April 2020 Reading

Articles

Parkinson’s Law of Triviality / Bike-shedding – HIGHLY recommend reading this. Bike-shedding = spending an inordinate amount of time around items that wont move the needle / aren’t important, but take time because everyone has something to say (typically not complex issues).  When something is within someone’s circle of competence and he / she is in the meeting, then this person will feel compelled to speak.  Solution:  narrow the focus, invite only people whose input is actually necessary (not all input is necessary), and have a designated individual in charge of the decision.

Two articles on positional scarcity (one and two)- Provides a counter view to typical post-COVID predictions by saying that we will go back to costly signaling via expensive education and business travel (think back to Rory Sutherland’s comments on costly signaling in Alchemy – strength of a signal is directly proportional to its cost / inconvenience).

  • Positional scarcity -the idea that in times of abundance, relative scarcity matters – people do things / purchase things that confer scarcity relative to the abundant backdrop. Types of positional scarcity include – curation (there is an abundance of choice so I will pay someone to curate), prestige (there are a lot of cars so I’ll pay more for a better brand), access (will pay more to get access – e.g., TSA, expensive toll roads, google search paid rank).  Overlaps between these create other types of scarcity – legitimacy (curation + prestige), proximity (prestige + access), and extortion (curation + access – think a drawbridge that also curates your choices).

Most Coronavirus Predictions Will Be Wrong – “Anything is possible, but take a closer look at how often definitive predictions about permanent change are simply extrapolations of recently observable trends taken to some maximum extreme. In other words, the future will be like this new present — only much more so.”

Who Will Pay For It – Interesting historical context on US debt and deficits over time.  Post WWII, taxes went up and stayed higher than pre-war, and debt continued to accumulate (gross $ amount, not as % of GDP).  I think his prediction about higher taxes and more comprehensive social safety net is a reasonable one.

Donella Meadow’s paper on Leverage Points – Main ideas below:

  • Leverage points are places within a complex system where a small shift in one thing can produce big changes in everything.  They are not intuitive, and we often use them in a backward way (worsen the problem).
  • Constants, parameters, and numbers are some of the weakest leverage points, but they take up 99% of our attention.  Think – changing the target on a KPI (changing a parameter) vs changing the KPI as a whole or the way a KPI is tracked / conveyed / incentivized, or even having KPIs in the first place.
  • Negative feedback loops = self-correcting (e.g., thermostat).
  • Positive feedback loops = self-reinforcing (e.g., compound interest).
  • Changing the information structure of a system (who / what gets feedback) can create a new loop and cause people to behave differently.  Think about the energy meter example (putting the energy meter in the middle of your living room where you can readily see it – seeing the meter daily causes you to behave a certain way vs not seeing it at all).
  • If you want to understand the deepest malfunctions of systems, pay attention to the rules, and to who has power over them.
  • Shared ideas and beliefs (or paradigms) are one of the most powerful leverage points.  Changing peoples’ underlying beliefs will cause everything else (feedback loops, parameters, etc.) to all change.  Much harder to do this for groups than it is for individuals.
  • Be flexible!  Don’t marry yourself to a specific paradigm; choose whatever one will help you achieve your purpose.

Conjunctive Events Bias – we underestimate the probability of failure when multiple events need to go right and in the right order to reach a desired outcome.  As the complexity of the system increases, the probability of failure increases (conjunctive probabilities are mathematically lower than probability of each specific part being successful).  

Letter from Howard Marks – “Calibrating”

  • Message from epidemiologist Marc Lipsitch – there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation (this was regarding COVID-19, but I think it’s a good way of thinking about things generally)
  • “In my opinion, the difference between most people’s positive and negative views is likely to stem largely from their innate biases, and thus the data points they choose to overweight. Future scenarios comprise a large number of variables: today even more than usual. It’s relatively easy to build a spreadsheet listing the many things that will contribute to the future and rate them as likely to turn out well or poorly. But merely toting up the plusses and minuses won’t tell you whether the future will be favorable or unfavorable. The essential element is figuring out which ones will be most influential. That’s often where optimistic or pessimistic biases come in. The optimist takes cheer from the favorable outlook for the positive data points, and the pessimist is depressed by the unpleasant possibilities for the negative ones . . . even if they’re both working from the same underlying spreadsheet in terms of elements and ratings.”
  • “All great investments begin in discomfort.”
  • Main job of an investment manager is determining right balance between offense and defense
    • Twin risks facing investors every day:  1) risk of losing money and 2) risk of missing opportunities
  • “The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
  • Interesting data:

Article on knowledge debt – Something to think about with regards to your work.  Where do you have gaps that you’ve been able to manage thus far without filling?

Kahneman paper on decision making – great read and worth the time for anyone who wants to implement more structured decision making on a personal or organization level. Some notes:

  • To combat cognitive biases (namely availability bias – overweighting information that you’ve seen more recently – and confirmation bias – overweighting information that agrees with your preexisting notions and interpreting ambiguous information in a way that favors prior notions), put in place a MAP (mediating assessment protocol).
  • MAP involves 1) defining the dimensions for analysis up front (create a checklist), 2) assessing each dimension independently and in a relative way (using a percentile scale and comparing what you’re analyzing to the whole class – “outside view” – e.g., what percentile would this management team rank in relative to all other management teams we’ve assessed), and then, after all the individual assessments are done, 3) viewing all the assessments in totality to make conclusions about subject as a whole.
  • By conducting “mediating assessments” and breaking the decision down into chunks before judging the whole, you avoid being mentally “overwhelmed” by the breadth of the decision and overweighting certain pieces of information or confirming prior biases.  Instead, you can look at objective scoring of each dimension and then make an assessment about the whole.

