The Exchanges

Q Excellent. Thank you. Uh, let's, uh, wind up with three questions that, I'm gonna try to ask everybody, at least for the start, so we'll see how this goes, but what book influenced you the most in your life, and why?

A Oh, that's hard. It's too hard to answer one, but I, I can mention probably a handful of them that, um, that were very influential. I mean, for, for, from a business point of view, certainly the book written by my mentor, Al Rappaport called Creating Shareholder Value was enormously influential. He's a, a dear, dear friend. We are collaborating on a project now, so that, that would be one. In terms of thinking, probably, uh, three books for me. One is, um, Dan Dennett's book, Darwin's Dangerous Idea. And I'm, uh, just a huge Charles Darwin fan, but this is this idea of how evolutionary thinking should permeate basically, um, almost, almost everything you think about. So, uh, Dennett, I think it did, it's a, it's a fascinating book. Another one I would mention, uh, Is E.L. Wilson's book, Consilience, right? Consilience really means the unification of knowledge, but the plea that Wilson makes in this book, to which I'm deeply sympathetic, is that many of the problems that we face as individuals and societally are problems that are going to be at the intersections of disciplines, and it's simply not enough now for us to, to use one discipline to try to solve problems. We need to bring people together to think across, uh, across those, uh, intellectual barriers. And the third one, which has also been a very big part of my life, is Mitch Waldrop's book, Complexity. And this really d…

AI assessment note: “I can mention probably a handful of them that, um, that were very influential.”

Q Where have you landed on with base rates? And talk to me about a little bit of the nuances that you've come up with in terms of how you apply them to make more effective decisions.

A Yeah, it's really super. So just to take one step back, the concept here relates to a notion that Danny Kahneman popularized, but it's been around for a while, and he calls it the inside versus the outside view. So the inside view basically says if I present a problem to you, the way we all tend to Cope with it is to gather lots of information, to combine it with our own experience and inputs, and then we project into the future. And almost all problems, you know, we deal with in that fashion. And what psychologists have come along and said is, you know, what you should probably do is start with something called a base rate. And basically asking the question, what happened when other people were in this situation before? And I, and I should mention, it's not a natural way to think, right? Because you have to find the base rate and defer to it. And you have to sort of leave aside your own experience and inputs, and we all are sort of slow to, to discount our own views of the world. So that's the basic idea. And I think there are a couple of things that come out of this that are extremely rich. Um, the first is how you should wait, um, the, uh, inside versus the outside view. And the basic heuristic on this is that if there's a lot of luck, A lot of randomness. You should rely exclusively or almost exclusively on the base rate. If there's a lot of skill, you should rely almost ex…

AI assessment note: “if there's a lot of luck... rely exclusively or almost exclusively on the base rate”

Q Yeah, I would say you've got a firm grasp of what derails most people. Why don't you describe a time that you failed, um, and I'm interested in the situation in which you, you failed through a personal mistake, and then not only how you recovered and got out of that failure, but how did you go about learning from that failure?

A Yeah. Well, probably my, uh, You know, the episode that I think of as the greatest failure was right when I got out of college, and, um, I was in a training program for an investment bank, which was terrific, by the way, and I learned a lot, and, uh, it was a year and a half long, and then, uh, that put us into our first jobs, and these were, we're now, we're now called financial advisors, but basically stockbrokers, and so I was, uh, given a job as a stockbroker, and this, by the way, was early 1988 The firm I was with Drexel Burnham had gone through a bunch of legal issues. It was obviously in the heels of the stock market crash. So the, the environment may not have been ideal, but I was so ill suited for that work. And, um, so I, you know, I gave it a try, but I was miserable and I was certainly a big failure in doing that job. And, uh, You know, essentially, I mean, I, I don't think I formally got fired, but basically got fired, right? Basically, there was a parting of the ways between the firm and me, and now that made sense, by the way, on many levels. And so, um, you know, maybe the silver lining and all that, maybe there are two things that came out of that for me that were really important. The first was that having gone through the training program, and this is why I'm forever grateful for that training program, um, we were exposed in our program to lots of different …

AI assessment note: “the episode that I think of as the greatest failure was right when I got out of college”

Q What other sort of, I mean, possibly counterintuitive strategies do you use as a parent with your kids? Do you either encourage them to think or?

