Category: Uncategorized

Supported by Greenhaven Road Capital, finding value off the beaten path.

The book Ike’s Bluff by Evan Thomas covers the Eisenhower presidency, 1953-1961. Thomas is bullish on the Kansanian, making the case that Eisenhower played the game of president well. That may be the case, but while I’ll never be the “Supreme Allied Commander”, Eisenhower’s decision-making principles work for grunts too.

These are only partial notes. This book was fantastic and along with Minute to Midnight and Dan Carlin’s podcast on the Cuban Missle Crisis, an excellent expedition into recent American history.

1. You can be a thing or you can do the thing.
2. Education isn’t about a particular place or person.
3. Smile and take their best punch.
4. Prompt good arguments.
5. Play games you can win.
6. Consider the opportunity cost.
7. Question the incentives.
8. Beware forecasters with partial information.
9. Don’t just do something, sit there.
10. What matters that you haven’t (or can’t) measure?

…

Be or do.

“Eisenhower disliked strutters and desk pounders, especially after working for General MacArthur in the 1930s. He preferred to operate by indirection and behind the scenes.”

Eisenhower was criticized for not cheerleading from his pulpit but that wasn’t his chosen path. He focused more on doing than being. This was true for fellow military man John Boyd who coined our phrase ‘be or do’. You can be a thing, Boyd would tell the people who worked with him, or you can do a thing.

…

DIY MBA.

“His de facto graduate school was the three years he spent in the early 1920s under the command of General Fox Conner, a genius soldier-scholar, in a remote outpost in the Panama Canal Zone…With Conner, Eisenhower read Plato, Tacitus, and Nietzsche, among other philosophers and thinkers.”

Education isn’t a place or a person. Education is a perspective. Are you going to learn or not? Eisenhower downplayed this to others but he was an eager learner.

Meb Faber is learning by doing by investing in startups. Ben Carlson suggested learning by investing in general. Seth Klarman said he probably learned more during his time at Mutual Shares than at business school. Eisenhower was furiously curious.

“As a boy, he had become so entranced by volumes of Greek and Roman history that his mother, irked that he was neglecting his chores, locked the books in a closet. Eisenhower found the key and read while she was off doing errands (another of his heroes, or in this case an antihero, was Hannibal, a magnificent loser).”

…

Smile and take their best punch.

“The famous smile, Ike told his grandson, David, came not from some sunny feel-good philosophy but from getting knocked down by a boxing coach at West Point. The coach refused to spar anymore after Ike got up off the mat looking rueful. “If you can’t smile when you get up from a knockdown,” the coach said, “you’re never going to lick an opponent.””

When Andre Agassi started playing tennis his dad said that he needed to learn to take the other guys best punch, to put “a blinster on the other guy’s brain.”

…

Argue well. Of all the things in the book, this ability surfaces again and again.

“Eisenhower was cagey, and he could be a provocateur, jumping into discussions to stimulate debate. He wanted to hear all sides, even if that meant arguing with himself.”

“A few days later, in a memo to the Army Chief of Staff, Ike suggested “the use of one or two atomic bombs in the Korea area, if suitable targets can be found.” The suggestion seems offhand, almost cavalier, but it could well have been made in typical Eisenhower fashion, as a prompt to debate.”

“He had an uncanny ability to enter directly and forcibly into a debate without squelching it,” wrote Robert Bowie, the State Department’s policy planning director.”

To argue well is to discuss ideas without ego. It can be uncomfortable noted Dan Egan but it’s a good way to make decisions. Marc Andreessen and his partner Ben Horowitz seem to have followed Ike’s lead. Marc said he takes the other side of Ben’s ideas even if they’re great.

…

Play games you can win.

“Never get in a pissing match with the skunk,” Ike told his brother Milton, who had pressed him to take on McCarthy by name.

McCarthy was a thorn in Eisenhower’s side. Rather than fiddle with it, it fell out on its own. Basketball teams know you can’t beat a team at their own game. Or, as Charlie Munger said, stay in your circle of competence, “If you play games where other people have the aptitudes and you don’t, you are going to lose.”

In Korea and Vietnam, this idea became a battle.

“Eager to restore their dignity after the shame of Nazi occupation in World War II, France clung to Vietnam, its longtime colony, despite a nationalist revolution led by Ho Chi Minh, who had studied Marxism as a student in Paris. The French wanted to draw the Vietminh, as the Communist rebels were called, into a conventional set-piece battle. The Vietminh were everywhere and nowhere. Talking to a Western reporter in 1952, the Vietminh top general, Vo Nguyen Giap, pointed to a dirt path and said, “Our boulevards.” Smiling, Giap asked, “In our war, where is the front?””

In our post on John Nagl we looked at the lessons of jungle warfare and Eisenhower knew them back then. The jungle, Eisenhower said, would “absorb our troops by divisions!”

…

Opportunity costs. Eisenhower called it “the great equation.”

“The jet plane that roars over your head costs three quarters of a million dollars. That is more money than a man earning ten thousand dollars every year is going to make in his lifetime…Now, here’s the other choice before us, the other road to take—the road of disarmament. What does that mean? It means for everybody in the world: butter, bread, clothes, hospitals, schools—good and necessary things for a decent living.”

“We pay for a single fighter plane with a half a million bushels of wheat. We pay for a new destroyer with new homes that could have housed more than eight thousand people.”

Knowing these costs is hard. You have cast a wide net, said Rory Sutherland. Opportunity costs exist for books, said Jeff Annello, investments said Marc Andreessen, and work said Ryan Holiday.

…

Incentives. To go along with opportunity costs, Eisenhower understood the incentives of the people he worked with. Leaders who aren’t owners prefer more to less.

“Eisenhower had a healthy skepticism about the grandiose schemes of the military. He knew how the top brass used worst-case scenarios to frighten their civilian masters into spending more on unnecessary new weapons systems and pet boondoggles.”

““I’m damn tired of the Air Force sales programs,” he said. “In 1946, they argued that if we can have seventy groups, we’ll guarantee security for ever and ever and ever.” Now they had come up with this “trick figure of 141. They sell it. Then you have to abide by it or you’re treasonous.” One member argued that the air force knew better than the politicians how to measure its needs. “Bunk,” Eisenhower scoffed. He knew the Pentagon “as well as any man living,” he said, and he knew how the people who worked there routinely overstated their case.”

Ben Falk saw mangled incentives in the NBA and Eric Maddox saw them in Iraq.

…

Forecasts for war.

“During the Korean War, President Truman had invoked a document called NSC 68, prepared for the National Security Council, calling for a massive arms buildup to face the Communist threat. NSC 68 warned of a “year of maximum danger,” when the Russians would have a hydrogen bomb and the means to deliver it. Ike regarded “target dates” as “pure rot,” a “damn trick formula of ‘so much by this date.’ ”

“Eisenhower had been more realistic than the jittery Pentagon planners who in the early days of the Cold War had predicted that the Red Army could—and would—roll virtually unimpeded to the English Channel, and even predicted the day: January 1, 1952. According to Army G-2 (intelligence) estimates, the Soviets could overrun Western Europe in two weeks. Writing in the margin of one such estimate in 1948, Ike jotted, “I don’t believe it. My God, we needed two months just to overrun Sicily.””

Part of the reason Eisenhower knew the numbers were wrong was that of the pictures he saw. The U2 spy plane provided the best intelligence he could get on Russia – or any part of the world, including his own farm. Good forecasts take a lot of work. Eisenhower might have been a Superforecaster.

…

Don’t just do something, sit there.

“Eisenhower was “an expert in finding reasons for not doing things,” recalled Andrew Goodpaster, his staff secretary and the adviser who probably knew him best.”

Sometimes the best action is no action. In the early days of NASA, the default was to do nothing. Gene Kranz wrote, “the first rule of flight control is if you don’t know what to do, don’t do anything.” Busyness, wrote Cal Newport, is not a proxy for productivity. Investor’s trail returns because of doing too much.

