices from disparate areas. 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 concilient 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 it's and that's really the case.

So I was very taken In the late nineteen nineties. By a book called Conciliance. By Eo Wilson. You know, so we'll talk about that book in a moment, but conciliance itself is a fairly old well, not that old, about eighteen fifties probably is when that word was coined.

And it's really about the unification of knowledge, right? This idea of bringing ideas together. So Eil 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 you know there's a there were some incidents he wrote a book about sociobiology in the nineteen seventies and th that was very controversial at the time at least. But in this book, Conciliance, Wilson argued, you know, 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 gonna 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 concilient, that's where the so concilient would be the verb for that.

And then um this is probably about two thousand or something like that. And I was just one of those guys who I and 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 Concilient. Observer. And the idea was

Let's look at different topics and see if we can shine a And it sort of shine a different light on it, look at it through a different type of a lens. And so that The Concilian Observer series ended up When you you mentioned a moment ago, uh more than you know the book.

That was sort of the greatest hits of the Concilian Observer. And those were all Sort of fifteen hundred word essays, so they are short. kind of pithy. It was hard to get really into ideas. But they were all over the place. As a consequence, I think they were somewhat fun for the audience to read. So that's where that word conciliance 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 lugg. Bam. How'd it take so long for somebody to figure that out? I'm 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 I actually think that wheels on luggage is like the indication of the decline of Western civilization. Okay. The reason is because'cause 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 everything around anyway. Now we're we're two steps away from Wally, if you remember those people with the super big gulps and the floating on the reclining chairs. And you get some of these things that are like tiny little bags with wheels on them. Like, all right, come on. You got yeah, you gotta have that one. Anyway, sorry about that. No problem. So EO 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 quota writers in my mind of the last hundred years. It's just remarkable how punchy and memorable so much of Eo 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.

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 in your brain, ants in an ant colony, 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 and there and try to do their thing.

And as the environment changes, they change their 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 a system works, uh an emergent system works by looking at the underlying components. Two or three obvious examples. One would be something like consciousness, right? So conscious very likely an emergent phenomenon. We have these neurons, we have this 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 m efficient markets. Is that people are really smart. They're rational. So they understand all the information, they know what to do with it, and they reflect that in prices. Now nobody really believes that, but that might be the the starting point. And then the second way you know, economists would talk about this is this idea of no arbitrage, right? So 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 And so if in their wake, the rest of us can benefit from these efficient prices.

Problem is here again. There are just famous episodes where these arbitrageurs failed to do their jobs. The third way of thinking about things is complex adaptive systems and you know, I think that the way that's most is easiest to understand this is is using some of the language from Jim Sir Wiggy's great book, The Wisdom of Crowds, which came out probably in two thousand and four, two thousand and five. And You know, the wisdom of crowd says crowds are wise when three conditions are in place.

A we have diversity of the underlying agents or heterogeneity, right? So this is one of the reasons that diversity is so important. is'cause 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 in the heads of people sitting around your boardroom. But if you're not extracting it and aggregating it, 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 can be fitness for species or other measures of incentives that allow you to propagate. So to me, thinking about markets as complex systems is very powerful and 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, and there's a consequence that reflects in 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. 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 the exactly the same classes, they may actually represent the same decision rules. Or similar decision rules. Or how do you think about that? Maybe a 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 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 of the benefits of that is cause 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 perspectives, points of views, mental models, training, personalities, and so forth.

Nearly all the literature I've seen. Suggest 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, you know, 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 know, you could rephrase this as almost a sense of purpose. And here we wanna 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 a number of great books. The difference is his big book on this, and he wrote a smaller book called The Diversity Bonus, which is 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'em are important contributors to Solving problems for corporate success. I'm glad you picked up on that because that's a that's actually a very interesting and important Point. And I'll just mention back in you know, this is probably now twenty years ago, but when I was at Credit Suisse

Well, as the time C S 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 twenty thousand 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 s thought that this cognitive diversity argument should be heard and s 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, so I apologize if I use it another forty seven times, but I'd like to double click on two Components of So the first That I suppose we could touch on. Is