A So, so one of the things that I, I always try to do, especially when the kids get to a certain age, I mean, look, some things for young kids, you're, you're telling them what to do. Just, you know, basic things like go to bed, you know, bathe yourself or whatever it is. And so that's, you're not going to get around that, but When the kids get a little bit older, um, for me, I try to be very mindful, uh, to give them ideas and ways of thinking, and I call them recommendations. So I say, here's a, here's a way you might, here's a recommendation for you. Here's a way you might think about this. Rather than saying, here's what I think, or here's what you do. And, um, It's been rare that, uh, the kids have come, have done something different than what that recommendation is because obviously I'm trying to illuminate it in a certain way that would make it sensible. But in a sense, it allows them to take ownership of these ideas, right? So, so I think that's one things I say, you know, here's a recommendation for you. Here's something, here's what the way I might think about that problem. See how that fits you and that suits you. And that's, that's helpful in your decision making process. So, um, And I think there's a lot of, you know, there's a, there's a book that was also very influential for me. Um, my kids were much younger called, um, Parent Effectiveness Training, P-P-T. And th…

AI assessment note: “I try to be very mindful, uh, to give them ideas and ways of thinking”

Q I'm curious about your take on the concept of, uh, invariant strategies or invariant ideas, something that never steers you wrong no matter the environmental changes, um, sort of a go-to, always on by default. Do you have any of these in your head, um, whether it's life or business?

A Yeah, I mean, I think that, um, uh, when I, when I think about, um, You know, I, I do, I would just step back and just think about evolution and what is evolution trying to do? And really, it goes back to Dawkins, right? I mean, it's propagation of genes to some degree. So it's basically living to see another day and living basically, right? So strategies to propagate, um, certainly would be a big one for that. Um, and yeah, and you know, and in money management, there probably would be a few things that are really important. One is, and then I would say close to immutable, if not immutable, one is that the value of, Um, usually a business, but really a financial asset is the present value of the cash that it generates. And, you know, it's hard to get away from that ultimately being case. Um, and that has always been true, and I think it will always be true going forward. Um, second is while it's extremely difficult to characterize, um, there should, there should be a general relationship is the sure something is, the less you get paid to bet on it, and the less sure it is, the more you get paid To bet on it. And you know, the, the very simple metaphors, the horse race, the track, you know, so the favorite should get, you should pay less if you bet on the favorite than the long shot. And that, that's probably pretty close to immutable. So, so there are some of those principles …

AI assessment note: “the value of... a financial asset is the present value of the cash that it generates”

Q So you're a bit of a pro prolific reader. I mean, how do you go about taking notes and synthesizing books and what is your process to kind of integrate that into your, your day to day life when you read something that's meaningful to you or something you want to remember?

A So I'm probably not as methodical about it as I should be. Um, that said, a lot of what I read does relate to my day job, and because a lot of my day job, I'm working with mostly, uh, concepts around business and investing, many of the concepts cross over quite well. So I find myself often using things in my own research, and that is actually incredibly useful, because when I write about it, or I have to speak about it, it typically means I need to understand the material reasonably well. Um, But there are still a lot of, there are a lot of little side topics. I don't really, I just, I just try to remember them. I try to bring them up in conversation. I try to weave them into my own mental models. Um, there are some books, uh, not many, but probably one in 10 where I will write in them quite, you know, underline a lot and write notes and so forth. But most of the books, you know, the great book, how to read a book, you know, is, is what I would recommend most people do in talking about different levels of attention that you would, uh, Mortimer Adler, different levels of attention you might pay to different things you read. And I don't, I'm not sure, again, I do it systematically, but that's roughly a structure that I tend to follow.

