There’s no such thing as financial incentives

An observation so obvious 🤦‍♂️.
One thread through these posts is the idea of Jobs-To-Be-Done, that what we really want are quarter-inch holes and we drink McDonald’s milkshakes to stave off boredom (pre-podcasts at least). Incentives for action also depend on the JTBD, something Nobel Prizer winner Esther Duflo noted to Tyler Cowen:

“The traffic ticket, I think, is much more than the financial incentive. If you get stopped by a traffic officer, you lose your car right this instant. I think that it’s likely inconvenience is much, much bigger. The point that we are trying to make is not that people are not sensitive to incentives, because we can always construct incentives. If you construct the incentive boldly enough, then it’s almost always true.”

Duflo goes on to say that we probably overrate the effect of financial incentives because we don’t consider them relative to something. “People seem to be pretty inelastic to receiving money for sure that doesn’t lead them to go on vacation.”

This came up with my daughter whose neighbor based babysitting and dog-walking business has been booming (with an assist from dad). Between her complimentary rooming and board, she has no need for any additional money. Books come from the library, music from Amazon, and clothes and makeup are non-issues.

She has no JTBD, so she has no financial incentive.

Like businesses focus on JTBD for their customers, we can focus on the JTBD of the people in our lives. At the margin, evidence from Silicon Valley suggests employees would trade some salary for better work conditions. Work is more enjoyable, hence better, if we like the people we work with.



Taking Action

This was in a magazine for our daughters. The spirit of the article is fine, but the nature is worth discussing. When dealing with people, as we often do, it’s important to remember that people behave in certain ways, for example, by taking action.

In a Capital Allocators’ podcast, Annie Duke spoke about how she convinces people NOT to act. We have a tendency to think that change requires action. Like reading vs listening to a book, we assume effort is good. But sometimes effort is bad.

Duke appeals to identity. Instead of giving advice to do X, try framing things as ‘we are the kind of people who do X’. And prepare others, “You’re going to hear other people who aren’t in on it who don’t understand this kind of stuff.”

In talks about her poker coaching, Duke said that it’s hard to get people to pass on poker hands because folding feels like not-doing. Instead, she works with clients so they choose to fold, because that’s a kind of doing that their group (aka smart players) does.

This beautiful framing from Annie butts heads with recycling because between reduce, reuse, and recycle, it’s the last that the least efficient but most advocated. Buying half as many sodas equates to a recycling efficiency of 200%. Recycling fails compared to reducing or reusing. Yet, recycling sticks because it feels like it’s something.


Our problem with randomness

Beyond basic math, maybe units of ten, we don’t have a good handle on numbers. We are a story-telling species who likes to see cause and effect. The example of randomness demonstrates this as Maria Konnikova told Adi Wyner:

“I had a fascinating conversation with Frank Lantz at the Game Center at NYU who used to be a serious poker player and is currently a game designer. He explained that oftentimes their random number generator isn’t random because people complain, they say the game is rigged because if something is truly random we might be getting a bunch of these outcomes in a row. Game designers say it is bad game design to have an actual random number generator.”

It’s not true only for games but also for Jeopardy Daily Doubles, Spotify and Apple shuffles, and fraud.

One of the ways our storytelling species acts is as the protagonist of the parable. In one study, researchers told students they would draw random numbers and letters out of a can. If they matched what the students chose, the students would win.

If the students were assigned their random numbers, say from a draw of a different can, the students bet less. If the students were assigned their draw based on their name or college, they bet more. If the students chose their numbers and letters, they bet the most.

The students took the most risk when there was a connection because a connection allows for a story. When things are truly random though, stories are harder to tell.

In the world of Thinking Slow, this seems like a bad thing but there are advantages to every disadvantage. Our search for stories allows for magic. When there is a story we are willing to bet, do, and relate more. This allows for magic (see below) and the creation of value simply by using psychology. Put another way, words and choices are cheap ways to improve experiences.

Maria’s book is The Biggest Bluff, and Rory Sutherland explains magic in Alchemy.


A story of two investments

This caught my eye.

I like the 🤷‍♂️ so much that ‘shrug’ is a keyboard shortcut. (Make technology work for you.) The likes and the huh and the obviousness of it makes it interesting. There are three reasons:

Distance. The difference between college debt and stock investments is partially the difference in distance. College tuition, like casino chips or in-app-Uber-payments, is abstracted away. Students do not pay to enter lecture halls or pay each professor (there were no tips in academia when I was there). Unlike the local bistro, there’s a cause-and-effect disconnect. 