The wisdom of crowds or the stupidity of crowds depending on how many check boxes are checked. And One example, real world example, sort of a classroom demo hopped out of me when I was watching your twentieth 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. Charles Darwin, by the way, who invented a number of important contaps context 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 eight hundred people participated. A few of them had illegible handwriting. So he I think he had seven hundred and eighty seven 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 in Nature magazine. He sort of says, you know, some of these people are butchers or whatever. You know, so they they would know they have a sense of this, but you go 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 I'm I'm thinking about. And when he tallied up the results that 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 one percent 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 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 uh nineteen eighties, 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're 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 uh he was totally cool about it. So I had the slide. Actually had a copy of my own slides and I'm like Mr. Trainer, would you sign this? I have an autograph 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 nines? Do you know this one? Uh you know what's pretty few. Very quickly. Solomon Ash was a psychologist and social psychologist and he wanna 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 of the A, B, and C lines are the same length as X? It's actually a very easy visual task. And in controls, people get, you know, they they start with controls, people get like ninety five percent plus, right? So th it's 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 the uh subject in seat, 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 a 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 h how important it is and 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 and he goes

I was at Swathmore College in like whatever it's in nineteen forties. 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 Jack Trainer was like, obviously he's 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 it was important to understand how markets work. I think Jim obviously came along. I mean Jim, Sir Wicky, the 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 the 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 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 two percent 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 you know, it vasillates. So in the last I actually'cause I did it, you know, my course started in January and we just did it in January. It's usually somewhere between two and ten percent. I've done times where it's been almost perfect, but usually two to ten percent. And then the other thing is Let's just pick ten percent as sort of a a not 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 fifty percent, five zero. 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 guest is better than any individual within the collective. It's not mathematically necessary, but that's often the case as well. So the 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 and if we Fine-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 and 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 gonna go through the math, but basically it 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 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, right? So in other words, if you have a leaky toilet or need a really hard math problem solved, you know, by all means get a plumber or a mathematician. Don't bring in like an astrophysicist and a poet and whatever, right? So that's the first thing to say is that We want to think almost like a a taxonomy of types of problems and there's certain 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's interesting, is it it just ends up being a mathematical problem that whatever 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 s I know that number. You might imagine what happens is people and like you said, even the business school students

And I give him some tips like you know, here's some ways to think about this. You might think they're gonna 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 how he was explaining it, which is You have this this distribution of outcomes.

And by the way, the standard error goes down. I mean I don't 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 they're all skewed, that's going to be really bad and that's going to be the manuscrap. You want them to have different guesses, right, based on their models or their representations. But a bigger problem would be if there are too few people doing it, right? So as the sample size grows. And so, you know, I have my class of probably, I don't know, sixty or seventy people doing it. Golden had, you know, close to eight hundred. So as you get that sample size larger, the number of people participating. greater it home in 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? 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 ten to twenty 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 Yeah. 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. 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 jelly bean jar thing would be cool. I'll mention, you know, we're gonna do this in class. Yeah, I think the Academy Awards is mid March and we also do an experiment with Academy Awards and I say this dude I g I give him twelve categories. You know, the front page is the best actor, best actress, best film, things you might have a shot at getting, and then the back is, you know, best costume design or something like that. You know, things that are gonna be much less

front and center. And I just I say to students, don't tell me who you think should win. Tell me who you think will win by popular vote. Again, the 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 a newspaper did a version of this. Fifteen or twenty 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 g ask for a whole number. From zero to one hundred. Then you hold that thought and then you say the person who's gonna win this contest

is the person whose guess is closest to two thirds of the average of everybody else's guesses. Right. So you follow that? So you everybody writes down their number. And then you as the M C 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 zero to a hundred, it started fifty, two thirds of fifty is thirty-three, but you know, people are gonna go that level, especially your educated audience. Well, two thirds of thirty-three is roughly twenty-two, uh, but maybe they'll go that far, two thirds of twenty-two, and so forth, right? So you keep iterating down.

This Is a problem that has an equilibrium solution and that's the answer is zero. 'Cause it iterates just down to zero. The problem is, and zero, by the way, is a often a common answer in my course when I do this. And I say this too, it's like you're real smarty pants, right? You found the equilibrium solution, but you're not making any money. Right, because if anybody writes a non zero number, you're not gonna 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 uh interesting. So when I was at Credit Suisse, I was part of a research group. And it had a number of 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. Uh leading a session on risk.