Impacts of COVID on Society (Collaborative Fund) – “When people feel the correlation between their decisions and their outcomes is high, there’s less desire for a strong social safety net. But when something impacts everyone at once, and can ruin the careful as much as the reckless, there’s a history of people coming together to support a public backstop. We saw that Wednesday, when a $2 trillion rescue package passed the Senate 96-0. I suspect we’ll be seeing more of it for years to come.”

Proximate vs Root Causes (Farnam Street) – A useful framework in life.  Ask “why” over and over again until there are no more answers.

Books

Finished Jonathan Haidt’s The Righteous Mind. Phenomenal. Notes coming soon.

Starting Getting Things Done by David Allen (pretty good so far) and rereading Superforecasters by Tetlock.

Cultivating Your Judgment Skills – Michael Mauboussin

  • Link here.
  • “Good judgment requires understanding causality, effectively incorporating information from past events to understand present prospects, and updating probabilities correctly based on the arrival of new information”
  • Philip Tetlock’s roadmap to improving judgment:
  • Cognitive – you simply understand the activity and are prone to errors; stuck in “inside view”, which is focusing on the thing itself vs context
  • Associate – better but still lack nuance
  • Autonomous – people don’t usually get here
  • Identifying causality – Clayton Christensen’s “theory of theory building”, or how theories are formed
    • Good theory seeks to comprehend causal relationships through observation (measuring and describing results), classification (categorizing the results / noting differences), and definition (describing the relationship between categories and outcomes)
    • As theories improve they rely less on attributes and more on circumstances
      • What does this mean?  Attribute is a general statement about a thing – e.g., outsourcing is good for companies because it lowers invested capital – but sometimes (like in Boeing’s case, where coordination costs are high), it fails!  The circumstances matter.  Context matters.  Good theory takes this into account
        • Don’t listen to stories of attributes driving outcomes / success.  They ignore circumstances.  Circumstances > attributes. 
  • Inside vs outside view
    • Inside view – what’s unique about the specific case we’re analyzing (e.g., the attributes of the company we’re looking to invest in).  We tend to think the thing we’re analyzing is more unique than it really is.
    • Outside view – how all members of a class do (not just the specific thing you’re analyzing).  Base rate.
    • The three inputs of a prediction are 1) outside view, 2) inside view, and 3) relative weights of each
      • Relative weights are based on where the activity is on the Luck / Skill Continuum
      • More luck involved —> give larger weight to base rate.  If more skill —> give larger weight to inside view
    • Ideally you want a lot of reference cases, and a lot of cases that are similar to the situation you’re analyzing
  • Updating information
    • Bayesian updating – updating your model with new information.  We have challenges with this because:
      • Confirmation bias – overweighting information that agrees with our existing views
      • We interpret ambiguous information in a way that is favorable to our prior beliefs

March 2020 Reading

Articles

Who Cares What Mr Market Thinks – the best article I’ve read on investing in markets during this crazy period.  In short, if your time horizon is long enough (10+ years), two years of earnings declines does not materially impact the intrinsic value of the business.

How to Manage Change – Read with Chesterton’s Fence.  New leaders often come into organizations wanting to enact change and start tearing up processes laid down by prior regimes without thinking through why the smart people that existed before them created those processes.  Before you destroy a fence, ask yourself:  why was the fence built in the first place?  By tearing it down, what problems might I cause?  What processes are relying on the fence?  What processes are relying on processes that rely on the fence?  Systems thinking!

The Bias that Can Cause Catastrophe – Outcome bias is when you judge the quality of a process or behavior based solely on the outcome while ignoring the many factors (including luck, help from others, etc.) that might have contributed to success or failure. Repeating the same process might lead to a disastrous outcome. How do you address this? Think about context!  All decisions are made in a certain context, so study the context and recognize the role of luck in the outcome as well.

Motivation / Deliberate practice – One key to mastery is what Florida State University psychology professor Anders Ericsson calls deliberate practice – a ‘lifelong period of… effort to improve performance in a specific domain.’ Deliberate practice isn’t running a few miles each day or banging on the piano for twenty minutes each morning. It’s much more purposeful, focused, and, yes painful. Follow these steps – over and over again for a decade – and you just might become a master:

  • Remember that deliberate practise has one objective: to improve performance. ‘People who play tennis once a week for years don’t get any better if they do the same thing each time,’ Ericsson has said. ‘Deliberate practise is about changing your performance, setting new goals and straining yourself to reach a bit higher each time.’
  • Repeat, repeat, repeat. Repetition matters. Basketball greats don’t shoot ten free throws at the end of team practise; they shoot five hundred.
  • Seek constant, critical feedback. If you don’t know how you’re doing, you won’t know what to improve.
  • Focus ruthlessly on where you need help. While many of us work on what we’re already good at, says Ericsson, ‘those who get better work on their weaknesses.’
  • Prepare for the process to be mentally and physically exhausting. That’s why so few people commit to it, but that’s why it works.

Howard Marks March 3 Letter:  Wisdom on current state of the markets.