Investing meanwhile is immediate. Transfer funds, buy, sell, spend the money. Distance affects how people feel.

Stories. We hear about people swindled, stolen, and schemed against. There’s a villain, an arc, a conclusion. In One Shot, a work of fiction, we get to the heart of the matter. In this case, a former Army soldier was framed for a shooting rampage. 

“A story needs the guy to be still out there. A story needs the guy roaming, sullen, hidden, shadowy, dangerous. It needs fear. It needs to make everyday chores exposed and hazardous, like pumping gas or visiting the mall or walking to church. So to hear that the guy was found and arrested even before the start of the second news cycle was a disaster for Ann Yanni.”

Yanni goes on to be one of the protagonists, but our antagonists act this way because they want to kill the story. Act one, two, and three close the book. Investing has clear stories, education does not. 

Legibility.  Thanks to the workings of Mr. Market, there is a numerical price. Clean and easy to see. Up or down. My local paper goes so far to use a thumb up or down to show price changes, the implied goodness, and badness as plain as the nose on your face. 

College is more nebulous. How much does your education help or hurt your career? There’s no way to tell. Few people would change their past, but then again, we’re terrible at considering opportunity costs

There are a few ways to change this situation. With a few tweaks, we can change the system so that stocks seem slightly better and college a bit more costly. Here are three ideas. 

  1. Borrow a page from Zappos and make students pay for college before they even enter the hallowed halls. Part of the recruiting at Zappos (Amazon too) includes a buy-out. If applicants make it through the application and evaluation, they’re given one more chance to step off the train in the form of payment to quit. At Amazon, it’s once a year. 
    The effect forces people to consider the Why to their actions. Relatedly, companies like Betterment, do the reverse by showing the tax implications of a transaction. Three-fourths of investors, once they see the tax hit, choose not to sell. 
  2. Taking a page from the college playbook, investors can distance the payment process for investments. Pre-tax plans do this, once an employee sets up a contribution they don’t ‘feel’ the effects that money because it never really arrives. Similarly, there are programs like Save-More-Tomorrow where a portion of each future raise gets invested. 
  3. Glamorize the savers. Part of the problem of investing is that we mostly only hear the bad news. Instead, we can highlight the people who live a good life, but also make sound financial decisions. This seems to be a thread among the FIRE crowd, who recognize both the today and tomorrow versions of themselves benefit from the same set of actions. 

The solution to this is probably something weird. Or a combination of the above. Or none.  Whatever the solution is though, I’d bet my investments that it involves distance, story, and legibility. 



Made up start up: The Financial Game

Edit: this was drafted in late 2019.

I loved the movie The Game. The premise was that for his birthday, Michael Douglas’s character was ‘attacked’ in a real life adventure. It was part thrill, part horror. I can’t even remember how much of it was real.

‘What is real’ is a common premise in my favorite movies.

Part-of-the-reason I like it is because it holds a truth. Without skin-in-the-game we really don’t know what we would do. There are our stated and revealed preferences. There are our human biases. There are the ways something is presented.

It’s a real quagmire and something Sallie Krawcheck noted when she spoke on The Long View podcast:

“Ya’ll probably know this as well or better than I do, but when you ask someone what their risk tolerance is, nobody knows it until they go through an ’07 or ’08. They just don’t. Let’s call a spade a spade. But we answer it. Men will answer it and women will go, I need to figure out what it is.”

Sallie Krawcheck

According to Daniel Kahneman, we’re answering an easier question. Instead of what is my risk tolerance we probably answer something like how do I feel today or which column of returns looks good? We do the same thing when choosing college.

Here’s the pitch: Taking a cue from David Fincher and Krawcheck, we’ll create a company that coaches financial advisors on how to stage Doomsday Days with their clients. Like for Douglas, the clients won’t know when it will happen (and we’ll hide this feature in a bunch of legalese).

The plan would be to make up financial statements that mimicked actual downturns; 1953, 1981, 2008, etc. Clients would come in for their regular meetings, be presented with a fictionalized loss for twenty minutes, and then have a debrief session. It’s the financial equivalent of a false positve lung cancer diagnosis.

During the debrief the advisor could talk about real feelings of loss, of risk, and pain. Then, together, work out a new plan.

As advisors are already busy, the business would sell them a script. They could choose a level of pain, and we would provide the portfolio forms (printed on very formal looking paper) as well as suggestions on handling the psychology of it. As an upset we could offer “Confederate Coordination” as we called the wife and explained the plan to her. Yes, it would have to be, the wife.


The Three Design Rules at Facebook

According to Julie Zhuo (YouTube), there are three design rules at Facebook. 