AI assessment note: “probably one in 10 where I will write in them quite, you know, underline a lot”

Q That's interesting. How do you see the role of technology affecting decisions, uh, and not only decisions, but the decision-making process, I guess?

A Well, I think it's, I mean, it's potentially very, very, uh, huge, right? And, and I think for the most part, very positive. And, you know, I think that there's been this, um, almost a tension between, you might call them fundamental or the intuitive or sort of the gut feel group and more of the quantitative group, you know, the Quants, and so forth, and I think that tension's been brewing for 60 or 70 years, but now it's really spilling over, right, big time, and, and, ah, the question is, can we use, ah, to what degree can we use algorithms and computers to make a lot of the decisions, and, and, and, you know, by the way, one of the chapters in one of my books I talk about, called it the expert squeeze, which is to say that it, it is, I think, factual to say that we're using algorithms to do many of the tasks that used to be the domain of humans, right, and that's, so that's interesting. Um, so, but, but the question would be something like, how might I use technology more effectively? And, and, um, you know, part of it is that, what are, what are computers good at, right? They're good at looking at lots of data. They're good at, um, establishing and understanding base rates. So, for example, if you're thinking about an appropriate reference class for a particular decision, your, your technology will allow you to access that reference class, I think, much more effectively tha…

AI assessment note: “They're good at looking at lots of data. They're good at, um, establishing and understanding base rates.”

Q Talk to me a little bit about the Jeffrey West book, um, in terms of taking linear and non-linear thinking. How, how can we apply that to day-to-day life?

A Yeah, so, one of the things that Jeffrey and his colleagues found that, um, is really interesting is that For, for example, cities that when they broke down some of these relationships, they found sub and super linear scaling. So what does that mean in plain language? Um, so sub linear scaling basically is an indication of economies of scale. So for example, if you look at cities of different sizes, as they get larger, they tend to use the physical infrastructure more efficiently. So you need fewer, you know, miles per road per person or Distance of pipes and electric wires and so forth, right? So cities like larger beings tend to be more efficient, um, as they get larger. So that's the sub linear scaling economies of scale. What they also found was super linear scaling, which is some things grow faster than linear scaling. And those are things that are good. For example, patents. So larger cities tend to be more productive from an intellectual capital point of view than smaller cities. But it also applies to things that are negative, for example, uh, crime and things like that. So I think that these guys are starting to make some headway in understanding these various properties of, and I'm in this case, cities. Um, corporations, by the way, you know, we're, we're, we're early on in that, but, but both, both, by the way, for, for animals, for animals, Biological systems as wel…

AI assessment note: “when they broke down some of these relationships, they found sub and super linear scaling.”

Q How do you go about reading? Like, when you pick up a book, do you read cover to cover? Is there a process? I know you, there's probably a process well thought out behind this. Like, how do you do this?

A I say, go to the Farnham Street blog and read the section about how to read a book. No, I think that, you know, the Adler, the Adler stuff is really how you should do it, and I do some of that. Um, I don't do it as systematically as I should. I usually do read things from cover to cover. I will, I will periodically read part of a book and put it down. But for the most part, I try to pick stuff that I like, and I usually will try to get through it from cover to cover. And, um, I, I don't know if you find this as well. I do find that there tend to be ebbs and flow in my reading pace. So there'll be, there'll be episodes, weeks where I'll read, I'll really read a lot. Part of that might be the content that I'm going through. Part of might just be how my, my schedule works and so forth. And other weeks where it tends to be much slower, I try to be consistent about doing something all the time, but it, it, it does speed up and slow down. Um, and I, I do, there are certain books where I will just do a sort of a heavy skim to make sure that I have some sense of the content and hopefully can remember if there's something in there that I should refer back to. So I won't read the whole thing, but for the most part, I do read things. Cover to cover. And, um, yeah, sometimes I, I regret that. For the most part, I, I, uh, I, I don't, I don't mind doing that.

AI assessment note: “I usually do read things from cover to cover.”

Q Um, one of the questions that I wanted to ask you that I've never had a chance to ask you, which is, uh, what is happiness to you? What does that mean? What does that word mean? Can you unpack it for me?

