TKP Michael Mauboussin

This post is going to be a little different. I started this blog because of the quality of guests on the James Altucher podcast. There was just so much to learn from people like Ramit Sethi (episode #36), Gretchen Rubin (episode #97), and  Peter Thiel (episode #43). But there are other great people to learn from too. This post is derived from The Knowledge Project, a new podcast from Shane Parrish, author of the Farnam Street Blog. If you enjoy this post, it’s only a small glimpse of the sort of thing that Parrish shares.

Michael Mauboussin (@MJMauboussin) joined Shane Parrish to talk about decision making, reading, and how to make your kids – or anyone else – better thinkers. Mauboussin is the author of three books; The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, More Than You Know: Finding Financial Wisdom in Unconventional Places, and Think Twice: Harnessing the Power of Counterintuition and is the managing director and head of Global Financial Strategies at Credit Suisse.

The interview begins when Mauboussin shares his daily routine and he notes that he really needs a good nights sleep and exercise. “Physical activity is important to me” says Mauboussin. I don’t know if you need your physical health to find success in life, but it might make it easier. Dan Harris nearly killed himself and his career when he was snorting cocaine. Rich Roll (episode #107) found that even though he kicked a drug and alcohol addiction, he wasn’t successful and happy until he got himself in a good physical state. Even Carol Leifer (episode #66), who has to look at twenty-something Hollywood actresses, hasn’t lost her motivation. If anything, looking at the young people around her has spurred her on to value her physical health too.

Besides sleeping and exercising, Mauboussin tells Parrish that he reads, a lot. Most of the reading he does is related to his job and when Parrish asks how he remembers so much, Mauboussin says, “when I need to write about it or speak about it, I tend to know the material reasonably well.” You don’t need to be the “head of Global Financial Strategies at Credit Suisse” to use this technique to learn things. Anyone with a blog – even me – can use what’s known as the “Feynman technique.” Maria Popova (episode #89)  told James Altucher, “Learning to read well and to write well is really learning to think well.” In taking information, turning it around in your head, organizing it, and then writing about it you learn it.

The main course of the interview between Parrish and Mauboussin is about decision making and Mauboussin notes that “there is often a role for intuition, but it’s generally overestimated.” A lot of his thinking comes from Daniel Kahneman’s book Thinking Fast and Slow.

Mauboussin says that a lot of our intuition is domain specific, in part, because it takes time to train ourselves to think about things following certain rules. Take the game of chess as an example. My daughter is learning how to play chess and I’m constantly reminding her which pieces can move in which directions. It takes a lot of active thinking for her play the game. My thinking on the other hand, is almost completely intuitive.* Flip the roles though, and have someone more advanced than me play me, and I’ll be as plodding as she is. Chess then is a domain I have a certain level of intuition in.

Mauboussin’s suggestion is that we lean on our intuition only when we have enough expertise. “An expert is someone who has a predictive model that works. Just because you’ve been doing something a long time, doesn’t mean you have a predictive model that works.”

To start developing your own intuition you need to get good feedback. This is something we talked about in the last TWP Book Club. If you want to be good at something, you need to practice the key parts to that thing and practice them well. James Altucher likes to talk about watching stand-up comedians before giving a talk. That’s good, but what would be even better is if he could watch a comedian and then have a comedian watch him. It’s not practical in every instance, but it’s what would make him better. You could also try to find a mentor.

It’s not easy to develop the right level of intuition. The bad news is that becoming intuitive takes time and a stable environment.  Luckily there is a model that anyone can use to become a better predictor. In Thinking Fast and Slow, Kahneman suggests we first start with the base rate. That is, 50% of small business survived four years, there is a 70% chance of rain, there is a 15% chance your stock portfolio will go up this year. This is the base rate that we should begin our thinking with. Paraphrasing Kahneman, you are not a special unicorn that poops rainbows, so don’t think of yourself as such. You. Are. Not. The. Exception. After the base rate, think about what you think the chances are once you get involved. Maybe you think the odds for your business rise to 85%, the chance of rain is 50%, and your stocks have a 40% chance of rising.

Now, Kahneman suggests, ask how much of an influence you might have. You do have some influence on your business, but not entirely. Lots of people work hard and fail. In regards to the rain, you can hope all you want, but your influence there is nill. Finally, move the base rate based on that influence. For example:

• The divorce rate is 30% (base rate).
• You think your marriage has a 10% chance to end in divorce.
• You give yourself those odds because you go to church together, had been friends a long time before getting married, and you both like Game of Thrones. Those seem like strong influences.
• Your best-guess divorce rate is moved to 14%.

The hard part to this, writes Kahneman, is checking your ego at the door and trusting the system enough to use it. Mauboussin and Parrish talk about this too. If you are the senior person on a team, it’s not just ego, but experience, that leads you to trust your intuition rather than a model. Suggesting you try models and experiment – which Mauboussin says is a good idea – is hard to do.

Getting people to experiment is difficult. Stephen Dubner (episode #20) recounts a story when he and Steven Levitt were consulting with a retail company. The company wanted to know how effective their advertisements were, but weren’t willing to change the ad levels in any meaningful way. Even when Dubner and Levitt found a market, through a mistake, where ads didn’t run, the company wouldn’t replicate it.

But there is value in experimentation. Ramit Sethi suggests you “test your way to it” and Tim Ferriss (episode #22) says that he tests almost everything in his life. Trip Adler (episode #61) says that he and co-founder tested, experimented, and integrated for 18 months before they started Scribd.