And this guy decides to do the two thirds game. And I'm thinking, now this is gonna be interesting, right? Cause we have like literally world leaders who probably negotiated these high powered, you know, things. 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, isn't that interesting? Like And 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 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 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 Tutlock and Some of his members of his team at 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 Ferris audience Be a super forecaster. Right. You know, geopolitical or economic.

events, you know, in six months will interest rates be X. In in twelve months will Trying to do X, Y, or Z. That'd be super interesting to see. And now the problem is again that you're getting one answer from a l a large group and so forth. So how easy is it 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, they're prediction markets. That's what they're trying to do as well. Well, I will allow that to just state because there are I 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. I 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.

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Try it out. Athletic Greens dot com slash Tim. I No. 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've mentioned. And I

don't mean to imply that we need to spend a ton of time on all 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 Yeah.

One is Against the Gods, the remarkable story of risk, and this came to mind because you had just mentioned risk in the context of Switzerland. And the other is Complexity by Mitchell Waldrup, if I'm 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 in 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 there 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 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 and if anybody's interested in the idea of how we understand risk, and this goes back to the Bernoulli's in the seventeen hundreds up to relatively modern times. It's a fabulous book. I'll give one other back up, 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 strolled over there and I picked up a book called Bionomics by a guy named Michael Rothschild. I don't think anybody's I mean it's it's I 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 nineteen ninety. And as as the 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 eighteen hundreds, but into the early twentieth century. Economics became very mathematized and in fact There's a wonderful book called More Heat Than Light by a professor named Phil Murroski. 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 anomics 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 and I'm thinking about this idea. And then Along comes Waldrup's book. complexity and this is really the story of the founding of the Santa Fe Institute.

And by way of background, the institute was founded in nineteen eighty four. by a number of scientists who felt and and very prominent scientists, many Nobel Prize winners. who felt that academia Had become too siloed, right? So the physicist hung out with the physicist and the economists with the economists and the chemists with the chemist

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. Yeah. And so This is how this thing got going in 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 uh 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'em 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 if Tim's lemonade stand super profitable, Michael will open up a lemonade stand right next door, charge slightly lower prices, and so you'll become less profit, 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 he was writing about this in the eighties and nineties. Completely heretical. And by the way, like basically the the mainstream economists Wanted nothing to do with it. Waldrippin I think in a very engaging way describes how all these ideas developed. And so if you said uh of the Santa Fe Institute, is there a unifying theme, it would be sort of this idea of a complex, adapting, evolving system is a way of 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 fifteen or twenty books, but these were both on that list.

Because I just think it's super cool to understand the history of ideas. And it's by the way, 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 are a couple of things that I'm I'm actually trying to track down now. These are specific finance type of things. And I'm 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 seed my question now so it can marinate.

Over on your side. But I'm gonna take the conversation in a different direction and then we'll come 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 nineteen nineties. And Then I've seen a number of other mentions, so i 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 gram acolytes were sort of these low P E low price to book folks and they were just buying, you know, again 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's 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 ideas that 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 And I think that's the thing. 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 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 nineteen nineties 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 able to apply those ideas to to are areas of market.

You mentioned Bill Gurley, I mean Bill Gurley's a venture capitalist, right? You wouldn't really call venture capitalist a value investor in that 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, grocked all these ideas and as well. Josh Wolfe 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

Yeah. In preparation for this conversation, I also shut texts to two mutual acquaintances. Both thinkers I respect greatly. Josh Waitskin and uh Patrick O'Shaughnessy. So I wanted to actually grab a few of the possible questions that Patrick had forwarded. Also great podcaster. I recommend people check out Patrick's podcast. And you can feel free to decline, divert, or transmography 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 equity, venture, credit, public equity, cash, gold, real estate, and what they do for you when done well and 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. Она май ковид проджекс.

Was And twenty twenty Was to do a big piece on Public.

Equity And we needed to find a bunch of things just to get out of the way. So public equities are just stocks that are traded in the United States. Today there are around thirty five hundred 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 nineteen nineties. And they're in fact less than there were in the nineteen seventies.