  1. What problem do people really have?
  2. Is this problem real? 
  3. How will we know if we solve it?

These three questions have a very JTBD essence to them. Serving customers is not just about giving them what they ask for but giving them what they really need. 

For example, Zhou said, many people over many years have asked Facebook for a dislike button. If there’s a thumbs-up for things we like, why can’t there be a thumbs-down for things we don’t? 

But this isn’t really what people want. If the Facebook feed was too much thumbs-down material and not enough friend’s photos, easy recipes (Tasty anyone?), and photos from the past no one would log on. What people want, said Zhuo, is that “not everything in the feed is likable and I want to express other things.”

It’s odd to think that what people say they want may not be what they really want, but we can trust this idea because conditions matter. For example, when parents were collected and questioned in focus groups about what kind of medical information they wanted for a vaccine, they said they wanted more information. The thinking was something along the lines of: ‘this is science, let me weigh the facts.’ 

But when researchers created 84 Facebook posts that went on to reach three-and-a-half million users, the results were different. The most resonate posts were those with personal stories. 

In another example, people were asked if they would wear masks during the coronavirus pandemic. The yes/no split was largely along party lines. However, when people were observed out-and-about, political preference yielded to prudence. 

In finance, Nassim Taleb rails, ‘don’t tell me how to invest, show me what’s in your portfolio.’ Tyler Cowen says to look at your actions, and then tell me what you think. 

Zhou’s other good point to add to our JTBD quiver is to think not in terms of supplier language but demander. It’s not about the click-through-rate as much as it’s about engaging content. Financial advisors should never bring up words like theta, Sharpe ratio, or quarter-Kelly. None of those are about the JTBD. 


Downward sloping, downright lying demand curve

From Keith Harmon’s pricing Chicken Parmesan

What’s notable isn’t to question simple models, or as the first draft of this post noted ‘economic textbooks’ but it’s to think about things as they act in real life. People buy more and complain less when the Chicken Parmesan menu price increases.

As Rory Sutherland puts it, the opposite of a good idea can be another good idea. 

Find these weird but good ideas by making small bets


Information Questions

close up photo of woman covering her ears
Photo by Oleg Magni on

“People always ask us how we do what we do without talking to management. I say that’s probably made me more money than a single fact of my investing process.” – Jim Chanos

Part-of-the-reason we are the way we are is because of energy conservation. Human tendencies (nee biases) exist so we, unlike a robotic vacuum, get stuck in a never-ending decision loop. We’ve survived this far, so these things work.

However sometimes we need to consider, weigh, or evaluate information. One tactic to do that is to think about the who, what, when, and how of the information.

Who. The person communicating a message offers information and we use that, even when we say we don’t. Doctors face the white coat effect as well as the halo effect. In his book, Messengers, Stephen Martin notes that “the messenger has increasingly become the message.” Why, do you think, businessmen wear suits?

What. A silver lining of the coronavirus pandemic is the rising awareness of statistics and their limitations. Average rarely is. The same treatments can have different outcomes because the groups are different in some way. If someone says ‘the average’ we think ‘the red flag’.

When. Ben Hunt spoke with Aaron Watson and noted “I always ask myself, why am I hearing this? It’s not just the what you’re hearing but also the why. it’s not to be conspiratorial, it’s just to ask the question.” We get this when it comes to marketing a movie but forget it in many similar areas.

How. The medium is the message. Audio offers intimacy. Have people read, listen, or watch opposing political messages and the the audio conveyers are “dehumanized less.” The sister effect is why audiobooks are different, not good or bad for learning.

On the Long View podcast, Moshe Milevsky spoke about narrowing the distribution of retirement returns. Just as some jobs are unlikely to make you obscenely rich (or poor), some financial products are unlikely to make you obscenely rich (or poor).

The employee of Enron (or Facebook) had (or has) a much greater chance of banking billions or blowing up, rather than earning an average retirement account return. A teacher who buys an annuity, has a great chance of earning the market average, but avoiding the extremes.

When Milevsky spoke in May 2020, it was a good chance to apply the who, what, when, and how to communication. Milevsky is an academic, speaking about finances during hectic time as people saw portfolios cut in half, but then running up. And it was the Morningstar podcast which has an authority and intimacy in itself.

Information used to be through a few sources and the contrast was easy. Visual or not. Political or not. Mainstream or not. Now, what is mainstream, what is orthodox, what is real? Whatever the answer, it comes from a question.

Want more? Check out this pay-what-you-want placebo prescription pdf.


Appropriate Proxies


Is this art?