…

What matters that you haven’t measured?

“Ike was a believer in what he called the p-factor—psychology, propaganda, persuasion.”

“He was seeking opportunities to, as he liked to say, “win World War III without having to fight it.””

For this ideas, check out our week of posts on Rory Sutherland.

 

Thanks for reading. Want more? Sign up here: http://eepurl.com/cYiwTP.

Supported by Greenhaven Road Capital, finding value off the beaten path.

Barry Ritholtz interviewed John Montgomery of Bridgeway Capital Managment and it was fantastic. Episodes like this are why I love podcasts. I knew nothing of Montgomery but got to spend an hour learning from him.

Behavioral finance lightbulbs. Montgomery’s first behavioral finance insight occurred when he was at Harvard Business School

“I was in one particular class where we were studying a quantitative method of investing and at the end of the class the professor stepped back from the blackboard, kind of tugged on his beard and asked, ‘Who thinks that when you get out of school and go to Wall Street you’ll beat this record?’

“This was a pretty fine record. It wasn’t just beating the market, it was doing quite well. Well, eighty percent of the hands in the class went up… I thought, if this is a microcosm of Wall Street five years from now, then using quantitative methods should help get you on the other side of that investment, which should have some advantages.”

“The iron rule of life,” says Charlie Munger, “is that only twenty percent of people can be in the top fifth.” However, some people can stay there. When Ritholtz brings up the idea that most people think they’re above average drivers Montgomery points out the nuance with this idea.

“Well, with respect to driving I’ve never had a chargeable accident. I’ve never had a moving traffic violation. I always go back to the statistics and the logic. Evidence-based investing is what we do.”

Reversion to the mean is real, but Montgomery says, “You want to differentiate when things do and don’t regress to the mean. Is there skill or just luck in driving?” Michael Mauboussin’s book, The Success Equation is about this idea. If clean driving records persist year to year, then driving is more skill than luck. Baseball bull-pens, wrote Joe Peta, tend to mean revert. “Value investing,” said Cliff Asness, “is highly related to mean reversion, they’re almost synonyms.” The Madden Jinx? Probably mean reversion too.

…

Scratch your itch. Success when starting from scratch takes a lot of stick-to-it-ness. Often that means working on things important to you.

“I love service industries and anytime I experience service that’s subpar I think there’s a market opportunity there; restaurant, hotel, anywhere. If you’re doing a lousy job of providing service you’re inviting competition in.”

“I was an investor in a couple of mutual funds, setting up an IRA and thinking, ‘You should be able to do better than this.'”

“I had a dozen ideas about how to improve that industry.”

Alex Blumberg compared it to a pebble in your shoe. Harry’s founder Andy Katz Mayfield said it was like a nervous breakdown. Soulcycle was a solution to the lack of hiking in NYC.

…

See it to believe it. Montgomery took a year off to study markets, models, and making money before beginning Bridgeway. This wasn’t his idea.

“I had a model for that. There was a mayor of Houston at the time, Bob Lanier. Each time he switched careers he took a year off to study the heck out of the next thing that he was doing. He was very thoughtful about it and I thought that was a fascinating idea.”

Tyler Cowen explained his moment this way, “I saw him and thought, ‘I want to be some version of this.’” Judd Apatow said that seeing it “puts a lot of gas in your tank.”

…

Evidence. Montgomery admits, “I’m a quant,” and comes back to evidence-based ideas throughout. Ritholtz needs to get this guy to EBI. For example, derivatives are not a deity.

“The models are built by people and there’s a very strong human component to that. The models are only as good as the modeling process you’ve got.”

And before presenting an idea:

“We have this thing called ‘Confessing your Biases.'”

The base rates of marriage.

“I got married at twenty-one and the statistics on that are not great. The statistics would say wait a while, get more life experience, but it was awesome for me.”

Ritholtz asked, “What led you away from cap weighted?” Montgomery answered:

“Research.”

Every year and a half Montgomery spends a quarter tracking his time to see if his commitments align with his goals.

“I wish there was a Mint.com for my time because it’s a real pain to do.”

Montgomery studied the great depression during his year off.

“If you want the granddaddy of downturns you go back to that period….the specifics of risks have changed but the nature of risk itself has been around a long time and you can learn a lot.”

“I convinced myself from that; be prepared for the inevitable downturn, it’s behavioral, and it’s incredibly difficult to time.”

…

Stewardship for screening stakeholders. Getting the right people involved helps a lot. It’s the ounce of prevention pound of cure mindset. Bridgeway does this.

“Stewardship is a pretty great screening tool. If you put at one end of the spectrum ‘Greed’ and a lot of the things the finance industry is criticized for and at the other end ‘Generosity’ and making a difference in life. It’s pretty great to say, ‘If you want to make seven figures and are about generating personal wealth you won’t come to Bridgeway.'”

Scott Norton is pursuing “stakeholder capitalism.” Ben Falk was a stakeholder in Sam Hinkie‘s process. But any cause of demand can be a stakeholder; spouses, health, and additions all count too. Early alignment of these is a powerful force.

…

The behavior gap. Two-thirds!

“This is my biggest sore spot professionally…we have not solved the problem of the behavior gap… the natural tendency of human beings to buy more as thing are going up and fear when things go poorly.”

“Over last fifteen years – on one of our more aggressive funds – the returns to investors is two-thirds of the total return.”

Two-thirds! That’s incredible. How is it that people who are motivated enough to seek out Bridgeway funds aren’t motivated enough to seek out mistakes? Dan Egan had this advice: “If you’re excited about what you’re investing in you should worry. If you’re doing something boring or standard you’re going to stick with it.”

…

Hire well to argue well.

“We all know that you don’t want to hire a bunch of yes people – but there is tremendous psychological pressure to hire people that look and feel and think just like you.”

“You want to associate with people you trust. Who do you trust? People that look just like you. That’s a formula for disaster.”

“We’re trying to intentionally hire people that don’t agree with us. People who have a different view into things.”

“Some people will say, ‘Do you know that this other team member doesn’t agree with you on XYZ?’ I’m like, ‘Yes, and that’s a good thing.'”

This goes by different names but it’s the same spirit. Larry Kochard calls it “diversity of thought.” Charles Koch calls it “challenge culture.” Hinkie wrote to “tolerate counterarguments.” Ray Dalio calls it “thoughtful disagreement.” Matt Wallaert said: “The thing I love about Oregon is that you can vehemently disagree about something and still come to dinner on Friday night.”

But as noted in Egan’s post and Montgomery’s quotes, this isn’t easy.

…

Books. Montgomery suggested three books.

The Bible. “Great mapping for life in general but especially finance.”

Daring Greatly. “As a research guy this research is just fascinating.”

The Honest Truth about Dishonesty. “Anybody who is in science or research should read some chapters in this book. We all think because we’re doing numbers and statistics we’re objective but this book would say ‘Not so much and if you think you don’t have that problem it’s going to creep in more not less.'”

 

Thanks for reading.

Montgomery inspired some digging into marriage rates and I think his base rate for the expected length of marriage shouldn’t be based on his age so much as his education. I guess that’s the point of data. Precision doesn’t always mean accuracy. Life doesn’t fit in spreadsheet cells.

Supported by Greenhaven Road Capital, finding value off the beaten path.

Fresh off his World Series victory Jeff Luhnow sat down with the Wharton Moneyball guys to explain how he did it.

Actually, that’s not true. The Moneyball interview is from months before the season and that’s even better. Rather than looking back and constructing stories, we get Luhnow without the haze of hindsight. Here are my notes.

Be different. Being Different is advantageous. It means approaching stale problems in fresh ways. Luhnow’s career arc is an example of this.

“My first career was as an engineer…then I went back to business school and then McKinsey…it’s not the traditional path to becoming a sports executive but I think my education and experiences outside of baseball have been really important for me in being able to do my job here.”

