Jason Zweig (@JasonZweigWSJ) joined Barry Ritholtz (@Ritholtz) on Bloomberg’s Masters in Business series. Zweig is on the show to talk about his new book, The Devil’s Financial Dictionary, but the conversation covers much more. As always, the actual interview was very good and deserves a listen. We’ll cover just these points.
– Grandmothers > Twitter.
– Why Zweig writes the same thing over and over again.
– Psychology & Neurology.
– Why to move the stock app off your homescreen.
– You stink at predictions.
– Kahneman (!!).
– What to read.
“Anybody,” says Zweig, “who has done reasonably well in any field and who doesn’t credit luck first and foremost is kidding themselves.”
Well, that’s a little harsh right?
It’s not like Zach Lowe at ESPN wrote that the NBA Champion Golden State Warriors got a little lucky.
Or Kevin Kelly who edited Wired magazine said he was lucky.
Or Michael Mauboussin looks at luck like a baker does sugar – a basic ingredient.
Really smart people give some credit to luck.
Zweig tells Ritholtz the story of how he got to edit and add commentary to Benjamin Graham’s The Intelligent Investor. Zweig was at a party and saw an editor from Harper Collins across the room. He knew the two hadn’t spoken in a few years, so we went over. He didn’t ask for anything, it was just a hello-how-ya-doing. Then a few weeks later she was in a meaning and suggested that he edit and update the Graham book.
There are also unlucky moments in our lives and we should acknowledge them too. Michael Mauboussin talked to Ritholtz about how to untangle luck and skill. He pointed out that luck can be good or bad and when it becomes more important.
As a field becomes more competitive, Mauboussin says, skill converges and luck becomes more important. Take anything like the stock market, professional baseball, or the restaurant business. In each of those instances skill gets you further when less people are skillful. If you were to draw a bell curve of baseball player skill, Mauboussin says, it would be more narrow now than in the 1940’s.
Does your Grandmother know more than your Twitter feed?
Zweig and Ritholtz talk about social media, and both are fans. Ritholtz even went as far as Periscoping a moment of their conversation.
Social media is good, says Zweig, because it makes information more accessible. The pair suggest two ways to use it.
- Follow the smartest people in areas that interest you. Ritholtz says that he’s amazed when he meets people that don’t use Twitter. How can you not use it, he wonders. At the very least follow smart people in a field you care about.
- Follow people who have different opinions than yourself. “Feed yourself as much disconfirmation as you can,” Zweig says. You want to be exposed to the counterpoint to your thought because it will strengthen your opinions. Plus, Ritholtz and Zweig agree, it helps combat confirmation bias.
But, it also has some drawbacks.
Tyler Cowen says that he’s glad he had time to learn before Twitter. Information now is like a firehose Cowen says. This suits him well, but doesn’t leave a lot of time to think. His advice is to consume but to think as well.
Zweig worries that the new media lacks the institutional memory of places like the New York Times or Wall Street Journal. Take House of Cards as an example, Zweig says. Do newspapers let their journalists act that way. Never, you’d be immediately fired. Do people know this? Maybe not.
Zweig is hopeful. He tells Ritholtz that someday someone will figure out how to create a new news organization that’s as forward looking as Twitter, but with the memory of WSJ.
Which reminds me, you should call your grandmother. She probably has more wisdom than your feed.
Zweig says that his early influences in finances were people who had lived through the great depression. Phil Carey, Sir John Templeton, and Bill Murray were all investors that Zweig looked to because of their experiences. In the same way that newspapers had institutional memory, those investors had experiential memories.
You and I can access this via people like Zweig and Ritholtz, but also from grandma. (Really, she’d love to hear from you.)
Why Zweig writes the same thing over and over.
“My job,” Zweig says, “is to write the exact same thing 50-100 times a year in such a way that my editors and my readers will never think I’m repeating myself.”
Wait, Zweig doesn’t give stock picks for next year? He doesn’t speculate about the next hot stock? Why?
There’s really only a few dozen things (6-30 they say in the interview) that the average investor needs to know. Beyond that and you start to do more harm than good.
The best advice, Zweig says, is to keep people from harming themselves. “The dominate determinate to long term financial outcomes,” said Nick Murray, “is not investor performance, it’s investor behavior.”
In the Intelligent Investor, Benjamin Graham writes: “it is probably too much to expect that the urge to speculate will ever disappear, or that the exploitation of that urge can never be abolished.”
How then do people like Zweig, Ritholtz, Graham and Murray have readers?
It’s not easy, says Zweig. There’s only three ways:
- Lie to people who want to be lied to, and you’ll get rich.
- Tell the truth to those who want the truth, and you’ll make a living.
- Tell the truth to those who want to be lied to, and you’ll make very little.
Psychology (mind), neurology (brain).