So obviously our economy's bigger, our population's 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 rapper 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 and so forth, right? So a couple observations that come out of that that are interesting. One is why are there fewer companies? And and basically the the simple answer is there have been lots of mergers and acquisitions and not a lot of IPOs. So part of it's the cost of IPOs have gone up and so there are simply fewer public companies than 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, last say since nineteen eighty. So let's call it the last forty years or so, there's been roughly uh and 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 a 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 kid through college or you're thinking 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 r 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 riskier 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 in 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.

Let's start the party. Let me just say, Tim, that if if there were an idea that I could go back and tell my young self, my eighteen year old self It would be this idea of base rates. I learned about this from Danny Conneman. He used slightly different language, but we'll 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, you're a college student, when will you be done with your term paper or your problem set or whatever it is. Right. The standard way to to think about that is to gather a bunch of information, right? So think about it. Combine it with your own inputs and then project. And like left to 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 gonna think about my problem as an instance of a larger reference class. I'm gonna ask a really simple question like What happened when other people were in this situation before? And it and it's a very unnatural way to think about the world, right? For a couple of 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 Wait on. And then second is you have to find an appeal to this base rate. And it may not be at your fingertips, or you may not even think about it that overtly. But what psychologists have demonstrated, and 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 or more accurate predictions. And this is a sort of was a real time I don't know what year this was, two thousand eight, two thousand nine, 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 Preekness. It's in Baltimore. It was stronger still. I think it run by f 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 Belmont. It's the longest, which is difficult. So many horses are actually quite fast. They're sprinters. Longer distances are more challenging for them.

But Big Brown was obviously sort of the the favorite, appropriately so. And He went off it. odds it suggested a seventy seven percent probability of winning the Belmont. Seventy seven percent. So the question is like all right.

How likely it is it that He's gonna win. at that probability. And 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 a the date at the time. And at the time there had been I think there was like twenty eight or twenty nine horses that had tried, forty percent had succeeded.

So forty percent's already a lot lower than seventy seven. But what's interesting is that eight of the nine horses that tried before nineteen fifty succeeded. And only three of the twenty. Since nineteen fifty it succeeded. So it was a fifteen percent success rate since nineteen fifty. Alright, so you're like, Okay, well that's an interesting data point. He's going off at seventy seven, 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 nineteen uh they I think they started about nineteen ninety so about thirty years call it. At the time it was probably more like twenty 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%, and of course he ran the race and what made the story sort of cap the story was

The horse basically took the day off. The 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 like is he okay? She's fine. He was just fine. So The guy who I 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 Steve, you're 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 forty percent probability, you know, forty five percent if you're using all these data. But at 77%, he's a bad bet. And this goes back, Tim, just 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 in, 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 Belmont I I think the attendance doubled from the prior year, even though it was a really hot and steamy day.

And people pull out their wallets and they start plunking down their best, right? Cause 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, they're paramutual markets, right? So the dollar flows are what dictate the odds. So it's a classic example of a diversity. There's a perfect example of diversity breakdown. 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 VIG. There are obviously there are professional handicappers, but not many, and those who are doing it are very sophisticated and so forth. But you know, you and I, just regular Joes, we're not gonna make money doing this. Anyway, so there's a good that's a good example. And it's hard to short you could bet the field or something, it's but it's hard to short a horse. It seems a little bit unsporty to do that. But anyway, that's the big brown. But the broader lesson is that no matter what your

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. Where 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? And 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's gonna fall within this distribution and you know, how Optimistic or pessimistic it might be. So I could ask a million questions about base trape, but the one that's really sticking out for me is what on earth happened around nineteen fifty with the horses? Was it anti doping measures? What what clicked in that that led to that

Might be the opposite. Could be the the ubiquity of doping, the secret's out. This is a fascinating conversation. There people I 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 nineteen fifties. They're no faster. So I think that thoroughbred horses are f it's a this topic is fascinating in and of itself, right? Because they've been bred from a very, very narrow stock. So there are a handful of horses that are essentially the ancestors of every horse that's around today. So the genetics are really crazy and they're and that's why they're such fragile animals. But I think that they're at their physiological limits and they have been for a while. Secretariat was a freak, literally a genetic freak. And as you know, you probably heard these stories when