John Gardner Speech on Self Renewal:  Worth reading multiple times.  Some of my favorite pieces were:

  • “I said in my book, “Self-Renewal,” that we build our own prisons and serve as our own jail-keepers. I no longer completely agree with that. I still think we’re our own jailkeepers, but I’ve concluded that our parents and the society at large have a hand in building our prisons. They create roles for us — and self images — that hold us captive for a long time. The individual intent on self-renewal will have to deal with ghosts of the past — the memory of earlier failures, the remnants of childhood dramas and rebellions, accumulated grievances and resentments that have long outlived their cause. Sometimes people cling to the ghosts with something almost approaching pleasure — but the hampering effect on growth is inescapable. As Jim Whitaker, who climbed Mount Everest, said ‘You never conquer the mountain, You only conquer yourself.'”
  • “When you hit a spell of trouble, ask “What is it trying to teach me?” The lessons aren’t always happy ones, but they keep coming. It isn’t a bad idea to pause occasionally for an inward look. By midlife, most of us are accomplished fugitives from ourselves.”
  • “The things you learn in maturity aren’t simple things such as acquiring information and skills. You learn not to engage in self-destructive behavior. You leant not to burn up energy in anxiety. You discover how to manage your tensions, if you have any, which you do. You learn that self-pity and resentment are among the most toxic of drugs. You find that the world loves talent, but pays off on character.  You come to understand that most people are neither for you nor against you, they are thinking about themselves. You learn that no matter how hard you try to please, some people in this world are not going to love you, a lesson that is at first troubling and then really quite relaxing.”
  • “You come to terms with yourself. You finally grasp what S. N. Behrman meant when he said “At the end of every road you meet yourself.” You may not get rid of all of your hang-ups, but you learn to control them to the point that you can function productively and not hurt others.”

Farnam Street Excerpt on “Positioning” (no link):  “When you can’t predict with accuracy, you can position. That means giving up something today to prepare a wider range of outcomes tomorrow. Positioning is always short term suboptimal. The longer your timespan, however, the more optimal it becomes. If you life a long life, it can’t help but be the correct strategy.”

Books

Finished It’s Your Ship by Michael Abrashoff. Very average and not worth your time.

Reread Cultivating Your Judgment Skills by Michael Mauboussin. MM is top-notch. Notes here.

Rereading The Righteous Mind by Jonathan Haidt.

See notes on Alchemy here. Buy it here.

  • One of the best books I’ve read this year.  It challenged me to think outside of the rational, economic view I’ve been trained in that requires a clear business case and ROI for every decision.  There is a huge subconscious component to decision making, and human behavior is context dependent – trying to model other peoples’ behaviors in Excel is a futile exercise.  Various points in the book reminded me of strategy discussions where we’re debating whether or not to pursue an initiative without a clear business case and supporting data.  Corporate environments tend towards risk-averse behavior, which leaves a lot of upside untapped (you don’t get fired for hiring McKinsey, but McKinsey is not going to solve the tough problems that you wouldn’t have already been able to solve through logical thinking).  The challenge involves structuring the decision making process and organization such that you don’t lose the “magic” and have room to take risk when the upside is difficult to quantify.
  • While reading this, I was also flipping through some old notes on “base rates”.  The base rate concept is a powerful and useful concept in investing and decision making:  when deciding whether or not to do something, understand what the “average” outcome is for people who have made a similar decision in the past.  For example, if you’re deciding whether or not to invest in a waste management business, understand what the average return on invested capital is for the waste management industry, what the average margins look like, etc..  Or, if you’re deciding whether or not to launch a startup, what is the average failure rate / return / etc.?  If you’re ok with the base rate, then make the decision, but don’t trick yourself into thinking you will wildly outperform the base rate.
    • This book is an argument against overly anchoring around base rates.  Average thinking will get you average results!  The way to break out of this is to think “psycho-logically” and cultivate a deeper understanding of human nature that opens you up to the quirks and (seemingly) illogical forces that drive human behavior.  The base rate is just one input – it’s not the final answer.

