Daniel Kahneman

This blog is supported by Greenhaven Road Capital, finding value off the beaten path.

My tallest reading hurdle is ignorance. Not willful, but present nonetheless. We all need a ledge to stand on and hoist ourselves up to new ideas. Podcast are great for this, so are YouTube videos.

Daniel Kahneman’s Thinking Fast and Slow is an accessible, though thick, book (we’re reading it here if you want to join us ). If you want to sample to the big ideas, his 2015 conversation with Michael Mauboussin is good.

Here are my notes and quotes from there:

1/ Intuition. You stink at predictions. You’re biased by recent data. You’re biased from a focus on survivors. You’re biased six ways from Sunday.

We all are.

Yet we have to make predictions in our lives. We have to use intuition. What to do?

Like a mat that teaches tango, there are beginning steps for good intuition. (1) Kahneman says to start by asking, “Is the domain one with enough regularity to support intuitions?” That is, does it pass the Hickory High test? Is the basketball hoop ten feet no matter the gym?

Coach Bill Belichick has a good intuition because he operates in a domain with regularity. If someone can develop good pattern recognition skills then that domain has regularity.

Kahneman also says (2), “did the individual have an opportunity to learn those regularities?” This moves the question from can someone to did someone? Warren Buffett did it after many years. John Boyd did it after many flights. The key, says Kahneman, is immediate high-quality feedback. (True for Buffett and Boyd). Toward the end of the YouTube video, an audience member asks about why some rules like traffic lights work better than others. “Unequivocal feedback,” says Kahneman “you know if you violated that rule or not.”

Good intuition is also delayed. (3) “There is a need for disciplined intuition and what I mean by disciplined is delayed intuition. One of the many problems with our intuitions is they come too fast and we tend to confirm them.”

Daryl Morey saw this, writes Michael Lewis, “Soon Morey noticed something else: A scout watching a player tended to form a near-instant impression, around which all other data tended to organize itself.” Morey had to tell evaluators to under-weight what they saw during a tryout. We can take a second look at Belichick and see that his success in “player evaluation” is less consistent than his success a “teacher of football skills” or “leader of men”. Head football coach includes multiple domains, some of which are better for intuition.

2/ I ♡ STORIES. “Why do smart women tend to marry men less smart than they are?” Kahneman asks. As someone with firsthand experience let me answer this for you, good jokes and cooking go a long way.

These things aren’t actually true. While “it sounds like a topic worthy of discussion,” Kahneman explains, it’s “an effect without a cause.”

“There is no causal explanation. You have to rid yourself of the idea of causation to understand that result. This is extraordinary difficult to do.” – Daniel Kahneman

Let’s rephrase the question to see the mess. Why do tall women tend to marry men less tall than they are? Duh, because most people are shorter than them. We don’t always see this logic, we sometimes make up stories instead.

Stories aren’t all bad. They are the yin to the yang of numbers. Good thinking requires a balance.  Bethany McLean and Barry Ritholtz both praised “left and right brain” thinking. Chris Cole said that the best macro investors have creativity like “some highly technical artists.” Buffett wrote that the big money is by being right qualitatively, but that the sure money is made being right quantitatively.

Our best results come from a balance of strategy. Stories and numbers pinch out falsehoods. Problems start if we get too focused on one end. If you too ♡ stories too much, there’s a simple tool to use.

3/ You know I’m all about that base rate, bout that base rate, bout that base rate. (#notreble)

“I will count on the fact most people here have not read what I wrote about this,” Kahneman said, “because it’s in a chapter that – frankly – many people who bought the book never get to.”

This comment got a laugh. Kahneman goes on to tell the textbook story. It’s a good one – that we covered in the third Michael Mauboussin post.

What I found most interesting was what Kahneman said next.

“I had the information. After that we should have quit that day…Even though we’d been given the outside view, we didn’t act on it. The inside view, the feeling that we were doing well, that this was a good team, and that we were going to succeed overwhelmed.”

Knowing != doing.

Ben Carlson put it this way:

“However, as anyone who has ever tried to diet or get their personal finances in order can attest, knowledge alone is not enough to change behavior. If it was, we would all be rich with six-pack abs.”

Charlie Munger wrote, “We started coping better with reality when it stopped waving the danger flags at us and started using them to poke us in the head and stomach.”

Knowledge alone is not enough. Thankfully we can turn some of our biases around and use the in our favor.

The anchoring bias is a pesky rascal until you anchor to the base rate. That’s a start. Then take the two-jar model and figure out if the thing is based more on luck or skill. If it’s more skill, you can move your expectation away from the base rate. If it’s more luck, don’t you dare touch it.

4/ Balancing optimism and objectivity.  On the one hand, you have the objective; base rates. On the other you have the subjective; like optimism. People are often optimistic, says Kahneman, because “they don’t fully appreciate the risk they are taking.”

That’s the truth.

While researching 28 Lessons from Startups That Failed this surprised me. Many founders lamented how difficult it was. Not just the start-up, but everything. Founders lost friends, relationships ended, and their diets and health went to hell. Funding was slow, if it came at all. Products orders were magnitudes more expensive in money and time. Feedback was kind but sales were nasty.

It was like founders had signed up for a marathon. They looked at race form, saw distance and knew it was hard but thought they could do it. After committing they got a call (late at night) and were told they couldn’t train more than ten miles a week and couldn’t sleep more than five hours a night. In addition, they were competing against elite runners who had years of experience, personal trainers, and supportive families.

Oh, and they were doing it barefoot.

In the business world, this is good for the whole but bad for the parts. It’s why Nassim Taleb suggests a holiday for entrepreneurs. Kahneman too believes in optimism:

5/ Are advisors inoculated against biases? Well, your personal biases, yes. Kahneman says that when a principal acts for an agent, loss aversion and the endowment effect recede.


6/ “That’s one thing I hate! All the noise, noise, noise, noise!” – The Grinch

“Noise,” says Kahneman, “is costly.”

Yes! Damn the noise!

Or maybe not. Didn’t we just say that a balance of tactics is often a good course?

  • Intuition (#1) balanced with base rates (#3).
  • Stories (#2) balanced with stats.
  • Optimism balanced with objectivity (#4).
  • Scouts balanced with algorithms (post-Moneyball).
  • Arm strength and football smarts (Tom Brady).

How then can noise be helpful?  “Noise-free environments end up being too sterile and predictable in their output,” writes Stephen Johnson. “The best innovation labs are always a little contaminated.”

Taking reading as an example. One reading model is to only read books on the NYT list. If  is on the NYT Bestseller list, then read.

No thanks. Instead, read whatever you’re excited to read. If you don’t want to trade a few minutes a day on activity X for reading a book the problem isn’t activity X. The problem is the book.

7/ Success and luck. I enjoyed this:

“Success = talent + luck. Great success = talent + a lot of luck.”

And this:

“Success has a lot of luck in it. We can say it differently because that can be misleading. Talent is necessary, but it’s not sufficient.”

Thanks for reading, I’m @mikedariano on Twitter.

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