I don't know if they actually did this, but apparently there was some sort of an autopsy and the secretary's heart was much, much larger. than was normal for a horse like that. So Secretary really was like one one in a multi generation freak. But yeah, I think they're at their physiological head limits. So the 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 know of quite a few drugs that that have made their way from research to race horses, to bodybuilders, to the billionaires who wanna live for a million years with six pack abs. So the racehorses are have been a sort of a 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. Averages have changed at all. We can go look at all the numbers, but I would imagine things like marathon times or hundred 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 nineteen fifty. 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 want to build a faster horse, you would you would have to shuffle some genes around, which has not been happening, right? By definition, it can't happen. Yeah. I'm not gonna become a handicapper, but I'm I may have to chat with Steven Christ and learn a little 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 have 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. captures certainly what 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 him 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 gonna put you at a substantial disadvantage. that's that decision making aspect. Now there's another aspect to all this that'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. Great investors is 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 the 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'll mention, Tim, have you had Robert Sapolsky as one of your guests, right? I haven't, actually. No. Do you Robert Sophia? I recognize the name.

Uh you should probably re remind me. He'd be a fun guy for you to talk to on m many levels. He's a neurobiologist and a primatologist at Stanford University. No, he wrote a book called Behave. In two thousand seventeen, which is I always 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 spend three hours a day feeding themselves and the rest of the time tormenting one another. But what Robert was interested in is a topic of stress. And so he wrote a book called Why Zebras Don't Get Ucers. in the mid nineteen nineties, which is a it's a wonderful title and it's a w wonderful

book about the idea of stress. So he's like a key guy in understanding stress. And so of course In these baboon troops, what he can do is Yeah, the question she's asking is like hey is Who's stressed out here? Is it 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 Sapulsky sort of asked this question, like what stresses out an animal, right? You're a zebra hanging out in the savannah, right? Pursuant to his title. What stress you out? The answer is a line to side you're the target for lunch. Bad news, right? Your stress response is gonna kick in, you're gonna pump blood, you're gonna pump adrenaline, and you're gonna 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 stress is a human being? And we have clear, we have episodic physical stressures and you've put yourself through more than your uh share of physical stressors in 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, it's 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 a 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, what are the symptoms of stress people you come up with a very familiar list of they're sick all the time, they have problems with their gut, they have reproductive problems, in extreme cases they don't grow properly, and so forth.

So here's the punchline. 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 gonna be doing in two weeks, right? You're thinking like how am I gonna survive twenty seconds? Likewise, if you're human in your stress, you pull on 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 gonna say, Man

I need to survive now. I don't need to worry about what's gonna happen in two or three years. And I actually live through this. I mean one of the big drawdowns of oh eight and oh nine. In the financial crisis, we had certain you know, some of our investors were recommending stock 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 and it goes down the next three months.

I'm gonna be out of job, right? I'm gonna be gone. So this is another aspect of it is this equanimity, right? This ability to 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 de stressors and so forth. And there's obviously a list of things we could talk about there. But to me those are some of those qualities. And Guess the other thing I'd just say overall, I already mentioned it.

But I'll just emphasize it again is that Almost all the great investors I know are J 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 they're 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 in 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 Oaklands, 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. Two, 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 four 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. 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. It's 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 fairly 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, it's gonna grow five percent. And if they kill it, they're gonna grow eight percent. And if they do really bad, they'll 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 the same industries, and look what their actual growth rates were and see if that's different. And quite commonly they're gonna have much bigger range of outcomes. And that's gonna 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 pre mortem. Have you talked about this on the show before? I think I discussed premortems Well, premortems and their opposite. I think I discussed this

With Rolof Botha of Sequoia. 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 postmortems, right? So post mortem the patient has died. And we sit around and we say, Given the information we had at 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 in the present peering out to the future. A pre-mortem, 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 pre-mortems, 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 pre-mortem is that you're standing into the future, you pretend like you've made the decision. Now you're in the future, say a year from now. And this decision's turned out horribly. It's embarrassing. And 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, making a particular investment, whatever it is, you know, and we're kind of optimistic and we're sort of positive about it. And the pre-mortem 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's 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 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 that might be difficult to do.