Alchemy by Rory Sutherland

Key Takeaways

  • On corporations:
    • “The problem that bedevils organizations once they reach a certain size is that narrow, conventional logic is that natural mode of thinking for the risk-averse bureaucrat or executive.  There is a simple reason for this:  you can never be fired for being logical.  If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame.  It is much easier to be fired for being illogical than it is for being unimaginative.”
    • We have a tendency to try things which can be explained logically and justified in retrospect (after we do them)
    • We are obsessed with rational quantification – we focus too much on the purity of methodology vs the possible value of a solution, and therefore ignore solutions that have not been reached through an approved process of reasoning
  • On evolution:
    • Evolution doesn’t care about accuracy.  Utility > accuracy.
      • Things that work survive and grow, whereas things that don’t work naturally die off.  Evolution does not care about objectivity – it only cares about fitness.
      • Whether something makes sense in theory matters less than if it makes sense in practice
  • On decision making / human nature:
    • “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
    • Whenever you add, average, or multiply something, you lose information
    • Conventional logic is a straightforward process that is equally available to all and gets you to the same place as everyone else
    • Framing:  What you pay attention to and how you frame it inevitably affects your decision-making
      • We constantly rewrite the past to form a narrative that replaces luck and random experimentation with conscious intent
      • How you frame things (good vs bad) influences how people will interpret and then behave
        • This applies to many things in life – relationships, leadership, providing feedback
    • “Value resides not in the thing itself, but in the minds of those who value it.  You can therefore create (or destroy) value in two ways – either by changing the thing or by changing minds about what it is.”
    • “The conscious mind thinks it’s the Oval Office, when in reality it’s the press office.” – Jonathan Haidt
      • We think we’re executing orders when in reality we are constructing to post-hoc rationalizations for decisions we cant explain / don’t understand
    • Wide context vs narrow context problems – the latter can be solved by computers (math problem), but former require myriad inputs and are much harder
      • People substitute narrow context problems for wide context problems – we think that by precisely solving one small segment of the problem, we’ve solved the wider problem.  We crave the certainty associated with neat, rational, scientific solutions.
    • Regret minimization – our brain will do its best to lessen any feelings of regret, but needs an alternative narrative to do so (sour grapes and sweet lemons)
    • Herd mentality – people would rather make a sub-optimal decision together vs an optimal decision alone
  • On signaling:
    • Signaling – the need to send reliable indications of commitment and intent, which can inspire confidence and trust
    • “Costly signaling theory” – The strength of the signal is directly related to how much it costs (financially, effort, inconvenience) – if you want to convey a strong signal to someone, make it costly.
      • All powerful messages must contain an element of absurdity, illogicality, costliness, disproportion, inefficiency, scarcity, difficulty, or extravagance – rational behavior and talk convey no meaning.  You must deviate from narrow, short-term self interest if you want to generate anything more than cheap talk.
    • “Upfront investment is a proof of long-term commitment, which is a guarantor of honest behavior.  Reputation is a form of skin in the game:  it takes far longer to acquire a reputation than to lose one.”
    • The prospect of repetition keeps people honest.  If you don’t have repeated contact with people, you have less incentive to be honest / care about their perceptions.  This is known as “continuation probability” in game theory – prospects for cooperation are much higher when there is an expectation of repetition vs single-shot transaction
      • Look to play repeated games vs single-shot games
  • On brands:
    • Brands convey information – they help us navigate and make choices (minimizes information asymmetry by indicating that other side has skin in the game), and our choices then create feedback loops
    • Look for brands that have a lot of reputation – more incentive to deliver quality product / service due to fear of tarnishing reputation
    • Theory on brands:  we prefer Brand A over Brand B not because A is better, but because we are more certain that it is good (more concern about downside than potential upside)
      • “We will pay a disproportionately high premium for the elimination of a small degree of uncertainty”

——-

Detailed Notes

Rory’s Rules for Alchemy

  1. The opposite of a good idea can also be a good idea
  2. Don’t design for average
  3. It doesn’t pay to be logical if everyone else is being logical
  4. The nature of our attention affects the nature of our experience
  5. A flower is simply a weed with an advertising budget
  6. The problem with logic is that it kills off magic
  7. A good guess which stands up to observation is still science.  So is a lucky accident.
  8. Test counterintuitive things only because no one else will
  9. Solving problems using rationality is like playing golf with one club
  10. Dare to be trivial
  11. If there were a logical answer, we would have found it

Introduction

  • We try to understand complexity via economic models and business case studies (we crave logical / rational solutions to problems) – these models are useful, but often inaccurate and misleading
  • “The human mind does not run on logic any more than a horse runs on petrol”
    • If we allow logical people to make all the decisions, then we will only discover logical things
  • “Psycho-logic” – the way that humans actually make decisions – rather than designed to be optimal, it is designed to be useful (utility > accuracy)
  • This book is about the misuse of logic and logical overreach (common in corporations) which demands that all solutions have a sound logical backing and evidence before being considered / attempted
    • Policy and business decisions are based on a “reason first, discovery later” methodology
    • Evolution works in the reverse way – things that work survive and grow, whereas things that don’t work naturally die off.  Evolution does not care about objectivity – it only cares about fitness.
      • Whether something makes sense in theory matters less than if it makes sense in practice
    • We have a tendency to try things which can be explained logically and justified in retrospect (after we do them)
  • “Think of life as like a criminal investigation:  a beautifully linear and logical narrative when viewed in retrospect, but a fiendishly random, messy, and wasteful process when experienced in real time.”
  • “If you are a technocrat, you’ll generally have achieved your status by explaining things in reverse; the plausible post-rationalization is the stock-in-trade of the commentariat.”
  • Human behavior is context-dependent – trying to apply a rational model to predict human behavior will fail
  • In psychology, the opposite of a good idea can be a good idea – think about the two different ways to sell a product (“buy this, everyone has it” or “buy this, no one has it and it’s exclusive”)
  • “The problem that bedevils organizations once they reach a certain size is that narrow, conventional logic is that natural mode of thinking for the risk-averse bureaucrat or executive.  There is a simple reason for this:  you can never be fired for being logical.  If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame.  It is much easier to be fired for being illogical than it is for being unimaginative.”
    • You can’t fired for being logical 
  • Absolutely right answer vs good enough answer – the former is achievable by limiting the number of data points (but risks being hopelessly wrong in many contexts), while later is generally right in large number of contexts
  • Trivers / Kurzban theory on why we don’t have full access to the real reason why we do things (subconscious) – we have evolved to deceive ourselves so that we are better at deceiving others
  • “The problem with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say.”