A Yeah, a lot, a lot for me is, um, you know, uh, ultimately I thought a little bit about this and really for me, it's a sense of, uh, I don't know, like independence actually is probably the word that comes to my mind, which is, That I, I feel like, uh, I can do a little bit of what I want, um, and don't have to worry about too, too many, uh, to, to, to not, to be able to do that. What, what brings me happiness though, as I get older, uh, certainly come to realize it is about people. And I think everybody emphasizes this, but it's really true. So. You know, um, I can say that I look forward to nothing greater than having, being with all my family, because now we have, you know, with all these kids, and many, a couple of them out of college, and so forth, it's difficult to bring everybody together, and I look forward to nothing, and I'm no happier than when we have everybody together, uh, as, as a group, and, and so family, I think, is ultimately, uh, the top thing, um, being with those people, but the sense of independence in society that I don't have to worry about, I guess it goes, ties back to this work on scarcity, that I don't have to worry about, You know, where my, uh, where I think it's going to come from and, you know, having a little bit of financial, uh, stability and so forth, uh, would be related to that as well. And then I think a lot about, um, you know, I think t…

AI assessment note: “really for me, it's a sense of, uh, I don't know, like independence”

Q typical trend or you've lost the skill advantage? In his book, Ed Thorpe talked about card playing and how he hit a rut, but as long as there was, he was consistent with the odds, he knew he was fine because cards are a physical system, but managing people is more of a biological system, so this type of analysis isn't as relevant. How would you kind of advise me?

A Yeah, you know, so Shane, it's such an, I mean, I, you know, I don't know really what the answer to that is, but it is an interesting, um, And I think a little bit of what Thorpe was saying, you know, would apply or some of those lessons might apply. And, um, you know, I think one of the observations we can make is if you are operating in this completely skilled, dominated domain, outcomes are all you really need to know about, right? And so to your point, if you're performing well or performing poorly, that's almost a pure reflection of your skill. And in those domains, uh, it's easy. But as you get into things that are more, uh, as you mentioned, you know, maybe luck-laden or, uh, biological, so they're going to be much messier, you do have to go back and default to understanding the process, and, you know, with some sort of faith that a good process will ultimately lead to good outcomes. So the simpler case in that realm would be the Thorpe story, right, where you know that, um, There's, there's, uh, you're making bets with a probability, and there can be stretches where, uh, you just have bad luck, even though you're making the right decisions in your process. Um, but when you talk about managing people, it becomes altogether, uh, that much more difficult, right? Because we don't really, don't really know exactly how the system is, and it's certainly not a physical system. …

AI assessment note: “to think about or revisit your process, um, periodically”

Q You do so much. So you're on the board, you have a full-time career in finance, you're a prolific kind of author and researcher. How do you, how do you balance all of these different demands?

A It doesn't feel like I do very much, actually. Um, no, I, I, there, there's no, there's nothing magical about it. I think that, um, is, is the nature of the Work that I've been able to do over the years. I've been, I've been blessed with the opportunity to allocate a fair bit of time doing research and being able to write. Um, and you know, it's, it's really fun for me. I like to think about it as input and output. And that's by the way, really the essence I think of teaching or quality teaching. So I I've been able to have this balance between learning about things and inputting and, you know, especially being able to follow a little bit of, of what I find to be interesting. And then output, which is communicating it, uh, you know, certainly within our organization first, but also more broadly. And, you know, I'm a big believer that the notion of synthesis and being able to write and speak reasonably intelligently on something is actually an indication of understanding or first step toward understanding, let's say it that way. And I just had this sort of lucky, a lucky ability to, or life that I've been able to pursue some of these things. Um, I also, I think Shane, we may have talked about this before, but I think it's also important to, to always recognize, and I think this is true for you as well, so I can't speak on your behalf, but I think I'll speak on your behalf, which…

AI assessment note: “a lot of this time allocation... I'm not watching TV much, right?”