“The central question that has obsessed me for the past 20 years: why do smart people become stupid when money comes into the room?” – Jason Zweig
Zweig makes a good distinction between psychology and neurology and it’s worth pointing out here. The psychological component is what Richard Thaler discussed in his interview with Ritholtz. It’s the idea that we respond to our environment – in ways that can seem illogical – and we should figure out why that is. It’s why Thaler writes that we should nudge people toward things they say they want. If people want to be skinnier, put apples in a prominent spot in the cafeteria. That’s a psychological tool.
Zweig’s focus – especially his book Your Money and Your Brain – was on neurology. His examination applied the tools of neurology to extend findings in psychology. It’s what Dr. Coates writes about in The Hour Between Dog and Wolf.
There are neurological actions that lead to decisions. In Mean Genes, the authors write that it’s biologic to have fat waists and thin wallets. Carbohydrates and fats taste good, because we’ve evolved from people who ate them. Those people survived by eating more when times were good. Our love handles then are a savings account we can draw from when times are lean.
If we think of things in both psychological and biological terms we get a more complete picture. That’s what Zweig does.
Have you checked today what your home is worth?
Our current world is a tugging match between our biological evolution and our rational brains.
Evolution has led us to a place where we sort benign from dangerous. Bird, good. Tree, good. Rock, good. Lion, bad.
It’s simplistic, Zweig admits, but it’s true. Dan Ariely told James Altucher that while it may not be rational to jump at bumps in the night, it makes sense. The cost for running from what might be a lion was just a short run. The cost from running from what was a lion was much more.
Well, we still have those mental triggers. See something bad, move away. The bad thing now is the Dow. If the stock market loses 1%, you may activate that primal part of your brain. It gives “bear market” an additional meaning.
In The Intelligent Investor, Zweig gives the example of your house. It’s also a large asset that changes in price, but no one calls their real estate agent at the same frequency they check stock prices.
Why, because it’s harder. And this leads us to a candy dish.
In his book, Mindless Eating, Dr. Brian Wansink explores what makes people eat. A nightly indulgences in moose tracks ice cream isn’t what makes most people overweight Wansink says. It’s the little things that add up over time. If we can change those little things, we can change what we eat.
Wansink found that people ate 71% more from the clear candy dishes. That would add up to five pounds a year. Just seeing the food made people eat more. This is part of the convenience factor. If it’s easier to eat, we will eat it. If it’s easier to do, we will do it.
Why does this matter financially?
There’s a cost, says Zweig. “The more often people get news, the more often they traded.” The more they traded the more fees they piled up. They also tended to get out on the way down (I can’t stand how bad things are getting) and get in once things were already on the way up (whew, it’s finally safe to invest again).
One research analysis showed that investors who turned over more than 3/4 of their portfolio each year earned 6% less than the market. Oops.
Here’s two steps to improve your returns 6%:
Step 1: move the stocks app to the very last page on your phone.
Step 2: repeat Step 1 as necessary.
Why you stink at predictions – but one hack to get better.
We are awful at predictions. If you don’t think so, you’re probably not keeping track. We have a tendency to remember the times we do well, and forget those when we do poorly.
I return to the golf course because I have rosy retrospection. Those three – or was it four(?)- balls I dropped in the drink are forgotten more quickly than the par three I stuck tight.
If we want to improve our predictions Zweig suggests three things.
- Remove unclear feedback. There is a lot of noise in our life. He tells Ritholtz that his first investment went up for a reason he had no idea about. The challenge is to figure out what is noise, and what isn’t. A good first step is to simplify your models and focus on the process.
- A lack of consequences. The second reason we don’t make good prediction is a lack of skin in the game. It’s easy to read ESPN and think how dumb a coach is. It’s another thing to go for it on fourth down in a big game. Managers of all type face this situation with asymmetric rewards or punishments. Stock brokers are rewarded for big wins, but not punished for big losses. Coaches are not rewarded for bigs wins, but are punished for big losses.
- It’s not prompt. Feedback is not prompt and that’s a problem. Look at tennis, Zweig says. A professional tennis player like Serena Williams gets immediate feedback. She hits a ball, it lands in or out. In our lives we don’t see prompt results. Over the long term it’s harder to figure out whether one action was positive or negative. That’s why we have trouble with accurate predictions.
And, we get to the 10K hour part of this post. A lot of people have referenced the idea, but Zweig explains it better than most. “If all we needed was 10,000 hours, he tells Ritholtz, “then everyone who’s picked up a guitar would be Eric Clapton, every band the Rolling Stones.”
But we aren’t. The problem is that the 10K hours of practice needs to include immediate and clear feedback that includes consequences.
Ugh. 10K hours is a long time. Isn’t there a good enough solution? Maybe.
In his book, Gut Feelings, Gerd Gigerenzer writes that we can use our ignorance as an asset. If we find ourselves in a situation where we don’t know everything but know some things, we should take that as a signal to side with the things we know.
What you’re doing, writes Gigerenzer, is using your ignorance to your advantage. If you don’t know about it, it’s probably not that important. In his research he’s found that people who know some make better predictions than those that know more.