And one thing I I want to mention, I think that's related to this, Tim, that I think is so important. And it 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 write really like counterfactuals. There are some psychologists who 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 um really important thing that once

We all understand that the future is pulsing with possibilities and we all we even if we do lay out these ranges of possibilities, we know that there are 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's called hindsight bias. We we start to think we knew it was gonna happen with a greater probability than we actually did. And the other's called creeping determinism. We start 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 and saying, Okay, this turned out this way, but We understand there was a counterfactual and things could have turned out differently. Failures and just

Pre mortem, postmortem. 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 failures that Ultimately seeded. Later successes.

Things that taught you Disproportionate amount compared to perhaps other mistakes or failures you've experienced. Favorite failures? So I You know, mentioned Drexel Burnham Lambert and this training program and all the positive things that came out of it. And by the way, you know, David Epstein well they g not David Epstein talked about it, but I I'm sure the idea's been around is this idea of skill matching, which is, you know, do you figure out what your

likely to be okay at and where you can add some value. That benefit happened there. But that job at Drexel Burnham ultimately led to being a stockbroker, 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. Yeah, it was pretty bad, right? Like in other words, I 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 uh 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 or more useful and try to pivot my activities in that trip.

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.

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've sort of gotten through maybe a couple of 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. 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 Meal from the nineteen fifties 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.

And 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 to the person themselves, right? So it's not the the slippage is not the way they're thinking about the world. The slippages are not executing, right? And this is the Lotta the work on the checklists 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

No, they're they're downsized algorithm, but more and more of these algorithms. And then the other one, Tim, is what we've already talked about, which is in 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 we talked about Phil Tetlock and the work on super forecasting a few moments ago. You know, Phil Tetlock's The first book I read of his was in the mid I think two thousand six or two thousand seven, called expert political judgment.

And there he actually took about four hundred experts. asked them to make very specific and by the way, these are masters, PhD level people, right? At the top of their field, and asked them to make very specific predictions in economic, political, and social domains. And then kept track and found that they were, you know, not much better than chance and 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, uh 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 I think that the wisdom of crowds can outperform. And so I think that's leading to this idea called the expert squeeze. In certain domains, again, you should listen to experts. One of the ways that you can figure this out is to say, like, okay, if I appeal to a bunch of different experts, are they gonna basically give me the same answer, right? And so tomorrow you want to say, hey, how's the weather gonna be tomorrow? You could turn on various TV channels, probably a couple of internet sources, and you're gonna get roughly the same thing, right? So those experts are gonna 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 gonna 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 where our experts where do you have to put the question? I suppose 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 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 somatically accessed. But we can potentially hit pause on that. You and I both know, Josh. But how do you think about infrastructure?

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 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 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 like some 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 it's lazy. It doesn't really wanna do much work. Yeah. 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 you're what you know to do is gonna uh 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 of the constraints, but certainly when you think about two domains, chess and Marti arts, for instance.

And he was, you know, working with different investors and he he would say to him, he he told me, he's like I 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 happened 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 m the martial arts and I just remember reading The Art of Learning, he's got this interesting section toward the end where I think he was in some sort of 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 I I hope I get this roughly right, is apparently they decided to change the rules to change the 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 l my system didn't be become unstable, right? Likewise, by the way, if you said chess, you know, we're gonna make the board now ten by ten 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'cause 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 overweighted. And you know, the other thing we have, a another problem with intuition is a big sampling bat bias problem, which which is like people say, like how'd you come up with this idea? And like ah it just came to me in a flash, like 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 it's 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 linear systems. your failures become it's much more e it's easier to point out your failures, I think, or or your mistakes or your errors. than it is perhaps in other systems. So I th I think they kinda get weeded out to some degree. We obviously I have these also I I mentioned before, like overconfidence and And confirmation bias. We have biases and all sorts of other things, but those tend to be more uh relevant for

for more open domains per se and but I I I should ask Tim. So would you say like When you think about it Your experience as a wrestler. Діллайк і тренд єс. 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 accurate and all that. I would say that uh probably even more so in judo. But I I I I generally 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 of com 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, no, I think that I think that's and that's a good example where and again, like I don't know exactly how the rules are in Judo, but again, if I change the rules somehow, or even in all s you know, any sports you watch popular sports, like, you know basketball or ice hockey or football, whatever is 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. Build off of what Josh had 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 in his ability to systematically deconstruct and

become world class in different domains. I mean he's doing it with foil boarding 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