In what ways does this help? Luhnow said that as General Manager he has to triangulate opinions from scouts, algorithms from analysts, and market conditions. “Those fundamentals are really similar to a lot of other businesses and being able to incorporate that thinking has been very important to me.”

…

Alpha erosion. Good ideas get copied.

“At this point (circa 2016) If you look at the transitions in the front offices, all thirty teams – for the most part – have analytical teams. They have general managers that have spoken about the importance of using information in decision making. The advantage you can gain from doing the Moneyball approach has dissipated. It’s now a level playing field. We’re all looking for the next area of advantage.”

“The reality is, whoever wins the World Series teams try to copy them.”

Theo Epstein said that clubhouse rapport and visual acuity are some new things. Fellow Houstonite Daryl Morey said he saw this with the Rocket’s draft board. Ed Thrope told Barry Ritholtz:

“Any edge in the market is limited, small, temporary, and quickly captured by the smartest or best informed investors.”

However, as one of the Wharton hosts noted “There’s always a narrative wrapped around recent successes. Some of which is due to luck and some of which may be a systematic change.” As anyone who’s taken eighth-grade science is aware, it’s better to copy the smart kid than the lucky one. Yet the copier is ignorant of this.

In Michael Mauboussin’s book, The Success Equation he unravels skill and luck – as best he can. “Most of the successes and failures we see,” Mauboussin writes, “are a combination of skill and luck that can prove maddeningly difficult to tease apart.”

…

Stakeholders. Not even James Bond has carte blanche, but Luhnow had a pretty good arrangement.

“Normally when you take these jobs you have a lot of constraints; keep this manager, do this, do that. I asked Jim Crane, ‘What are my constraints if I take this job?’ He ripped out a blank piece of paper of the pad he was holding.”

Baseball also has a certain kind of fan.

“I think fans are never patient but in baseball, the typical fan is aware of your farm system…and there’s a certain amount of patience baked in.”

The type of owner matters too.

“Owners recognize that we’re playing the odds. As long as we have the odds nudged in our favor we’re going to have better results in the long haul. But it’s not like blackjack that we can sit there and play a million hands.”

Aligning the different stakeholders; fans, owners, employees, etc takes good communication.

“I spend a large part of my job managing those stakeholders. It all comes down to communication.”

We’ve speculated – along with Ben Falk – that part of the reason Sam Hinkie was fired was because of poor communication. As Josh Brown cautioned, “If you’re just telling a client, ‘Shut up I got this,’ you’re not going to be the client’s advisor for a long period of time.”

…

Frontiers. As edges erode frontiers are found. Two examples from baseball are pitch framing and defensive shifting. These two things are wonderfully told in the book Big Data Baseball. 

New means must make sense. People want to understand.

“The key for us was building a tool that linked results to video so you could actually see the pitches where a catcher took a ball from inside the strike zone to outside or presented a ball that the umpire called a strike. Once they visually see it and we show them how the data aggregates up to an answer they’ll do drills that will make them better.”

Luhnow adopts the investing mantra that the best plan is the one you’ll stick with.

“You can get 80% of the value rather than 100% by presenting it in a way that really allows you to have an impact.”

…

Empathy is magical. When asked how analysts can get their ideas considered Luhnow said:

“The most important thing is to talk to the people in the industry who are going to be affected by the recommendations you’re making. Try to understand from a scout’s perspective why they see things a little differently or from a player’s perspective why they may be resistant to whatever it is that you’re working on.”

Those people may know things you didn’t consider. Feeling heard matters too. Jeffery Solomon said, “The number one thing you need to think about as a manager is empathy.” Dan Carlin reminds us about studying history, “There’s this thinking that if we try to understand them we’re justifying them and that’s not what we are doing. You want to understand what makes monsters tick.”

 

Thanks for reading. Want more? Here’s more.

Supported by Greenhaven Road Capital, finding value off the beaten path.

On Freakonomics, Stephen Dubner brought to light the work of the Behavior Change for Good Initiative. All the lectures are available on YouTube, including the hour-long fireside chat with Danny Kahneman.

The podcast was good, and on the heels of our Rory Sutherland Week – timely. Sutherland suggests MONO solutions – minimalist oblique non-obvious. Angela Duckworth (I liked her book Grit) et al want to marry big data with behavioral economics and give birth to better choices.

The podcast episode included this insight from Danny Kahneman.

Controlling the environment, say, by compiling resources. I was enamored with the ideas shared in this episode and so I tracked down relevant resources for people who want to learn about what the heck they’re doing at Wharton. Want a degree from Wharton? Here’s the easiest way. 

The Wharton Consumer Psychology Minor has three requirements; statistics, psychology, and marketing.  After scouring syllabus’s, Googling guesses, and abounding around Amazon (these are affiliate links), here’s a course resource for a DIY Wharton minor. Heads up, there were many guest lecturers. I included their names for YouTube/podcast searches.

Statistics. Wharton wants students to complete some kind of basic statistics class. What’s worked for me is to search YouTube for videos as problems come up like the Monty Hall problem. Books that help are How to Lie with Statistics, A Field Guide to Lies (the modernized version of How to), and anything by John Allen Paulos.

…

Psychology.  Students at Wharton need to choose four courses from the genres of social, evolutionary, or positive psychology. Other options include language and thought, judgment and decisions, and behavioral economics and psychology.

Social has Social Psychology and Yes! for texts.

Positive has four books, students won’t be so positive after seeing that book bill. A Primer in Positive Psychology, Ungifted, The Happiness Hypothesis, and Happiness: The Science Behind Your Smile are the initial texts with lots of optional reading on the syllabus.

Evolutionary I couldn’t find. MIT has a readings list and course as does Geoffrey Miller at the University of New Mexico. Miller is also the author of Spent.

Behavioral Economics has a free book Policy and Choice in addition to not free books by Thaler and Kahneman.

Judgement and Decision Making has Thinking and Deciding and YES! for readings.

…

Marketing. This is an academic smorgasbord. Introduction to Marketing and Consumer Behavior are two required courses. Then students choose from below.

Consumer Behavior sounds interesting with a wide reading list and handful of guest lectures including David Neal, Kelsey Price, and Pam Strifler.

Principles of Retailing suggests The New Science of Retailing and a handful of HBS case studies.

Digital Marketing suggests Location is (Still) Everything and a handful of academic readings. Guests lecturers include Kristen Green, Aileen Lee, Philip Winter, Jen Rubio, and Rob Coneybeer.

Pricing Strategies has Smart Pricing as the required reading and The Strategy and Tactics of Pricing as the suggested reading.

Creativity has only recommended readings, but thirty-three of them. That’s a creative offering but after advising undergrads I can imagine their paradox of choices.

Strategic Brand Management lists a few books with “strategic brand management” in the title, but has “no required textbook.” Guest lecturers include Eric Anderson, Andrew Mitchell, Eric Staples, and Fran Boller along with case studies on Harley Davidson, Super Bowl commercials, and Steinway and Sons.

Marketing Strategy and Technology is built around articles and guest lectures from Eric Kessler, Candan Erenguc, Ann Ferracane, and Adriana Crespo Tenorio along with lunch with the instructor. Delicious.

Note: At this point of drafting, I realized that college is good at coordinating.  It took a fair bit of time to find this information and type it out. Also, all of these classes have a “class discussion” component of the grade. Having a room where people interested in these ideas can discuss them is a powerful learning tool – at least judging by the weight it has on the syllabus. 

However, thanks to the internet, these costs have gone down. I can buy the books on Amazon. With some clever/devious/illegal searches, anyone can get the HBS case studies. People coordinate on Slack and Reddit all the time. Instructors are missing but DIY is cheaper in dollars and days. 

Marketing for Social Impact has no book. Readings include things like Test, Learn Adapt, Everyone’s Voting and so Should You, and Choice Architecture. Guest lecturers include Chris Marvin, Morgan Berman, and Irma Shrivastava.

Principles of Advertising has a book by the course instructor who comes across as very enthusiastic in the syllabus – no small feat!

