The Exchanges

Q What does that mean? Beansian thinking. I mean, we all have this idea of it. What does it mean to you?

A So I guess I'll take a step back and just make sure that we're on the same page with, with Bayes' theorem. Um, Bayes' theorem is, is a probabilistic approach to updating probabilities based on new information. So Yeah, in a simple example, if I said, um, what's the probability that I rolled a four on a six-sided die? It would be one-sixth. But if I said, what's the probability that I rolled a four, given that I rolled an even number? Well, now I can eliminate half of the, uh, the possible outcome. So if I know that I rolled an even number, now the only numbers I could have rolled were two, four, and a six. So the probability I rolled a four is now one-third. So I can update my original, um, probabilities, my priors, With this new information, the new information here being that I rolled in even number. In the same way, when we're looking at option pricing, one of the big determinants of, of the fair value of an option is options derive their value because, um, the future stock price is not going to be the same as what it is today. And there's some probability that it's going to be higher or lower. And knowing what that forward looking probability distribution function looks like, Leads to the ability to price the options to, to come up with the fair value based on their expectancy. And one of the determinants of sort of how much a stock can move is what we call its volatility. …

AI assessment note: “Bayes' theorem is, is a probabilistic approach to updating probabilities based on new information.”

Q What I don't like about cognitive biases is that they seem to be poor at preventing us from making poor decisions in the future. What I do like about them is they seem to offer a language and a framework for thinking about why we've made poor decisions in the past. How do you use that information to make better decisions in the future?

A This is a place where maybe not so much call out culture, but being able to see other people's behavior, uh, really comes out as a, as a strong positive. It is definitely true that it is sort of descriptive of the past that, that, that a lot of these, um, a lot of these heuristics and biases are things that we, that we can see when we, after we've already identified that a mistake has been made and we say, okay, well, why was the mistake made? Say, oh, because I was anchored or, oh, because of the way the question was framed or, Or whatever it might be. We have a really hard time seeing it in ourselves, but a really easy time seeing when someone else is, is making that, that type of stupid mistake. A big part of our approach to education is to teach people to talk through their decisions, um, and, uh, and to talk about why they're doing what they're doing with their peers, the other people on their team. If we can do that real time, that's great. Uh, often in trading, you don't have that opportunity because things are just too immediate. Uh, but certainly anytime things have changed, if you're doing things differently, it's a really good time to turn to the traders around you and the, and the quantitative researchers around you and the assistant traders and your team and say, huh, it looks like all of a sudden GameStop is a whole lot more volatile than it was a week ago. Here's…

AI assessment note: “teach people to talk through their decisions... with their peers”

Q Now talk to me a little bit about why that happens. Is that because we see our identity as the tribe or, uh, and then anything that goes against that is now challenging our sense of self?

A The short answer is I don't know. And, and, and I'm afraid that I might say that phrase more than a lot of your previous guests, because, because that is a part of what I value. I mentioned Kahneman. I've got heuristics and choices within, within, within arm's reach of me where I'm sitting here. And I think that this is a heuristic and heuristics are the, uh, you know, the shortcuts that we take that are Mentally freeing, right? It would be really hard to always, to always work from first principles. So it's so much easier if you can have a heuristic that you can fall back on that just sort of tells you what to do next without having to stop and think through, think through the process. And when that heuristic is, I'm going to find people who are like me, and if I do what they do, then I'm going to sort of maintain my integrity. I'm still going to be like me because this is what people like me do. Then it's very easy to fall into the trap of, of never contemplating or not, or not sufficiently contemplating, uh, each of those, uh, each of those actions, each of those different behaviors.

AI assessment note: “I think that this is a heuristic and heuristics are the, uh, you know, the shortcuts”

Q How do you reflect in yourself? Like, are you, do you catch yourself prone to depression or do you catch yourself sort of falling into the, that way of thinking and then move yourself out of it? Or is it something that's sort of not there all the time in the back background?

A It's, it's definitely not something that I feel like I live with and struggle with. This definitely feels like a, a much more of a footnote in my history than it is a, Uh, you know, uh, uh, a description of, of something that I, uh, that I fight. Um, I do know that, that there are certain behaviors that I tend to fall into when I'm feeling overwhelmed that are nonproductive. That is, I don't feel depressed, but I know that there are better ways for me to, to, to approach either the way I'm caring for myself or the way I'm interacting with others. And importantly, it's given me a lot of good tools, um, for, for handling, uh, issues that, that my loved ones face that, that I feel like, you know, when my, When my children are facing issues with depression or unproductive, I feel like I've got better tools now to, uh, to be able to, uh, to help them out of wherever they are. And the other really important thing that I think goes, is, is still stigmatized, uh, broadly is, is using mental health, uh, professionals that just before we started, uh, this conversation, I got a phone call from my dentist to set up my annual cleaning. So in two days I'm having my annual cleaning, which most of your listening audience is going to think, you know, so what? Okay, great. He's getting his teeth cleaned. If I were to tell you that instead it wasn't my dentist that called, but it was my therapist…

AI assessment note: “It's, it's definitely not something that I feel like I live with and struggle with.”

Q Is it fair to say that probabilistic thinking is probably the biggest bang for the buck when it comes to improving your decision-making ability? If you had to isolate that into the top three variables that you could teach somebody to improve their ability to see reality or truth finding, what would they be?