Utilise different systems of thinking in their own lives. And so had for instance John Verivek, who is a professor of a few different things, cognitive science among them, at the University of Toronto, and he uh 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 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 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 and experts

They definitely work in a different way than the rest of us. But I I'll just say like in the world of investing, you know, investors often talk about this idea 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. 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, but also came up with some of your students in your tribute video. And That is Time management. So you I have

jobs. You write books, you read a lot of books, you have five kids. Yeah. The list goes on and on, and I would love Two 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 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 and I really mean a partner and I've always thought this is at least my own view. I don't I don't people have talked about this or 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 s 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. thirty 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 Go off on vacation, she would always allow me a couple of 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 it 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 will just say that I enjoy a lot of this stuff. So I really enjoy learning things. I enjoy uh 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 McVee your professor? He was. And I still, much like some of your students were saying that their friend took your course fifteen 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 to it late, but I read draft number four last year. And I was just like

It's so on some level it's like brilliant and another level it's like so discouraging. It's like this guy is like so f off the charts, so good, right? Or you read Michael, another Princeton guy, Michael Lewis, or you read these guys and you're like, oh my God, spectacular, right? But I think this idea of organizing your thoughts and trying to communicate them effectively, that's also a 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 I use it. 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 it 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 is 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 sh 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 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 everything else goes to hell in a handbasket 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 Any Late nineteen nineties, 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 at seven thirty 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 with Al Rappaport to write the first edition of Expectations Investing. So I was like, All right, I'm gonna do this. I got Clear it for my boss. I'm like, I'm gonna work from home. Yeah, like three days a week is Back whatever this is like nineteen nine, two thousand.

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 so productive. Like for years, for years, literally, like afternoon, I was like a basket case, right? I would I could talk to people, but I could certainly not do any s hard lifting cognitive work. Whereas correcting all that has really made a huge difference. So That w works for me. Now I would just say the other thing is you know,'cause 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 the deficits and other categories. It's very important to 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 so first of all I just was 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 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 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'cause I'm not up on all the things in pop culture and so forth, but I think it'll be fine. Yeah.

Yeah, well I don't know, yeah, I hope so. Five kids. Any resources you'd recommend or thoughts on parenting that you'd like to share with people who are in earlier innings? People often ask this question, like have you changed your mind about anything? The one thing I don't know that I completely changed my mind, but the one thing that I found to be really

Interesting and to some degree liberating is the work of Judith Rich Harris. I don't know Judith Rich Harris's work. And Her first book is called The Nurture Assumption and then sh I think she wrote a second book called No to Alike. She passed away a few years ago. First of all.

Background's 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. Yeah, one of the premises I think most people operate with is that parents are really important in how their children's turn turn out. And I think what her work shows and by the way, the fascinating literature in twin studies.

Right, twins 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 in 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 and so on and so forth. And then the other one I this is probably totally pop, but I always like this book called Parent Effectiveness Training. P teen. What I liked about it was that the the the guy I hope I'm getting this accurate uh 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 one of 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 kid's 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 help. But you can do it as a 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 is this my problem or is this the kids' problem? Is 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 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 Haidt 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 and there's a chapter about this thing think twice. I think we used 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 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 Think the downside is that

the recognition, I think it 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 intervention, 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 misf founded 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, too. I'm ready to dig in after being waterboarded with all the the value of studying complex adaptive systems from Dr. Bill Gurley and and yourself. I'm sold. Uh so I need to sound like well I don't know, would if I wanted to read about complex adaptive systems

Is Let's try to find the title of the book, Complexity. That came up earlier. Is that the place to start, or are there other books you would suggest starting with? There's a book by Melanie Mitchell. who is now uh resident faculty at the Santa Fe Institute, called complexity a guided tour.