New Product Development  suggests the Designing for Growth book (and accompanying workbook).

Entrepreneurial Marketing has “all-star” speakers like Lucinda Duncalfe, Wiley Cerilli, Brett Hurt, and Seith Berger and uses the book Marketing that Works.

…

Thanks for reading. Ease and enjoyment grease the wheels of action. This is what Duckworth et al. are trying to do – make ‘good for you but hard to do’ things easier.

Supported by Greenhaven Road Capital, finding value off the beaten path.

Update: This is a two-parter. First, the update from Falk on Wharton Moneyball and below from his podcast with Zach Lowe.

Getting lucky. When asked how he got started in analytics Falk said:

“The short answer is right place, right time.”

“But also the right time of my life. At the time I was in high school and college and could explore these things. I could volunteer, I didn’t have to take a paying job. It kind of all just came together.”

Like Ezra Klein, Yvon Chouinard, or the Wright brothers, Falk didn’t have demands on his time. This was Malcolm Gladwell’s point when he wrote about ten-thousand hours. If you spend the time becoming great at something that’s time you don’t spend doing something else.

https://soundcloud.com/mikesnotes/malcolm-gladwell-clarifying-the-10000-hours-idea-to-stephen-dubner

…

About working for Sam Hinkie.

“Sam very much valued a different kind of thinking and having different backgrounds and we had a diversity of backgrounds.”

Michael Lombardi is fond of noting that if everyone is thinking the same, no one is thinking. Varied thoughts are the ingredients for good arguments. Bill Belichick promotes this at the Patriots.

“(The range of problems we thought about) was as wide as you could imagine. That was one of the beauties of working for Sam. It was about a method of thought more than anything and that method of thought could be applied to any problem you faced in basketball operations.”

…

The meta game. In my post about Sam Hinkie I noted that poor communication was Hinkie’s Achilles Heel. Josh Brown advised financial advisors, “If you’re just telling a client, ‘Shut up I got this,’ you’re not going to be the client’s advisor for a long period of time.” Falk said:

“I think there are things that could have been done from a PR or media standpoint to make it slightly more palatable.”

“Sam and I would often talk about the metagame. There’s the game itself which you might be able to optimize but there’s this game outside the game which is important to optimize as well. (Selling an unconventional strategy to others.) Yep, and that impacts whether your strategy works.”

Falk points out that if it were a video game you might do one thing, but in reality, you’d do another. It’s why we pointed out in Rory Week that spreadsheets don’t have elbow room.

… …. …

Ben Falk joined Zach Lowe to talk about constructing NBA teams and it was excellent. I should have expected that. Falk worked with Sam Hinkie, who I wrote a post/love letter about. Lowe and Falk talk about a lot of ideas we’ve covered here, so let’s rapid-fire this.

…

Stakeholders matter. If your boss says ‘do X,’ it precludes doing Y and Z. If your boss says, ‘do what’s right,’ you can do X, Y, or Z. Team owners that say to ‘win now’ remove Y and Z.

“(This can be) a mandate that comes down from ownership, ‘I want you to do both. To win now and win in the future.’ It’s an incredibly competitive league, that’s very difficult to do. You need to get incredibly lucky to pull that off so you have to be willing to strategize in such a way as ask, ‘What are we willing to give up?'”

Investors see this with capital withdrawals. Businesses see it with customer departures. The best teams, investors, and businesses filter in the right stakeholders from the beginning. General Managers that want to rebuild a certain way will try to find opportunities where that ‘way’ aligns with the ownership. If you can, as Dan Egan says, attract wonderfully boring customers to your wonderfully boring company, you’ve got a good match.

…

Conditions matter. As Warren Buffett wrote, “the rise and fall of the tide is hardly something for the duck to quack about.” Investors admit that if you did well in a bull market all you really know is that you did well in a bull market. The same holds for sports.

“Early in the season, (during Falk’s stint in Portland) we had gotten blown out and everyone asked, ‘Is this a bad sign for the Blazers?’ It turned out, it was a good sign for the Suns.”

Mike Lombardi says this riddle exists in the NFL too. Did your team play well or did the other team play poorly?

…

Non-linearity. Lowe and Falk talk about many individual players and Zach said, “I think on a better team where he had to do less heavy lifting, Devin Booker’s shooting would really sing.” Lombardi recalled, “Scotty Williams looks great when he plays twenty-eight minutes for the Bulls but when he plays thirty-eight minutes he sucks.”

Lowe admits that this might happen to Kristaps Porzingis, “I don’t know that any projection systems factored in the enormous damage of having an atrocious point guard rotation. Getting into the offense is going to be a struggle. God bless Porzingas…but I worry if he can maintain this level of efficiency carrying that kind of load.”

Nassim Taleb likes to point out that snow resorts operate similarly. No snow is bad and so more is good – up to a point. Too much snow falls and no one can get to the resort.

…

You know I’m all about that base, bout that base, bout that base rate. “If you do a search of all rookies who are 18, 19, or 20,” said Lowe, “and played X amount of minutes and had a PER of less than 7.5 the results are not encouraging.” True, adds Falk, who said that you had to think probabilistically about outcomes. And “as soon as you get more numbers you should be updating those beliefs.”

Base rates are incredibly helpful to figure out what normally happens here. Hinkie said this in his podcast with Lowe:

“One of my big things is to survey base rates any time you can. You go back to facts whenever you can. You go back to finding what has worked. Often things have changed …but at the same time you should be staring with some base rate. What does this look like?”

…

Better predictions. In projecting a player, Falk said to think about things that can change and things that can’t.

“You try to think about things that are predictive of future ability and what are the things that can change.”

…

“Basketball IQ and understanding of the game doesn’t change as easily as people think. You can learn a little bit but if you come in not being able to pick up the nuances of the game it’s hard to change that.”

“This is one of the reasons shooting may be overrated going into the draft…but it’s easier to change than height or basketball IQ. It’s harder to find a player who massively increases their basketball IQ than who increase their shooting ability.”

Lowe and Falk thought one player might become a better shooter as he became a bigger shooter, getting “bumped off his spot” less. Body size is toward the malleable end of the spectrum.

…

Be there. The Sixers had a tumultuous ‘process’ of rebuilding – or at least that’s how it looked from the outside. But the inside was different.

“We got a lot of flack for not having the right ‘veteran leadership’ but you have to be on the ground and see it day to day get a sense of what the impact of that is.”

“As soon as Sam started there, there was a lot of noise. The media sort of latched on to this story and there were a lot of people with very strong opinions either way.”

The outside view can be helpful, like when we use base rates, but it can also be misinformed. During the Pittsburgh Pirates rebuild the media criticized signings because they didn’t see the same statistics. During much of Andre Agassi‘s life, the media criticized his actions because they didn’t know his life.

If you’re in those situations, says Falk, you need to find your own metrics of success.

“It’s easy to have your goals set from the outside and whether you succeed or not is determined by what the public reaction is and oftentimes that can be very misleading. There’s a lot of luck, maybe the public doesn’t right their expectations very quickly.”

“That’s easier said than done because all the stuff that goes on and when you’re with the Sixers and you’re not winning games how are you judging your own success?”

Metrics based on process remove the luck component that metrics based on outcomes include. This takes more work though. Outcomes; wins, losses, hits, runs, pounds, etc are easy to measure and compute in spreadsheets. But functions are not always faithful.

…

Alternative histories. Much of life is path dependent. We saw that with the series on Rory Sutherland who pointed out that much of the time we don’t decide what to eat but how. Once you make a choice you’re down a decision path and a host of other paths go untraveled. Falk recalled something similar.

“Who knows what happens if we win the game (in Boston), we break the losing streak, who knows if that changes things…all this stuff happens and that obviously changes the dynamics of an organization. That shifts some of the tasks you have to do. That shifts what you’re paying attention to at any given time.”

…

Incentives. Even though there were external pressures (from people who aren’t there).