Part 1 – On the Uses and Abuses of Reason

  • What people say they want / what we think they want vs what they really want
  • 1.1 – Broken Binoculars
    • “regular issue binoculars” – lenses used to solve most problems – market research and economic theory –> the lenses are cracked!  They distort our vision!
      • Produces an overly rationalistic view of human motivation
  • 1.2 – Working in Practice vs Theory
    • “If you would like an easy life, never come up with a solution to a problem that is drawn from a field of expertise other than that from which it is assumed the solution will arise.”
    • Upton Sinclair quote:  “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
  • 1.3 – Psychological Moonshots
    • Achieving improvements in perception vs reality (e.g., adding wifi to trains vs making trains faster) –> future innovation might come through improvements in perception (which cost a fraction of what it costs to actually change reality)
  • 1.6 – The Right Thing for the Wrong Reason
    • People don’t understand the reasons for their own behavior (think about use of toothpaste – why people say they do it vs why they actually do it)
    • Revealed preferences – what people actually spend their money on (prices are the only reliable means of determining this)
  • 1.7 – How you ask a question affects the answer (questions themselves have information value in them)
  • 1.8 – “A change in perspective is worth 80 IQ points”
  • 1.9 – Be Careful With Math
    • Whenever you add, average, or multiply something, you lose information
    • 10×1 DOES NOT equal 1×10 in real life – think of getting hit by a pebble ten times vs one giant stone
  • 1.10 – Recruitment
    • Hiring for one role vs hiring a group – the former makes it more difficult to hire a diverse candidate (you have one shot – have to get it right by conventional standards) vs when hiring as a group or a class, you don’t have all your eggs in one basket
  • 1.11 – Beware of Averages
    • Design for the extreme – spend your time designing product for the one extreme user vs the 10 average users
  • 1.15 – Same Facts, Different Context
    • Conventional logic is a straightforward process that is equally available to all and gets you to the same place as everyone else
    • What you pay attention to and how you frame it inevitably affects your decision-making
  • 1.16 – Success is Rarely Scientific – Even in Science
    • We misuse our reason, setting too low a bar in how we evaluate solutions, but too high a bar in our conditions to how we reach solutions (we look for super logical reasons during ideation / testing)
    • Richard Feynman on his method:  “In general, we look for a new law by the following process.  First, we guess it…then we compute the consequences of teh guess, to see what, if this law we guess is right, to see what it would imply and then we compare the computation results to…experience, compare it directly with observations to see if it works…in that simple statement is the key to science.  It doesn’t make any difference how beautiful your guess is, it doesn’t matter how smart you are, who made the guess or what his name is…if it disagrees with the experiment, it’s wrong.  That’s all there is to it.”
    • We are obsessed with rational quantification – we focus too much on the purity of methodology vs the possible value of a solution, and therefore ignore solutions that have not been reached through an approved process of reasoning
  • 1.17 – The Reasons we Supply
    • We constantly rewrite the past to form a narrative that replaces luck and random experimentation with conscious intent
    • Argumentative hypothesis on function of reason – to defend our beliefs to others
  • 1.19 – Efficiency Doesn’t Always Pay
    • Markets are not highly “efficient” – they trade efficiency for market-tested innovation and competition, rewarding the winner.  Competition is highly inefficient (buying groceries from one place vs eight)

Part 2 – The Alchemist’s Tale

  • 2.2 – Value is in the Mind and Heart of the Valuer
    • “Value resides not in the thing itself, but in the minds of those who value it.  You can therefore create (or destroy) value in two ways – either by changing the thing or by changing minds about what it is.”
  • 2.4 – The nature of our attention affects that nature of our experience
  • 2.8 – Why Less is Sometimes More
    • Design-thinking concept called “affordance” (Don Norman) – when the design of the thing clearly indicates exactly how it is meant to be used.  E.g., knobs are meant to be turned, buttons to be pushed, slots for inserting things to
    • Significant innovation often results from the removal of features rather than the addition – e.g., Google is Yahoo without all the crap
    • Strongest marketing approach in a B2B context is not proving that your product is best, but pointing out that competitor product will result in horrible outcome (sow fear, uncertainty, and doubt, aka FUD)

Part 3 – Signaling

  • 3.1 – Signaling – the need to send reliable indications of commitment and intent, which can inspire confidence and trust
    • Reciprocation, reputation, and pre-commitment signaling are the three mechanisms that underpin trust
  • 3.2 – Notes on Game Theory
    • “Upfront investment is a proof of long-term commitment, which is a guarantor of honest behavior.  Reputation is a form of skin in the game:  it takes far longer to acquire a reputation than to lose one.”
  • 3.3 – Continuity Probability Signaling
    • The prospect of repetition keeps people honest.  If you don’t have repeated contact with people, you have less incentive to be honest / care about their perceptions.  This is known as “continuation probability” in game theory – prospects for cooperation are much higher when there is an expectation of repetition vs single-shot transaction
    • Think:  when customer has a problem and a brand resolves it, customer often becomes a repeat purchaser / loyal.  Prospect of repetition ensures honesty / quality —> signaling often doesn’t make sense from a purely rational perspective!
  • 3.4 – Why Signaling Has to be Costly
    • “Costly signaling theory” – the fact that the meaning and significance attached to something increase directly with the expense with which it is communicated
  • 3.6 – Creativity as Costly Signaling 
    • Potency and meaning of communication is in direct proportion to the costliness of its creation – the amount of pain, effort, talent consumed in its creation.  Think:  writing letters vs sending email
    • All powerful messages must contain an element of absurdity, illogicality, costliness, disproportion, inefficiency, scarcity, difficulty, or extravagance – rational behavior and talk convey no meaning.  You must deviate from narrow, short-term self interest if you want to generate anything more than cheap talk.
  • 3.7 – Advertising Does Not Always Look Like Advertising
    • We draw unconscious references from environmental cues constantly, without having awareness of what we’re doing
    • “Spreadsheet thinking” – centering your thinking around what can be measured / quantified (on a spreadsheet)
  • 3.8 – Bees do it
    • Analogy using bees and flowers – flowers “advertise” (distinctive scents, large petals, bright) to attract bees.  This is parallel to corporations with big advertising budgets – a big ad budget doesn’t mean your product is great, but it does signal that you have some faith in your product and are comfortable marketing it to a lot of people 
    • Company’s with long-established reputations for high quality products have more to lose 
  • 3.12
    • Brands convey information – they help us navigate and make choices (minimizes information asymmetry by indicating that other side has skin in the game), and our choices then create feedback loops.