And it's it's more than just the narrow concept of complex adapt 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. Dot EDU. So I would check that out as well. But if you really just go to a bookstore or 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 uh he may have coined the term complex adaptive system, but John Holland also's also like another he he's also passed away, but a a a a Titan in this whole area as well. So I wanted to Perhaps wrapped 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 question is is is I 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, a 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. 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 another 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 do know that book by Richards Hewer. It's called The Psychology of Intelligence Analysis, and the author is Richards Hewer. And there's actually A PDF of it. Which you can get through the CIA website. So if you just do Google, you know, here H E U E R The psychology of intelligence analysis and then CIA it'll it'll pop up somewhere.

And I'm gonna paraphrase this. It's toward the beginning of the book, but I always love this too. And it's 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 Tedlock 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, US 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.

We're 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. you fail to unlearn your past. What a great place to begin to wind.

to a close. So Michael, people can find you on Twitter at MJ. Mobisin, that's M A U B O U S I N, your website, Michael Mobison.com Where should people start with respect to your books? If they are a lay person not focused on investing, but would like to become better thinkers, where would you suggest they start? And then for professional investors who are new to your work or people who would like to become better investors, where should they start? For decision making sort of 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 backstory. So I wrote Think Twice and I had a chapter about luck there's a chapter in lu 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. No one's gonna really care about this. Like you could keep it, but like put it at the end, you know, nobody reads the whole book. Okay, so so I put it at the end. And then I sent out the book and a and a bunch of friends contact 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 you 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 the big brown story. And so that got me thinking more about What can we do with

With that luck and skill topic. Now Nassim Talab wrote a book called A Fool by Randomness in two thousand and one. And I have to say, you know, Michael Luce's book Moneyball I was a lacrosse player, played lacrosse in 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 a obviously a very there's a lot of data and and more constrained systems, there's a lot those guys can talk about with luck and skill. So that ended up being the 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 that More Than You Know, which were the greatest hits of the Concilient Observer. That one is gonna 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,'cause I end up putting it just in sections, but that's the book to read. So these are fifteen hundred word chapters that you're not gonna get Bogged down by the ball. Could you repeat the title one more time? Yeah, more than you know. Got it. Yep. Yeah. And then the final one is expectations investing. 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 nineteen ninety nine, right? The stock market's roaring, the economy's doing great. The book came out September ninth. No, September tenth, two thousand and one. So the day before a national tragedy, which happened to be in the middle of a three year bear market in the stock market. So it was like timing's horrible. Anyway, uh expectations by and so we did another version of it twenty years later, and that came out in the fall of twenty twenty one. So expectations revised. And so if you're a serious investor, and by the way, there's a website that goes with that called expectationsinvesting dot com, which also includes a bunch of downloadable Excel tutorials that brings those ideas to life. And I'll just mention I already mentioned Al Rapport and creating shoulder value.

He's an extraordinary guy. He's now in his nineties I talk to him f very frequently. He's fabulous. His mind is going he's working on multiple project. His mind is going great. It's been throughout my career knowing him for thirty plus years a complete delight 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. 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. It's just wonderful. You're absolutely right. And again, as we know, we all have our lucky turns. I met him first in May nineteen ninety one and I gotta remember somebody called me up and they're like Professor Rapp report's gonna be in New York. He has twenty minutes to meet you. Like you could bow and I was like, Oh my God, it was like I'm not worthy kind of scene.

And you know, I hit it off with him and he Invited me to join In the early nineteen nineties, so I was a young guy. I was in my Twenty's.

And I think it was you know kinda 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 in my thirty first year Columbia Business School. 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. So anyway, these are the kinds of relationships that are so valuable. Yeah, 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. Uh anything at all. That comes to mind that you'd like to say? I think we covered a lot of the things that we're going to do

Terrain, Tim, and I really appreciate first of all I I wanna 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 and work better, especially in the domain of investing. But I really appreciate that you're actually a guy doing stuff all the time. So um I I'll just say that as as a point of admiration. And um I leave this as sort of uh the final thing I say to 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. So that's what I probably would leave with is just to make sure that people to the best of their ability. 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 that's awesome. Absolutely. Well thank you, Michael, for saying that and for being so game to cover so much terrain and to everybody listening We'll have links to everything we discussed in the show notes as usual at Tim.blog slash

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 were 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 Ps and Qs 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 Ferris 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 Bold 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 podcasts. 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.blog slash Friday. Type that into your browser. Tim.blog slash. Friday, drop in your email and you'll get the very next one. Thanks for listening.

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