“(Sam Hinkie) was incredible at having an internal consistency and not paying attention to whether or not something would cost him his job and paying attention to what was best for the franchise in the long run… a lot of times that’s how the worst decision in the NBA get made is people who are desperate to save their jobs. They’re acting correctly for their own incentives.”

Incentives – and not only money – matter. Wells Fargo, said Charlie Munger, had an incentive structure too aggressive and it led to people doing bad things. The best incentive systems align stakeholders and owners, principals and agents.

…

Numerators and denominators. Certain teams have good advanced metrics but aren’t winning games. Their process numbers look good but their outcome numbers look bad. Rather than always trumping outcomes with process, the curious will dig deeper.

“When you see a terrible defensive team with the right shot profile you wonder, are the shots so easy the opponents don’t even have to work for them?”

A team that allows ten shots at the rim where eight go in will have a better “Shots at Rim” statistic than a team that allows twenty shots at the rim but only five go in. If you don’t have rim defenders then the rate that rim goes up. Analytics don’t solve problems like a silver bullet. Analytics lets you ask better questions.

…

Be different. In his resignation letter, Sam Hinkie pointed out the importance of being different. We covered that here too.

In Philidelphia, they recorded three-point rates in practice.  “We did things that were thought of as crazy,” said Falk. If a player shot above a certain rate in practice they got a green light in games.

It’s hard to be different, Zach noted. “They’re (the Pelicans) trying lineups right out of the jump that maybe would have taken them twenty or twenty-five games to get to had they been healthy and I think that might have been good for them.” Too often teams have an incentive structure that rewards tradition over interestingness. As Sutherland put it:

“One of the reasons stupid, or pig headed people do well, and when they do well they do really well, is because they are ignoring all the category norms everybody else thinks are important and they’re emphasizing something completely different.”

…

Using data. Falk created Cleaning the Glass and said:

“(About the site) I focused a lot on making the stats understandable. The ranks and percentiles are the key because there’s a lot of advanced stats that people don’t know what it means but if you know compared to other players at that position that tells you a lot more. One of the other things I did was broke things down by context.”

In Big Data Baseball we hear the story of the Pittsburgh Pirates staff getting buy-in from the players. One thing that led to this was understandable statistics. For the Pirates, heat maps were the key.

…

Lowe and Falk talk about a lot more; optionality, redundancy, luck, small samples, distributions, Bayesian updating, and weighted decision making.

Thanks for reading. If you want an email that includes all the best stuff I listened to each week it’s here.

Supported by Greenhaven Road Capital, finding value off the beaten path.

Tyler Cowen joined David Perell on the North Star Podcast to talk about China and India, reading and going, and curiosity. Cowen’s ideas have been on the blog before in posts about cheeseburgers and an interview with Erik Torenberg. Cowen’s own podcast is one of my favorites. Here are my notes.

…

Curiosity. Cowen is very curious and it might be the fuel for the ‘Tyler Cowen Production Function.’

“I have long-term study plans. Part of my long-term study plan is to understand India and China much better, so that’s a ten-year project I’m kind of in the middle of…during the day I just try to keep up with the flow and the flow always beats me.”

“I view myself as a prisoner of my passions so what helps me is to be very motivated to do what I do.”

“You just want to try to figure things out. It’s a Sherlock Holmes-like game.”

“If I can find things that are fun, compounding will kick in in my favor and all the blunders I make in the meantime will come out in the wash. I recommended against that for most people but that was my so-called planning – to have fun.”

In his podcast on cryptocurrencies, Patrick O’Shaughnessy said it was a fun rabbit hole. Rory Sutherland said, “the one quality I always look for in people is curiosity.” Ray Dalio said that curiosity is a big motivator.

Around the same time of Cowen’s conversation, Walter Isaacson was doing the podcast book tour and he agreed with Cowen about the value of being curious. DaVinci – Isaacson’s latest subject, and a book Cowen recommended – was curious. He kept a notebook of questions. Isaacson is curious too.

Curiosity isn’t only external, it can be internal tool.

“I think so much of what we are, we are born with, so admit that about yourself. Figure out what you’re really good at and try to build on that. Be pretty honest with yourself about what you’re not good at. It has to be fun because you need to be more motivated in this competitive world order.”

…

Reading + Going = Knowing. Travel is one of the best ways to learn about the world, and it’s the combination of reading and going that deepens knowing.

“I like to go to weird places.”

“That’s part of what being there means. It’s not all going to look like Venice, nor do I want it to.”

“I’ve tried reading (about how the Balkan states are messed up) and I can’t grasp it. I go there and the mix of going there and the books makes it all work.”

Cowen’s erudite interactions engulf the audience, but he gives David good advice, attack the elephant from all sides. Use whatever interests you as a foothold. Architecture, music, celebrity, humor, mentors, sports, and food are all good jumping off places. Cowen chose Masadonia wood carving as his jumping off point for that country, but it can be anything. He also suggested Monty Python comedy as  way to understand cheese shops.

And Proust.

Comedy is only possible with a deep understanding. From Jason Zweig to Judd Apatow and Joe Rogan to Lonely Island, comedians are funny because they know what’s funny, and what’s not.

…

Mentors unmask.

“There was a fellow named Walter Grinder, who was probably my most important mentor. I met him – I’m guessing – when I was about fourteen (or 13). Walter had never had worldly success but he was the person who had read and understood more books than anyone else and he’s still one of the few I’ve ever met who has read and understood more than anyone else. I saw him and thought, ‘I want to be some version of this.’”

Cowen’s see-it-to-believe-it moment contributed to his lifetime of curiosity. Kevin Delaney saw it during walks to school in New York City. Ken Fisher saw it in his father and grandfather. Alton Brown saw it in a Tuscan pizza maker. Mentors are like magicians, they reveal secrets of the world for those curious enough to find them.

 

Thanks for reading.

 

Supported by Greenhaven Road Capital, finding value off the beaten path.

This post was part of a week of posts about Rory Sutherland. I learned many things, but broadly Sutherland speaks about four big ideas; creative thinking is hard but worth it, rationality is the wrong model, framing and choice architecture change decisions, and butterfly effects are easiest using psychology. There’s also a Rory’s reads post.

I was going to try to read all of these and give you just the good stuff but there were too damn many. Here you go, as affiliate links and with limited commentary.

Poor Economics by Esther Duflo and Abhijit Banerjee. Sutherland suggested this book because the authors found out that a little can do a lot. In marketing, for Sutherland, the ideal is to create a large effect with a small effort. Virgin Airlines does this, he says. Their salt and pepper shakers are miniature planes and embossed on the bottom it says “pinched from Virgin Atlantic.” This creates delight, says Sutherland.

Duflo and Banerjee found that if they offered poor people small incentives they were more likely to do things that were good for them. A small bag of lentils was enough incentive for mothers to get their children vaccinated. Cultural norms – repeated in television – made people act certain ways and not others. In Brazil for example, birth control became more popular when people saw it on their soap operas. In the United States and the United Kingdom, Sutherland said the same thing happened with the term “designated driver.” Duflo and Banerjee also found that nudges work well. Obstacles mean friction.

Nudge by Richard Thaler and Cass Sunstein. “A tremendous book.” “I’m a big fan.” I’ve written a post about Richard Thaler and also enjoyed his book/biography Misbehaving

Obliquity by John Kay. Successful companies and brands are driven by mission. “Jobs, Knight, Kellogg, Ford – they’re all barking basically. But because they are barking they pursued something bigger than the simple pursuit of short-term profit.”

Thinking Fast and Slow by Daniel Kahneman. “If you read nothing else read his Nobel Prize acceptance speech.”

Predictably Irrational by Dan Ariely.

Ludwig von Mises is one of Sutherland’s favorite economists. Here’s the Mises Institute, Wikipedia, EconLib.

Buckminster Fuller. Tim Ferriss likes Fuller too but I don’t know where to begin. If you do, leave a comment.