Q So let's say we're in a fairly stable kind of environment where intuition can play, you know, a predictive role. How do we go about honing that? And I guess more importantly, in the context of an organization, how do you go about learning to hone your intuition based on other people's expertise? Yep.

A I mean, that's a great question. I think the, the simple there, this is where you would fall back on the Anders Ericsson stuff on, you know, uh, deliberate practice, right? So this would be, I think, I think that the key here is really the notion of feedback, right? Where you make a decision or you see something and you get, you get feedback as to whether that's correct or not, and then you correct course and so forth. So in those stable linear environments, you can practice deliberate practice and you can get feedback that allow you to correct course and, and get better and better. And then you start to internalize a lot of those lessons. So, you know, ah, there, there's even a, you know, an even more trivial example of where intuition might work, and that is low level driving, right? So you learn to drive a car the first day, you're using your system too, but as you progress, you get better so that you're, you know, you're capable, right? You're, you're okay, and you're not a hazard to society. Now, the fact is most of us as drivers can't go on some race course or drive some stunt, right? Because we don't really have that level of expertise, but For, for good, you know, for, for many things in life, good enough is good enough, but to, to, to really train your system, one, to be really, really good, I think it requires, you know, that structure, deliberate practice, and I thin…

AI assessment note: “this is where you would fall back on the Anders Ericsson stuff on, you know, deliberate practice”

Q So how would you advise me hypothetically if I was, uh, I had a company, we, we, you know, we're a fortune 500 company, we don't really have a decision making process. How do we put one in place? What does that look like? And how do we, how do we use that to get better over time?

A Right, exactly. So, you know, there's, um, I mean, the overarching theme here would be whether they're, and by the way, we should acknowledge at the outset that there's probably a continuum of decision types, some of which are very simple, cut and dried, and there are probably right or close to right answers, and there are wrong answers, and other decisions that are inherently probabilistic and, you know, harder to write. I will say that, um, so I think the broad concept would be, are there ways that we can be systematic in evaluating Goodness. Right. So by goodness, you need to really think about two things. One is what are the inputs and what are the measures by which we judge this? Right. So in certain applications, that's pretty straightforward for a company might be, you know, creating value might be for a portfolio manager and investing. It would be, um, creating a more attractive portfolio, but you need sort of good inputs and some measure of, um, goodness. Now, one of the things, so, so, and the key is to try to be as systematic about that as possible, and, you know, in a sense, write down. So one of the things that's really captured my imagination since we have spoken last was this article published about a year ago by Danny Kahneman, son of his colleagues, on noise in the Harvard Business Review. Do you see that article? Do you know that article?

AI assessment note: “are there ways that we can be systematic in evaluating Goodness.”

Q How have your, your thoughts on algorithmic kind of decision making progressed over time? Last time we talked, I think we talked a little bit about AI and I think you called it the expert squeeze. Where are you on that these days? Um, do you think AI is going to take over ground more quickly or perhaps less quickly than most people think?

A Um, yeah, well, I think it's incredible. It's incredibly wide open. Um, I think that we can continue as, uh, societies to continue to apply more of these kinds of concepts. So there's, there's applicability, but you know, all this also gives me a little bit of, uh, a little bit of pause. And, um, I guess the thing that concerns me the most, if you can imagine almost like a little three by three grid and, uh, in the various columns you would put, You know, business, government, and academia. And then in the rows, you might put something like, you know, um, access to resources, access to data, and then maybe incentives, right? Those three rows. And then just fill them out in a way that you think would make sense. And I think if you do that, um, what you probably would find is the access to resources and the access to data is probably greatest among a certain handful of businesses, companies, actually. And those are companies you could probably name right off the top of your head. And then the question is, what are the incentives? And, uh, whereas in academia, the incentive might be, you know, to write some really cool paper and to get citations and so forth. In government, it might be to obviously try to govern effectively and do the best for the most people. For business, the incentives might be sell more ads, get more people to click on my page, right? Something like that. And …

AI assessment note: “I guess the thing that concerns me the most, if you can imagine almost like a little three by three grid”