Parrish and Mauboussin also talk about the value of technology and Mauboussin says that technology does two things well. It computes big data and it builds models without emotion. If you do this when you’re clear headed, and then follow through during a stressful time, you’ll avoid some mistakes. Models are like a bridge you build to cross a river. Put in the time and effort during construction, and then trust your work when the wind is blowing and rain is falling.

The second half of the interview between Mauboussin and Parrish moves from decision making to thinking in general. Mauboussin says that he uses the Colonel Blotto game to teach his kids, “how we might act in various contest.” Here it is explained:

There is a nice collection of videos like the one above that come before and after that one if you want to dive deeper.

One of the big lessons from Colonel Blotto is that if you are the the stronger position, you’ll do better with fewer battlefields. If you are in the weaker position, you’ll do better with more battlefields.

After hearing this, I began to see it more places. In technology you can see it in the number of screen sizes. Apple offers tables with two choices, their competitors see this as two battlefields, neither of which they will be “win.” But, they reason, what if we add more battlefields (tablet sizes), then there is a chance other companies can win.

Another example is that of Samuel Zemurray, the man who might have been most responsible for bringing the banana from Central America to the United States. Zemurray began his career as a “fruit jobber” the lowest position in the fruit trades. These jobbers, mostly immigrants, would line up at the docks and bid for produce to sell in their carts. After doing this awhile Zemurray found a new battlefield, ripe and nearly ripe bananas. “The importers were happy to get money for what, in other towns (Zemurray was in Mobile Alabama), was considered trash.” writes Rich Cohen in his book about Zemurray.

In the framework of Blotto, Zemurray didn’t many resources. He was a bit wiser, stronger, and more driven than his fellow “fruit jobbers,” but much smaller than the big fruit companies. But it was in selling the ripes that Zemurray found a new battlefield, and it was one that let him get the footing that would lead him to become the largest importer of bananas many years later.

For other learning moments, Mauboussin suggests that people adopt the right mindset, noting Carol Dweck’s work on growth versus fixed attitudes. Lewis Howes (episode #88) brought this up in his interview with Altucher too.

Mauboussin also wants his kids to consider different points of view, take fun bets to learn things, and talk about things like the solution to the Monty Hall problem.

And this is why I write these things. I heard Mauboussin say that his 7th grader knew the solution to this, and I felt a little bit dumb. I’m old enough to have a 7th grader as a son, but don’t know the answer. So let’s figure this out together.

Rather than me explaining it in words, watch this video from Numberphile. Even if you don’t get it, stick with it because the second half makes it very clear.

Mauboussin also said that he doesn’t “tell my kids what to do.” He gives them suggestions, but doesn’t provide specific instruction. In his book, The Secrets to Happy Families, Bruce Feiler writes that for money, this is pretty good advice. This is his conversation with financial advisor Byron Trott.

“One of the biggest problems I see in families,” Trott said, “is a reluctance to let your kids make decisions for themselves.” As an example, he cited the story of Jack Taylor, the founder of Enterprise Rent-A-Car, who with a net worth in excess of $ 9 billion has been ranked as high as the eighteenth richest American. When his son turned thirty-two, Taylor handed him the company and never looked back. “Most parents meddle,” Trott said.

He chided me for not letting our girls make enough decisions for themselves. For example, he said, Linda and I should not force our daughters to divide their money equally into the four pots. We should let them choose the percentages, even if that means one pot gets less. “You’ve got them on their training wheels, now take the training wheels off and let them ride by themselves.” “But if they ride into the ditch?” I said. “It’s a really good idea to bike into the ditch with a $ 6 allowance instead of $ 60,000 salary or a $ 6 million inheritance.

Mauboussin also wants his kids to be “bayesian updaters.” That’s a fancy term for changing your mind when you get new information. But, Mauboussin says, “it’s extremely difficult. Even if I get you to move in the right direction, I can’t get you to move the appropriate amount.”

The interview ends with Parrish asking for some book suggestions and Mauboussin doesn’t disappoint. Besides the other books mentioned, Mauboussin suggests:

• Creating Shareholder Value by Alfred Rappaport. An “influential book” from Mauboussin’s mentor.
• Darwin’s Dangerous Idea by Daniel Dennett. “A fascinating book.”
• Consilience by Edward O. Wilson. This book inspired Mauboussin to say, “many of the problems we face are going to have solutions at the intersections of disciplines.”
• Complexity by M. Mitchell Waldrop. A book that’s “extremely fertile. It gets you to think about systems, be they business, markets, what have you.”
• Work Rules by Laszlo Bock. A good book for managing people from the HR Director at Google Mauboussin says. When he was coach of the Los Angeles Lakers, Pat Riley said “the major part of my job isn’t to tell the players what to do. The most important thing I do is to create a great setting for them to work in.”
• Creativity Inc. by Ed Catmull. “One of the books I enjoyed the most in the last few years.”
• Tales From Both Sides of the Brain: A Life in Neuroscience by Michael Gazzaniga.
• Intuition by Dave Myers.

If book reading seems overwhelming, do check out what Shane Parrish has written about reading. If you want to see what I’m reading, you can sign up here.

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Thanks for reading. If you want to connect, I’m @mikedariano and at 559-464-5393.

One extra note, I’m actually not that intuitive playing chess against my daughter. With her I’m trying to keep the game going long enough she doesn’t get discouraged, effectively playing both sides of the board, which is not intuitive for me. When I play my nephew though, I crush him like a bug, a role all uncles need to serve in from time to time.