How to Solve It by George Polya. “You’re a fan of How to Solve it?” Sutherland asked Daniel Kahneman. “Yes, of course,” he replied. Polya lays out a four-step process for figuring out any problem. Understand the problem, devise a plan, execute the plan, look back. To understand the train problem means to think in terms of better not necessarily faster.

Risk Savvy or Gut Feelings by Gerd Gigerenzer. Which book Sutherland suggests he didn’t say. In both Gigerenzer makes the case that our intuitive judgments aren’t so irrational and he offers other explanations than Thaler and Kahneman.

Why Everyone Else is a Hypocrite by Robert Kurzban. I just started this, it’s similar to Gigerenzer.

The Company of Strangers by Paul Seabright.

The Righteous Mind by Jonathan Haidt.

The Darwin Economy by Robert Frank.

The Armchair Economist by Steven Landsburg. “It’s a really, really good read.”

The Drunkard’s Walk by Leonard Mlodinow.

Spent by Geoffrey Miller. “Alongside Steve Harrison’s, this is one book on marketing and advertising you should read this year.” Miller’s book is about the biological signaling that consumerism creates. This book was much more than “the peacock shows his lovely feathers” because Miller tries to drill down to what the foundational levers of our actions are.

Traffic by Tom Vanderbilt. Malcolm Gladwell has also recommended this book.

The Rational Animal by Douglas Kenrick.

Books on statistics and probability.

“An awful lot of maths is a total waste of time, when on earth in life do you need to know the surface area of a cone? But the stuff involving statistics and probability, I would argue that should be taught as a mandatory at school. People instinctively are bad at it, you know, they’re bad at working out probabilities, likelihood, statistical significance, all that kind of stuff.”

“To make the point, I think statistics and probability should be taught extensively.”

 

What? Not enough? Sutherland suggests more on Twitter.

This week was a bit of an experiment. If you liked it please let me know on Twitter, mikedariano.

Want this week’s series in pdf? –> sutherlandpdf

Want this week’s series as a podcast? –> Soundcloud or Overcast or iTunes.

Supported by Greenhaven Road Capital, finding value off the beaten path.

 

This post was part of a week of posts about Rory Sutherland. I learned many things, but broadly Sutherland speaks about four big ideas; creative thinking is hard but worth it, rationality is the wrong model, framing and choice architecture change decisions, and butterfly effects are easiest using psychology. There’s also a Rory’s reads post.

Ready?

Sutherland is searching for butterflies. This is what marketing is. Add value through intangible means. Small inputs, large effects.

“One of the brilliant things to look for in marketing is disproportionality, how very very small things have a huge effect.”

“That’s the glorious thing about marketing. You can create glorious delight and memorability and distinction with utterly trivial levels of expenditure.”

“Intangible value is a very fine substitute for limited resources in the creation of things.”

Think of the hamburger, says Sutherland. Start with the meat and add a bun. That’s one kind of burger. Then add lettuce, and tomato, Heinz 57 and a french fried potato, a big kosher pickle and a cold draft beer and that’s paradise. The ground beef is central and each additional part is a complementary good. Advertising is a complementary good too.

“Instead of thinking, ‘how can I persuade people to buy my product.’ — ask instead ‘what’s the equivalent of lettuce, ketchup, and bun?’.”

Here’s where Sutherland says to look for these opportunities.

“What we need to do as marketers is either look for things that are objectively similar but subjectively different…or things which are subjectively similar but objectively different.”

Too often we prefer large sweeping gestures because we think that’s what works.

“If you’re a guy at the UN with a budget of two-hundred million it is beneath your dignity, it’s insignificant, it doesn’t satisfy you own self-love to say – ‘The solution to poverty is free lentils.’ You always look for a big grandstanding heroic thing.”

As we saw in the ‘Irrational’ people section, it’s a mistake to think linearly. Big inputs do not equal big outputs. Sutherland says that the Eurostar is an example of this mistake. Engineers and politicians wanted to change a three-hour train ride to a two-hour thirty-minute train ride. That’s a sixteen percent improvement!

But at what cost? Instead of making it faster what if they made it more enjoyable? But that’s hard to measure. People like spreadsheet math, however as Sutherland says, “there is no aircraft as fast as a sleeper train.”

Building more doesn’t always help either. You’ve probably seen this in your commute. There’s a road that’s busy, too busy. Someone decides to widen it. Work begins. Barrels sprout. Bulldozers arrive. Temporarily congestion is worse. ‘That’s fine,’ you think to yourself. ‘Once the work is done things will be so much better.’ Months later the last equipment is removed and traffic is not so much better. Why? You can’t build your way out of congestion. Make something easier to do and more people will do it.

“So my tip for the day is this: spend just as much time working on how you can reduce consumer transaction costs as you do trying to reduce manufacturing costs.”

Another small effort to large effect is speed cameras versus ticketing cameras. The cameras that take pictures of car license plates, record the data, and send out a ticket are an order of magnitude more expensive to install and maintain than the ones that display “Your Speed Is…” We should ask if spending ten times as much is bringing back ten times the results.

In a talk for WIRED Health, Rory gave advice for how small changes can lead to people being a lot healthier. Start, with the name of thing. Sutherland said that if you want people not to go to the A/E for small things change the name of the A/E (which stands for Accidents and Emergencies).  “What you call things affects how people behave…Because if you create a name for something we automatically assume it’s a norm.” This worked for designated drivers, says Sutherland. Once that term was introduced on television sitcoms it joined the lexicon.

Another medical example is multicolored pills. Filled but unfinished antibiotic prescriptions are troublesome. Rory thinks that these prescriptions should be filled in two colors. Then pharmacists can tell people, ‘finish the eighteen blue ones and then take the six red ones.’

“The likelihood that people will get to the end is much greater when there is a milestone somewhere in the middle.”

Sutherland calls these butterfly effects MONO ideas –  Minimalist Oblique Non-Obvious interventions.

“Minor irritations are really worth focussing on because unlike things like health care, they’re relatively cheap to solve and the difference they make to the quality of life may be enormous.”

These are not obvious, so to find them you need to look in different places.

“Test strange things and when they succeed you know something nobody else does and that’s what’s really valuable in business.”

And this area of thinking is fertile.

“It’s hard to make an airplane ten times faster but you can make a hotel ten times cooler than another hotel for a fraction of the price.”

And butterfly effects are easier now than ever before thanks to the computer in your pocket. This is key because timing matters too. Sutherland says, imagine you have the option to drive or take the train. The decision point isn’t once the car is packed, the decision point is well before that. Once people are packed in a car the inertia to make it a car journey is too great.

“In fact, if you have kids and have already packed the car up with seven tons of shit the decision is already made for you.”

What if instead, you make the decision earlier. “Then the asymmetry doesn’t apply…By using technology to change the place that decision gets made you will fundamentally change the decisions that people make.”  

The best billboards, says Sutherland, are ones that change. In one talk he shows a billboard advertising travel and points out that it changes throughout the day and the year. During afternoon rush hour it notes that the train doesn’t stop. Around the holidays it reminds you to visit your mum. Different messages with different means at different moments change momentums.

Here’s another example you’ve seen, please shower before swimming. My local YMCA has this sign on the pool deck. Whereas this sign should be in the locker room. On the pool deck, I think, well I’m about to get wet anyway I’ll just jump in. While in the locker room I think, well I’m about to get wet anyway, I’ll just rinse off first. Putting messages at the wrong place, says Sutherland, “is a disaster.”

 

Thanks for reading, tomorrow, a surprise.

Supported by Greenhaven Road Capital, finding value off the beaten path.

This post was part of a week of posts about Rory Sutherland. I learned many things, but broadly Sutherland speaks about four big ideas; creative thinking is hard but worth it, rationality is the wrong model, framing and choice architecture change decisions, and butterfly effects are easiest using psychology. There’s also a Rory’s reads post.

Ready?

The way choices are presented to people influences the choices they make.

“The power of reframing things cannot be overstated.”