One of the best way to find deals in life is to find things where people have attached the wrong proxy metric.

In any systems where we count things (scores, hits, years, etc.) we optimize. People buy more fuel efficient cars rather than consider riding a bike, carpooling to work, or calling an Uber. If it’s counted, it’s prioritized. “Personally, I feel it has gone too far in that direction, and economics has overinvested in one very particular kind of intelligence,” laments Cowen.

How do people find new metrics?

Creativity. It takes a certain worldview to see that there might be a better way. Like the vertical-horizon illusion but for our worldview.

New counting techniques. Sports changed, and is changing, when data collection  (e.g. cameras) changed. Math ability is easy to quantify, so we do.

Career capital. Jason Blum outfitted a van as a mobile office because he spent so much time in Los Angeles traffic. From there he made calls to directors who had recently flopped and asked if they wanted to make movies for his company, Blumhouse Productions. In an industry where ego rules too many decisions, Blum only had to answer to himself.

Ties to history. Since 1987, the NFL combine has been held in Indianapolis. With activities like the 40-yard dash, 20-yard shuffle, and 3-cone drill it’s an annual tradition for fans and front-offices. But those tests have less predictive power than collegiate performance. Yet the show goes on.

First principles. Of the many flaws highlighted in Bad Blood, was a lack of scientific understanding from the Theranos investors. “Since he didn’t have the expertise to vet her scientific claims,” John Carreyrou wrote, “Parloff interviewed the prominent members of her board of directors and effectively relied on them as character witnesses.”

Front lines. Proxies exist to make things easy, but business doesn’t exist on a spreadsheet. Alain Bertaud said ” By living in the cities, and confronted very early, I learned the difference between the theory about a city which you read books and what it means to live in a city.”

Perhaps Rory Sutherland, of course, put it best. Too many people, Rory reasoned, think of art as something you hang on a wall. It’s something famed and famous. It’s by a so-and-so from a certain era. It’s recognizable. That. Is. Art.

Unless it’s not. Architecture is also art, and because people don’t think of homes that way, they may be undervalued. Sutherland thinks so:

“Human decision making is also pretty path-dependent. In one case in my life I’ve been able to profit from this. I live in a house, which in the UK is something called Grade 1 listed. It’s by the great eighteenth century Robert Adam, and the grounds are by Capability Brown. I’m in a four bedroom flat on the roof of a house built for the doctor of George III in about 1785. For a time it was the home of Napoleon III.”

Want more? Check out this pay-what-you-want placebo prescription pdf.


The room or use Zoom?

We noted in the Quarantine Education post that things will need to change in how teachers teach. The classroom model, with breaks for stations, specials, and snacks works fine only in the classroom. Teachers will need to adapt.

Rory Sutherland spoke on Great Minds and Jason Blum spoke on Bill Simmons and both addressed how being in-person was especially helpful in creative endeavors.

“When you’re talking to a creative person, there is so much insecurity and doubt if this is going to be a good idea. Part of what my job is making whoever I’m talking to feel early on tat there is no bad idea.

“Of course there’s bad ideas, but right now, talking early on or how something fits, we can think of any idea.

“And that’s very hard to do on video.”

Jason Blum

Blum makes horror movies in a Moneyball way so he even kinda wants things that look or sound a little hairy. He wants something to be ugly on the first draft and beautiful on screen.

Sutherland’s angle is only slightly different and it’s in the field of marketing.

Take comedy, for example. It’s a field very similar to marketing because it reframes an idea. People are relative thinkers (more than that, different from those, etc.) and comedy changes the that and those we compare against.

In his book, Shtick to Business, Peter McGraw prints an Anthony Jeselnik joke: “My parents were strict. My mom and dad once made me smoke an entire pack of cigarettes. An entire pack of cigarettes in one sitting..just to teach me a valuable lesson..about brand loyalty.”

That’s good reframing. That’s a good laugh.

But it probably didn’t start out that way. It probably started in a place, as Blum put it, of “insecurity and doubt.”

At Ogilvy’s behavioral unit, Sutherland said they have a rule to “dare to be trivial and don’t be afraid of looking stupid.” That’s easier in the room than on the Zoom.

Coming out of social distancing it’s likely that the individuals and collectives that do best are the ones who can communicate the best. If Jason Blum has a series of great meeting he’ll have a great movie. If Sutherland finds a ‘Python-esque’ framing, he’ll have a great ad and behavior change. Alchemy, is powerful but will take more work when using Zoom rather than in the room.

Want more? Check out this pay-what-you-want placebo prescription pdf.