Part 4 – Subconscious Hacking:  Signalling to Ourselves

  • 4.2 – Placebos
    • Placebos influence our body’s unconscious / automatic processes – the only way we can influence these processes is by controlling the things we can control (e.g., environment)
  • 4.4 – Conscious Mind
    • “The conscious mind thinks it’s the Oval Office, when in reality it’s the press office.” – Jonathan Haidt
      • We think we’re executing orders when in reality we are constructing to post-hoc rationalizations for decisions we cant explain / don’t understand
  • 4.6 – Why we buy stuff
    • One failure of Soviet-style command economies is that it’s impossible to know what exactly people want and why people want it.  People don’t know why they like what they like, and the only way to discover what people like is to track their actual spend (“revealed preferences”), which requires trial and error (competitive markets)
  • 4.7 – On Self-Placebbing
    • Cosmetic industry can be viewed in context of placebo effect – men don’t actually care how your face looks, but women want to know that they’ve put in the time / effort investment into looking good for men —> more for yourself than for others
  • 4.8 – Effective Placebos
    • Rules for effective placebos:  must have some effort, scarcity, or expense associated with it; involves an element of illogicality, waste, unpleasantness, effort, costliness; needs to be slightly absurd to work
  • 4.9 – Red Bull – great example of placebo effect.  It tastes bad, potentially dangerous for you, bottle looks weird – checks all the boxes.
    • Luxury goods expenditure can only be explained by people seeking to impress each other

Part 5 – Satisficing

  • 5.1 – Being Vaguely Right vs Precisely Wrong
    • Wide context vs narrow context problems – the latter can be solved by computers (math problem), but former require myriad inputs and are much harder
    • People substitute narrow context problems for wide context problems – we think that by precisely solving one small segment of the problem, we’ve solved the wider problem.  We crave the certainty associated with neat, rational, scientific solutions.
  • 5.2 – Satisficing (term coined by Herbert Simon, won Nobel prize)
    • Satisficing vs maximizing (single optimally right answer).  Two forms of satisficing are 1) finding optimal solutions in simplified world (accurate model) or 2) finding good enough solutions for complex world
    • Study bees!  Bees do a waggle dance when they find a flower with nectar, but other bees don’t necessarily follow that waggling bee – they continue moving in seemingly random ways.  This looks short-term inefficient and sub-optimal – all the bees should follow the one that found nectar.
      • BUT, if they did, the hive would get stuck at a “local maximum” and run out of resources sooner – instead, these randomly moving bees go and find other food
  • 5.3 – We buy brands to satisfice
    • Theory on brands:  we prefer Brand A over Brand B not because A is better, but because we are more certain that it is good (more concern about downside than potential upside)
    • “We will pay a disproportionately high premium for the elimination of a small degree of uncertainty”
    • Look for brands that have reputational risk – those are the ones with more to lose from a bad product
  • 5.6 – The best is not always the least worst
    • Choosing EWR vs JFK for booking your boss’s trip – you wont get into trouble if there is a delay at JFK, but if there is a problem at EWR, you’ll get all the blame —> we make downside minimizing decisions and forego upside
    • “Defensive decision making” – making a decision that is unconsciously designed not to maximize welfare overall but to minimize the damage to the decision maker in the event of a negative outcome

Part 6 – Psychophysics

  • 6.1 – Psychophysics – study of how neurobiology of perception varies amongst species, and how what we see / hear / feel / taste differs from objective reality
  • 6.2 – Reality vs perception – what really is vs what we perceive can be very different
  • 6.4 – People behave based on what they think they see – hard to put yourself in that position
    • “In reality, all valuable information starts with very little data – the lookout on the Titanic only had one data point…iceberg ahead, but they were more important that any huge survey on iceberg frequency.
    • Perception may map neatly onto behavior, but reality does not map neatly onto perception
    • All big data comes from the past – change in context can change human behavior significantly
  • 6.6 – Objectivity
    • We crave the objectivity of science when analyzing human behavior, but human behavior is based on perception, which is different than what is objectively true
    • “Economic logic is an attempt to create a psychology-free model of human behavior based on presumptions of rationality, but it can be a very costly mistake.  Not only can a rational approach to pricing be very destructive of perceived savings, but it also assumes that everyone reacts to savings the same way.  They dont, and context and framing matter.”
  • 6.9 – The focusing illusion (Kahneman / Tversky) – causes us to vastly overestimate the significance of anything that we’re focused on