“The interface fundamentally determines the behavior.”

“If you make making a decision really difficult people do two things. They either decide really badly or they don’t do anything at all.”

“The idea that we value things objectively, free of the context and expectation which we bring to them is completely wrong.”

What does that look like? Rory says to imagine a restaurant with great food but that’s had a sewage backup. No matter how good the food, you aren’t eating there tonight. Even if the maitre d offered half off, you’d back off.

We can frame good things in bad ways to change behavior. Two Australian radio personalities convinced Ed Sheeran to help them with a bit. The plan was to offer a peep show – starring Sheeran. One guy would hawk the show on the sidewalk, the other would take the money and guide people to their seats for the thirty-second peep.

It took them two hours to get anyone interested. Sutherland said, “It doesn’t matter how good your product is if your marketing is terrible.” An ‘Ed Sheeran peep’ is great for a radio stunt but horrible for fans.

Another example of good and bad framing is dietary guidelines. Successful diets prioritize easy, not logical, decisions.

“If you’re a dietary advisor or nutritionist the logical thing to say is ‘this is your caloric intake for the day and you should stick to that.’ That’s a very difficult thing to do because it requires you to invoke System Two to eat meals that are smaller than the one you want to eat.

“It’s tiring, cognitively difficult and requires a huge amount of self-policing. If you just say ‘Don’t eat carbohydrates.’ Once a week you go to a shop and don’t buy carbohydrates. You need no extra self-control because there aren’t any carbohydrates in the house.”

Forget about counting units says Sutherland. It’s not hard to do but it’s hard to start. Make it easier, and don’t count at all. “When it’s abstinence you can’t con yourself.” And how are you supposed to count how much you’ve drunk when “you’re already a bit pissed”?

Rory likes the work that Richard Thaler and Cass Sunstein wrote about in Nudge. For people that get worked up about ‘being told what to do.’

“Nudging can be nothing more than the act of painting white lines in the middle of the road or painting a pattern in a car park so that people all park in a way which allows more cars to fit into a given space.

“You know, as an absolutely purist libertarian, I could get really angry and say, ‘I hate car parking lines because they interfere with my right to park at the diagonal.’ But you’d have to be a fairly deranged libertarian purist to take that view, to protest against the lines in car parks.”

Thaler and Sunstein address this in their book. Everything has some design, why not be thoughtful about it. Sutherland suggests designs for people’s psychology.

“If you look at the world of physical design—I drove you here today and I steered the car with my hands; every single car I know, including Formula 1 cars, has a steering wheel. Now, our hands didn’t evolve to steer cars. What we do very sensibly is we design cars in such a way as some evolved equipment that we have is quite good at steering, which is why nobody’s attempting to devise an interface where you steer your car with your nose.”

“What fascinates me is that when we design physical things, no one’s so dumb as to design a car that you steer with your little toe. When we design programs and government policies and things, we commit that error all the time. And the reason we commit the error is because, first of all, nearly all the decisions where we attempt to predict or understand human behavior are based on, as I said, this broken pair of binoculars. One lens is neoclassical economic theory and the idea of perfect rationality, perfect information, perfect trust. That’s obviously wrong.”

How do people actually make decisions? In businesses they use spreadsheets. We buy fat toasters rather than consider bread slicers. We often satisfice and rationalize even more. Those are the things to consider. Focusing matters too.

As Sutherland observed about being on the airplane that unloaded to a bus, focusing matters. Danny Kahneman said this to Sutherland:

“Nothing in life is as important as you think it is while you’re thinking about it. So just thinking about anything makes it look bigger.”

Sutherland rephrased it this way.

“If you can change people’s focus, attention, and their status currencies so they derive more pleasure from what already exists, rather than from what has to be created to sate their demands, you can essentially increase wealth without increasing consumption.”

Think about this. If we change the way people look at a situation it changes how they feel about it. What does it take to change the way people look at a situation? Almost nothing! Just words.

Four words will sometimes be all you need. When Sutherland helped a company figure out why people didn’t renew their subscriptions, they found that four words increased renewals by thirty percent. “Most people like you…” This design is called choice architecture.

“In many cases instead of persuasion, you want to ask ‘How could we change the situation to make it easier for people to do what we want them to do'”

“When you want to change behavior, try to change the environment rather than try to persuade people.”

“I think the first role of marketing is to make a decision easy to make. And that means clarity of choice and lack of anxiety.”

Sutherland says that we are blind to the path-dependent nature of decision-making. How did you decide on your last meal? Often we choose ‘how’ not ‘what’. Stay in or go out? Cook or be fed? Fast or slow? Those are the initial questions, not, Italian or Greek.

The same is true for buying houses says Sutherland.

“When we buy a property, the order in which we look at things matters. Location is the highest priority. Next, In the UK, it might be the number of bedrooms it has (in the US, it might be the floor area, by square footage). We might then look at the size of the garden, a few other features, and whether it has a pool. But architecture generally comes pretty low down the list. We only look at architectural aesthetics when we’ve got down to a final selection of four or five.”

Rory recalled a business example of this too.

“Here’s a really interesting thing, a lot of people at Ogilvy, senior people at Ogilvy…used to say: ‘look, Amazon’s a really successful online book seller, but once Barnes & Noble get serious about selling books online, people are going to choose Barnes & Noble.’

“Quite a few intelligent people said this, and I always remember thinking that they were wrong. What those people weren’t realising was path dependency, which is about how I want a book or I hear about a book or someone mentions a book or I read about a book or I think about a book or my course professor tells me I need a book.

“The next decision is which channel I should buy it in — shall I go to a shop or shall I go online? And then the third decision is, in that channel, which branch shall I go to? Now, within the bookshop channel, Barnes & Noble were strong, but once you’ve made the decision that you’re buying that book online the strongest brand in the online channel was Amazon.”

Amazon still benefits from this path dependent thinking. If I want to buy something online, I check Amazon rather than if my local WalMart could deliver it cheaper, quicker, or both.

Another example – one that Sutherland dislikes – is the the placebo choice. ‘Red or white?’ wine is a placebo choice. You feel like you’re getting to make a choice but really you aren’t. This fundamental human quirk even works on toddlers. Never give a child infinite choice. Give them placebo choice instead.

This works because people prefer to adapt rather than work. Besides the Placebo Choice here are some other choice designs.

• People tend to choose the middle of three options. “There are huge, huge comparative forces in how we actually exercise judgment.”
• People tend to do what others also do. “Making something seem like a social norm massively decreases the stigma of doing it yourself.”
• People tend to believe complicated things do more. “Because it’s complicated we think it’s really good.”

The way people see a situation affects what people believe and how they will act.

“The context, the medium, and the interface within which a decision is taken may have a far greater effect on the decision we make than the long-term consequences of the decision.”

This can be incredibly helpful. Good framing has butterfly effects.

 

Thanks for reading, one more set of notes tomorrow.

 

Supported by Greenhaven Road Capital, finding value off the beaten path.

This post was part of a week of posts about Rory Sutherland. I learned many things, but broadly Sutherland speaks about four big ideas; creative thinking is hard but worth it, rationality is the wrong model, framing and choice architecture change decisions, and butterfly effects are easiest using psychology. There’s also a Rory’s reads post.

Ready?

If you liked the Be Different post, you’ll love this one.

Drinking the spreadsheet Kool-Aid leads to causality hallucinations. Life isn’t cause and effect and even if it were we may not pay attention. If we were homo-economicus then a change in the weather would lead to a change in the wardrobe. Plummeting stocks would lead to buying, not selling. We may think we are, but we are not homo economicus.

Homo economicus is the ‘species’ invented by Nobel Prize winner Richard Thaler. It’s the person at the perfect weight, with the optimal savings, and one who strides gaily and daily for their ten thousand steps. This species is the one that not only thinks that time is money but disagrees with Rory about longer but more enjoyable train rides because they know how much productivity is lost. Rory kindly disagrees.