Sam Holtz knows this. Holtz, a 12-year-old from Illinois was one of the best predictors of the NCAA men’s basketball bracket . With a potential prize of $50K in gift cards and trips it was a lucrative opportunity. So how does a kid do so well?
Sam said he watches college basketball only when his favorite teams — Notre Dame, University of California at Irvine and Michigan State — are playing…“Just pick the team that you like and pick whoever you want,” he said. “You never know what’s going to happen in March Madness so just pick teams that you really like.”
Just to recap, I’m not the only Kahneman fan.
Zweig got to work with Kahneman on Thinking Fast and Slow and tells Ritholtz:
“He has the wonderful ability that most of us lose in our intellectual lifetime of putting yourself into the shoes of a child and just asking why.”
Stephen Dubner writes that this is one the ways he thinks like a freak. In his book, Think Like a Freak, Dubner has chapters like, “Think like a Child” and “The Three Hardest Words, ‘I Don’t Know.’” The point these guys are getting at is, don’t be a know it all. If there is something that befuddles you it’s best to figure it out. It happens to everyone, even Nobel Prize winners like Kahneman.
When it was time to write Thinking Fast and Slow, Kahneman told Zweig that he didn’t want to fall for the planning fallacy, of which he was once gullible. The roots of the planning fallacy sprout what General Stanley McChrystal calls red teaming, Michael Mauboussin calls in/out box thinking, and it’s the reason Hollywood screens their movies.
It goes like this.
The people involved in a project tend to be more optimistic about its completion and success than people not involved. For Kahneman it happened early on in his career. He was part of a team of people tasked with writing a new textbook. They began the work and in the beginning it was easy. He writes that the team had made good progress over the first year.
Soon they began to write about the planning fallacy (Chapter 23 of Thinking Fast and Slow).
Well, thought Kahneman, let’s see what this looks like. He asked each team member to write down how much longer they thought the book would take to finish. The collective average was 2 years. Not bad, but Kahneman didn’t stop there. He writes in Thinking Fast and Slow:
“I turned to Seymour, our curriculum expert, and asked whether he could think of other teams similar to ours that had developed a curriculum from scratch… and Seymour said he could think of quite a few.”
Okay, so far so good.
“I asked him to think of these teams when they had made as much progress as we had. How long, from that point, did it take them to finish their textbook projects? He fell silent.”
“I never realized this before, (Seymour said), but in fact not all the teams at a stage comparable to ours ever did complete their task.”
This sounds bad.
In groups with comparable situations 40% failed to finish. Of those who finished, none did it in less than 7 years.
But, wait! This group has Daniel Kahneman, a man who would go on to win a Nobel Prize in economics. Surely a brilliant star can lift a team. Kahneman asks about this:
“I grasped at a straw: ‘When you compare our skills and resources to those of the other groups, how good are we? How would you rank us in comparison with these teams?’ Seymour did not hesitate long this time. ‘We’re below average,’ he said, ‘but not by much.’”
Zweig tells Ritholtz that he doesn’t think the book ever was published.
Another reason Kahneman thinks so well says Zweig, is that he’s mostly immune to the Dunning-Kruger effect. Dunning writes, “if you’re incompetent, you can’t know you’re incompetent.… The skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.” You don’t know what you don’t know.
Zweig also praises Kahneman’s work on base rates. It’s another idea – I said I wasn’t the only one – that other guests have talked about. Rather than rehash those specifics, here are some links. Ramit Sethi said to look for base rates in similar businesses. Dave McClure looks at base rates for what his venture fund should aim at. Michael Mauboussin told Shane Parrish that base rates are the best place to start.
What to read.
Lots of good suggestions in this interview, here are the links.
- Current financial journalism lacks the institutional memory but does have some great young writers. Morgan Housel at the Motley Fool, Ben Carlson at A Wealth of Common Sense, and James Osborne at Bason Asset are all good places to start.
Of course there were some book suggestions as well.
- Anything by Richard Feynman is good says Zweig.
- How to Lie with Statistics, though old is still relevant.
- Where are the Customer’s Yachts is a book that Ritholtz admits not having read, though he says he should.
- Charlie Ellis and Daniel Kahneman are both people to read as well.
Zweig doesn’t promote his own articles in the interview, but here are some links.
- Fat Tails Thin Ice. “the real lesson of the late 90s mania and the 2000 massacre is that certainty is every investor’s worst enemy. The only universal truth that the past offers about the markets is that they will surprise us in the future.”
- The Cruel Psychology of the 1,000 Point Drop. “Crimson arrows pointing down, pundits shrieking on financial television, stock-market charts flickering like monitors in a hospital emergency room: all these indicators make what is happening in the short term seem perfectly clear. But…”
- Like Buffett, Another Folksy Investor Turns Patience into Profit. “ he is keenly aware of his limitations. “I tell investors, ’You’re smarter than I am, but I’m managing your money, if you see me doing something I shouldn’t be, tell me.’”
Thanks for reading. I’m @MikeDariano on Twitter. If you have a book suggestions or difference of opinion, let’s chat.