Part 7 – How to be an alchemist

  • 7.1 – Framing matters.  How you frame things (good vs bad) influences how people will interpret and then behave
    • This applies to many things in life – relationships, leadership, providing feedback
  • 7.3 – Regret minimization – our brain will do its best to lessen any feelings of regret, but needs an alternative narrative to do so (sour grapes and sweet lemons)
  • 7.4 – herd mentality – people would rather make a sub-optimal decision together vs an optimal decision alone

February 2020 Reading

Articles

The Nuclear Family Was a Mistake: Sent to me by a friend. If you read one article from this list, make it this one. Some of my highlights (emphasis added):

  • “If you want to summarize the changes in family structure over the past century, the truest thing to say is this: We’ve made life freer for individuals and more unstable for families. We’ve made life better for adults but worse for children. We’ve moved from big, interconnected, and extended families, which helped protect the most vulnerable people in society from the shocks of life, to smaller, detached nuclear families (a married couple and their children), which give the most privileged people in society room to maximize their talents and expand their options. The shift from bigger and interconnected extended families to smaller and detached nuclear families ultimately led to a familial system that liberates the rich and ravages the working-class and the poor.”
  • “In short, the period from 1950 to 1965 demonstrated that a stable society can be built around nuclear families—so long as women are relegated to the household, nuclear families are so intertwined that they are basically extended families by another name, and every economic and sociological condition in society is working together to support the institution.”
  • “Finally, over the past two generations, families have grown more unequal. America now has two entirely different family regimes. Among the highly educated, family patterns are almost as stable as they were in the 1950s; among the less fortunate, family life is often utter chaos. There’s a reason for that divide: Affluent people have the resources to effectively buy extended family, in order to shore themselves up.”
  • “In 1970, the family structures of the rich and poor did not differ that greatly. Now there is a chasm between them. As of 2005, 85 percent of children born to upper-middle-class families were living with both biological parents when the mom was 40. Among working-class families, only 30 percent were.”
  • “In other words, while social conservatives have a philosophy of family life they can’t operationalize, because it no longer is relevant, progressives have no philosophy of family life at all, because they don’t want to seem judgmental. The sexual revolution has come and gone, and it’s left us with no governing norms of family life, no guiding values, no articulated ideals. On this most central issue, our shared culture often has nothing relevant to say—and so for decades things have been falling apart.”

The Economics of All-You-Can-Eat Buffets – Very entertaining.

Flipping the Philippines by Peter Zeihan.  Interesting perspective on shifts in US and Chinese strategy in the region.

On Valued Living:  A good article on the importance of clearly defining what you value / what your purpose is, and consistently coming back to that purpose every day (especially in moments of distress and when facing obstacles).  “In the study, participants began by identifying their central aim or purpose in life (eg, ‘trying to be a good role model to others’). Then, each day over the next two weeks, they rated their daily efforts and progress toward this goal, and provided daily ratings of their self-esteem, meaning in life, and experience of positive and negative emotions. On days when they reported investing greater effort toward their main life goal, they also tended to enjoy greater wellbeing: they said their life had more meaning, and they scored higher on self-esteem and the experience of positive emotions. Importantly, support was not found for the reverse path – greater wellbeing did not predict greater effort or progress toward strivings. This study highlights that sometimes we need to make the value-guided choice, regardless of how we feel.”

40 Powerful Concepts for Understanding the World: Great to read through.

The Best Thing You Can Do for Your Work Is Take a Walk: Walking is good. Chicago makes this difficult because it’s very cold.

Hard Startups: “An easy startup is a headwind; a hard startup is a tailwind.  If people care about your success because you seem committed to doing something significant, it’s a background force helping you with hiring, advice, partnerships, fundraising, etc.”

Books

Finished Alchemy by Rory Sutherland. Fantastic book and worth rereading. One quote that I’ve been thinking about:

  • “The problem that bedevils organizations once they reach a certain size is that narrow, conventional logic is that natural mode of thinking for the risk-averse bureaucrat or executive.  There is a simple reason for this:  you can never be fired for being logical.  If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame.  It is much easier to be fired for being illogical than it is for being unimaginative.”

You can find my notes on Payoff by Dan Ariely here.

Other

Quote from Dale Carnegie’s How to Stop Worrying and Start Living: “The best possible way to prepare for tomorrow is to concentrate with all your intelligence, all your enthusiasm, on doing today’s work superbly today.  That is the only possible way you can prepare for the future.”

Payoff by Dan Ariely

What I Took Away

  • Encourage people and acknowledge their hard work.  Quality will vary based on the individual, but it’s important that you understand when people are pushing themselves and acknowledge their efforts
    • Don’t ignore, criticize, disregard, or destroy the work of others
    • Help people develop a sense of ownership, connection, feel accomplished, and have a sense of shared purpose
  • Motivation has a long time scale – the more you can tap into longer-term desires (meaning, connection, autonomy / ownership / control), the more loyal people will be
  • Trust and goodwill encourage people to step above and beyond their normal job requirements –> paying for performance is an easy way to destroy trust and goodwill
    • Relates to Peter Kaufman’s idea of getting people “all-in” – money is just a small part of it!