A Talk more is number one. That beats probabilistic thinking that, you know, that, that beats sort of anything else in truth finding is, is being able to, to bring in other people in the decision process in a constructive way. So finding good ways to communicate to improve, um, the input from others in your decision process, uh, I think is pretty important. Thinking probabilistically, I think is, is definitely a very, very important piece of that. I'm trying to sort of diagnose this, what works by trying to think of where, where things fall apart, where people fail. The other place that people fail is really falling, falling in love with their decision process and not being open to being wrong. So in openness to To feedback, to finding disconfirming information, to actively seeking out disconfirming information, which is really uncomfortable. Uh, but, uh, that, that I think is the other piece that is, uh, uh, is super important for, for being a good trader.

AI assessment note: “Talk more is number one. That beats probabilistic thinking”

Q Are there other things that you do to help your kids learn how to make better decisions that other parents can be like, aha, I want to do that to you?

A Uh, one was something that I learned while I was in college, uh, from a book called teacher effectiveness training. When I read it in the book and we talked about it in class, I said, this is the dumbest piece of advice anybody's ever put down on paper. And it was around reflective listening. And the idea was that instead of trying to step in and problem solve, instead of trying to reframe, instead of trying to provide context or, or dig deeper, all you do is tell the person what you heard them say. And that night, a friend of mine was over at my apartment for dinner. And she was talking about a problem that she was having with her roommate. And I was like, just for kicks, I'm going to give this a shot. And she's, you know, I'm sauteing the chicken or whatever it was. And she's like, and then my roommate never puts her dishes, uh, away and it bugs the hell out of me. I said, sounds like you're really bothered when she doesn't put away her dishes. She's like, yeah. And it's not just that. It's also that, um, she doesn't appreciate it when I do clean up. I said, oh, so it sounds like, you know, a part of the problem here is, is that you're not feeling appreciated. She's got to think I'm the dumbest guy that she's ever known, right? Like all I'm doing is, is repeating what she's saying. And I was like, well, this, this certainly feels dumb. And I guess at some point I got to call …

AI assessment note: “And it was around reflective listening.”

Q Alright, so that's one of the more secretive and successful investment outfits. You make a living, though, effectively making decisions. So I want to dive into that. What's your process for making decisions?

A The products that we're trading are Pretty much any financial product that you can, that you can think of being traded. So equities, fixed income products, currencies, commodities, uh, and we really got our start in derivatives. So equity options, uh, and then index products. And, um, our approach is to, to recognize that, uh, we, we are often, uh, on the bad end of informational asymmetry that other people who are looking to trade in the markets frequently know more than we do. And as a, as a result, we don't want to back our own limited opinion against a more informed counterparty. Instead, what we want to do is take the information that we have coming from outside sources, and there are multiple outside sources, different types of products that are being traded, different option series, if we're trading derivatives, and use that information to improve our own information set. To then be able to allocate our capital in a way that we think will, uh, lead to a return.

AI assessment note: “use that information to improve our own information set. To then be able to allocate”

Q Talk to me a little bit about that experience. Uh, how do you teach somebody to find the truth? Like how much can people improve as they come in the door to where they, what they're capable of?

A Susquehanna has always had, uh, a very growth mindset perspective on, on teaching trading, you know, before Carol Dweck, uh, had even shared her, her views on growth mindset. That is, that has always been, uh, the company's, uh, position is that traders are made, not born. You know, we're now over 2000 people, uh, worldwide, and we still have a small company mindset of, you know, we gotta, you know, we've gotta make the best of what we have, and we're competing with the world. Let's, uh, you know, let's, uh, let's figure out how to, uh, how to improve our, uh, our employees, uh, the best way we can. And the way that we're training people today has certainly changed from what it was originally, but there are a lot of things that have stayed the same. And among that is, is this idea that if we have smart people that are educable, And vocal about their thought process so that we can improve it and willing to be wrong, then we can teach them about trading. Part of my background is studying education, and as I moved through my time at SIG as an educator, I was finding that I was applying things that I had learned in the classroom, you know, over a decade earlier in a way that I hadn't anticipated. When I was originally studying education, I was thinking that I might be teaching sixth grade deaf kids how to do math. Instead, I've got MIT graduates who certainly understand math, but d…

AI assessment note: “That is, that has always been, uh, the company's, uh, position is that traders are made, not born.”

Q Walk me through a little bit about why we struggle, though, because this happens in all different types of decisions, right? It's not just sort of buying stocks or trading. We get new information, but we don't appropriately weight it or update our priors. What contributes to that, and what can we do about it?

A The what contributes to that is covered by a whole host of literature. And you've had some of the luminaries in this field as guests on your show before, so I certainly can't speak more articulately about this than Danny Kahneman could, but the types of things that, that Kahneman, Tversky uncovered 45 years ago about the, the failings of, of our ability to look at and process and update information is exactly what's happening here. So, so things like confirmation bias and hindsight bias and attribution error, and we've got all of the, all of the decision biases that, that have been covered in behavioral economics come into play here. So if I, for some reason, have some stake in believing that The fair value of this option is three dollars. Then I'm going to discount this new information that, um, that someone wants to buy it for three dollars and 10 cents and say, you know, high fives all around. I just made an extra 10 cents that, that the rest of the world missed out on. If, on the other hand, I am able to have, have better second order knowledge, so knowledge about what I know and knowledge about what I don't know, then I can appropriately weigh this information and act accordingly. And You know, the price of an option doesn't feel like something that anyone's going to have a very strong personal tie to, but certainly there are lots of other things in your life where you're,…

AI assessment note: “things like confirmation bias and hindsight bias and attribution error”