Book Notes

  • Meaning does not equal happiness – things that give us a sense of meaning don’t necessarily make us happy
    • People who report having more meaningful lives are often more interested in doing things for others
    • “Meaning” – difficult concept; associated with having a sense of purpose / value / impact – being involved in something bigger than the self
  • “…human motivation is actually based on a time scale that is long, sometimes even longer than our lifetimes.  We’re motivated by meaning and connection because their effects extend beyond ourselves, beyond our social circle, and maybe even beyond our existence.”
  • Viktor E Frankl:  “Life is never made unbearable by circumstances, but only by lack of meaning and purpose.”
  • On motivation at work
    • Acknowledgement is human magic – gift from one person to another
    • Treat people as unique individuals that are appreciated and respected for their creativity and intelligence
    • People care about the things that they work on – the harder they work on something, the more they care, and the more important it is to acknowledge their hard work
    • Money is not always the best motivator – there is more to work than merely the opportunity to earn money in exchange for labor
    • Motivation has a long time scale and managers need to tap into this – offering coworkers opportunities for meaning and connection –> will work harder / be more loyal
    • “…when we are in the midst of a task, we focus on the inherent joy of the task, but when we think about the same task in advance, we overfocus on the extrinsic motivators, such as payment and bonuses.”
    • Trust and goodwill encourage people to step above and beyond their normal job requirements –> paying for performance is an easy way to destroy trust and goodwill
      • Don’t treat people like mercenaries!  This is certainly something that I’ve been on the other side of
  • On relationships
    • Fixed pie vs pie expanding – social relationships are pie expanding – the more we put into them, the more we get out.  View relationships as compounding, long term investments that bring you more when you put more in
    • Humans need symbolic immortality – being remembered after we’re gone (examine funerals)

January 2020 Reading

Articles

The Future of America’s Contest with China – A great summary the last decade or so of our relationship with China.  Long read but a useful one.


Latin America’s ‘Oasis’ Descends into Chaos – Had no idea this was going on in Chile – liked the concept of “elite self-hatred” and interesting case to study.  “The free market didn’t fail Chile, whatever its politicians might say, and the state doesn’t lack the means to restore the rule of law. The central problem is that a large proportion of the elites who run key institutions—especially the media, the National Congress and the judiciary—no longer believe in the principles that made the country successful. The result is a full-blown economic and political crisis. Other nations should take note: This is what elite self-hatred can do for you.”


The Art of (Not) Selling – Good one reiterating the power of compounding and making some good points on when to sell:  slowing growth, loss of competitive advantage, and management.


Beware the Man of One Study – Important article worth rereading. I’m having a hard time balancing “don’t trust anything / anyone” with the need to put a pin in some basic assumptions / beliefs.


Tyler Cowen on US / China Trade Outcome – “The U.S. has established its seriousness as a counterweight to China, something lacking since it largely overlooked China’s various territorial encroachments in the 2010s. Whether in economics or foreign policy, China now can expect the U.S. to push back — a very different calculus. At a time when there is tension in North Korea, Hong Kong, Taiwan and the South China Sea, that is potentially a significant gain.”


Berkshire Hathaway’s Culture of Trust – Trust makes life easier.


Having Kids by Paul Graham – This was nice.  The ambition part wasn’t great to hear, but he echoed on a view I had previously – time and attention are finite / zero-sum, and allocating them to children means you’re taking away from other things.


Sam Altman on Investing in Startups – Main takeaways for me included general rules of thumb when approaching early stage ideas (look for low marginal cost, excellent product, growth, and future market size – not simply current market) and the big things investors can do to improve their investing (see good deals, make good decisions, close).

Books

Payoff by Dan Ariely.  Has a slight pop-sci feel to it (many of the experiments that he describes are likely not replicable), but has some good insights on what motivates people.  Useful for leaders. Here is a decent summary.  Here are some highlights thus far:

  • “While perhaps unintuitive, research that examines the differences between meaning and happiness finds that the things that give us a sense of meaning don’t necessarily make us happy. Moreover, people who report having meaningful lives are often more interested in doing things for others, while those who focus mostly on doing things for themselves report being only superficially happy. Of course, “meaning” is a slippery concept, but its essential quality has to do with having a sense of purpose, value, and impact—of being involved in something bigger than the self.”
  • “This is because human motivation is actually based on a time scale that is long, sometimes even longer than our lifetimes. We’re motivated by meaning and connection because their effects extend beyond ourselves, beyond our social circle, and maybe even beyond our existence.”
  • “Life is never made unbearable by circumstances, but only by lack of meaning and purpose.” —Viktor E. Frankl
  • “Acknowledgment is a kind of human magic—a small human connection, a gift from one person to another that translates into a much larger, more meaningful outcome.” – Do you acknowledge 5 people a day in a positive way?
  • “The good news is that we don’t have to fall into these common motivation-killing traps. There are all kinds of things that companies can do to reinforce the feelings of meaning and connection in their employees. One important way to do this is to treat them as unique individuals not to be used, but rather to be appreciated and respected for their creativity and intelligence.” – Relates to one thing my Dad always says: “Everyone has a gift.”

A Treatise on Efficacy by Francois Jullien- good book so far on differences between Western conception of progress / efficacy (means / end – coming up with an “ideal” state, then imposing your will on the world to reach that ideal state) and Eastern conception (less active; involves deeply understanding the current state and channeling the “potential” inherent in the current state to make progress).