“What you have to realize is that most human behavior doesn’t follow physical laws.”

“Marketing is the science of knowing what economists are wrong about.”

“Consumer capitalism is like the Galapagos Islands for understanding human behavior.”

We must move past standard economic theory and physics precision. Spreadsheet cells don’t have elbow room.

“That does not mean that changing human behavior does not involve science. What it means is it’s a different kind of science. It’s less like physics and more like climatology.”

We need to study something different rather than study nothing at all. Sutherland compares psychology to technology. Thought is code. The rational agent model implies that code is buggy – but it is what it is.

One example from – another Nobel Prize winner – Daniel Kahneman is ease of remembering. What people do, says Kahneman, is that we equate recall with accuracy. If asked about the value of international trade deals, your opinion will mostly be based off what comes to mind. The worker who lost his job will have on point of view. The person with no relation to the company another.

Rare is the person who will say ‘I don’t know.’ Why is that? Internal trade is a huge issue. It’s an idea that circles the world like a spool of thread around a globe. It’s complicated, but we don’t say that. Instead, we take the easy way out and believe that what comes to mind is the answer. Kahneman has an acronym for this idea; WYSIATS. What you see is all there is.

This system isn’t good or bad – it just is. When Gerd Gigerenzer asked German students to identify which city is larger, Detroit or Milwaukee, they largely guessed correctly. Americans did not. “I recognize that” is a good heuristic, writes Gigerenzer. That’s our code.

Sutherland wants people to understand that. In one talk he said, “My first very simple and important point to make is; psychology is technology…As you get better understanding these properties, technology gets better.” People are complicated. Here’s how.

Satisficing and maximizing. We tend to choose good enough results.

“Most real-life decisions aren’t like archery; aim for the ten, if you just miss you get a nine, if you miss that you get an eight. Most real-life decisions are more like darts. If you aren’t very good at darts aim for the southwest corner of the board. You won’t get a triple twenty but you won’t get a one or a five. The average score is better. This is called satisficing.”

Satisficing is good enough and it’s a helpful decision-making strategy.

“We are descended from people – whatever their other faults – who avoided making really really shitty choices…People pay a premium for brands not because they think Brand B is better than Brand A but because they’re more certain it’s good. It’s less likely to be terrible. It’s insurance against disappointment.”

When we buy brands we buy assurance. During the early days of mp3 players, there were as many devices as options for illegally downloading music for the device. It was great, but I couldn’t understand why Apple products were so popular. There was no logical reason for it. Apple wasn’t the behemoth they are now but their brand was still strong. The iPod satisficed.

“The idea is that when you make decisions in an uncertain setting, you have to care about not only the expected outcome, but also the possible variance. We’ll pay a premium not only for ‘better,’ but for ‘less likely to be terrible.’ That seems to be an important thing to understand when analyzing decision making.”

I recognize this as an iPhone owner. There are (probably) better phones than the one in my pocket, but I don’t want to take the time to learn a new operating system and research brands in an attempt to maximize my experience. I’ll satisfice instead.

Here’s another. Why is Airbnb a billion dollar company but no one talks about Craigslist rooms? It wasn’t always this way. During their early days, the Airbnb founders wrote a script to post rentals on Craigslist too. At some point Airbnb became “less likely to be terrible” than Craigslist listings.

“Once you understand the perfectly sensible evolutionary instinct to satisfice, then the preference for brands is not irrational at all: I will pay a premium as a form of insurance for the reduced likelihood that this product is appalling.”

Satisficing and maximizing are domain dependent. My wife maximizes family vacation plans while she satisfices family dinner plans. I’ll maximize my writing but satisfice the online hosting.

“If you are an expert in a field, you are a maximiser. Your car is Teutonic. You listen to relatively obscure Indie music. You wear niche clothes brands, like those funny jeans with a wiggle on them. You eat at restaurants you have learned about through recommendation or reviews. And go on holiday somewhere other than Spain, France or the USA. The maximiser seeks to find the very best of everything, and uses his consumption choices to define himself or herself apart from other people.”

Great brands are built around satisficers.

“To be great you need a few rich folks and a few poor folks; a few oldies and some young people. Nike’s extension of their brand belief to all sexes and ages is not a cop-out. It is proof of the brand’s greatness. As Andy Warhol said of Coca-Cola: ‘The great thing about Coke is that the president of the US drinks the same Coke as the bum on the street.’”

“Is Red Bull an energy drink or a mixer? What is the user-imagery of Amazon? Who is the typical Google user? What makes Google better? The fact that we cannot answer these questions simply would typically be considered a flaw.”

We use clues for decision making. They can be internal – I recognize that. They can be external – let’s follow the crowd. They can be aspiring – I’ll maximize. They can be avoiding – I’ll satisfice. Sutherland’s goal is to get people to think in these terms.

Rationalizing.

Satisficing and maximizing is not how most people see themselves. We’re wiser, less whimsical. This is the story we tell ourselves. In his conversation with Rory, Danny Kahneman said:

“When you need information that you don’t have you usually aren’t aware that you need it. If you have partial information about something you will make the best story possible out of the information you have. And your confidence will be determined by the coherence of that story.”

What Kahneman has found in research, Sutherland has found in people’s minds and mouths. Take toothpaste for example:

“Why do we prefer stripy toothpaste? When you think about it, once you put the toothpaste in your mouth, you mix it all up. Why does it need to be stripy?

“The strangest thing on the web is, there are hundreds of articles saying how they make the stripes in toothpaste but there’s no article saying why. All those materials, the red, and the blue, and the white get mixed up in your mouth. It’s completely pointless.

“Why do you do it? Something about the human brain just thinks if there are three different colors, it’s easier to believe that that toothpaste is doing three different things: banishes plaque, freshens breath, eliminates cavities. Because there are three colors, I find it easier to believe that this thing is doing three totally different things.”

That’s one way we rationalize. Google, Sutherland thinks, does another. Because they began offering a single search bar on a simple web page, people assumed they were better at search.

“People believe something that only does one thing is better at that one thing than something that does that thing and something else. It’s called goal dilution.”

In his presentations, Sutherland often includes these lyrics from Bob Dylan’s Brownsville Girl.

We can rationalize almost anything – and have done so for hundreds of years. Benjamin Franklin praised our reasonability, “since it enables one to find or make a reason for everything one has a mind to do.” Kahneman took this thinking, researched it, and wrote a book about how we think fast and slow. He told Sutherland.

“If I say two plus two a number comes to mind. You didn’t ask for it, it just came. The capital of France, a word comes to mind. If I say a nasty word like ‘crime’ you have an emotion. You didn’t ask for it, nothing deliberate, it just happens.

…

“Most beliefs come from childhood but we build arguments. We pretend that we got to our conclusions from arguments when in many cases it isn’t true.”

Sutherland also likes the quote from George Loewenstein, “just as we have a sex drive and a food drive, we have a sense-making drive.” Academic researchers (and business marketers) study (and exploit) this gap. They know it’s there because if you change small things a behavior changes.

Here’s an example. Once upon a time, there was a very nice hotel. To celebrate the season, the hotel commissioned an ice sculpture for their lobby. It would be the cherry on the sundae of a great stay. Only things didn’t work that way.

What really mattered for the guests was check-in. If guests had a great check-in experience; a short line, kind staff, ready room – then they rated their entire stay as better. The music sounded better, the room was cleaner, the ice sculpture was more beautiful. However, if the check-in experience was bad then the entire trip was shit.

“Everything we judge is based on our prior expectation…the idea that there is just this thing called ‘Utility’ which is produced in a factory and is completely disassociated from the context in which the thing is consumed is not happening.”

“The price of things is not an absolute. We don’t have an internal measure of pleasure against which we measure our expenditure – it’s completely relative.”

We rationalize. If check-in is disorganized then the room can’t be that nice. Stories color in details and smell of certainty. This is part of the reason Uber succeeded. The app created a chance for stories (and certainty).

“The nature of a wait is not just dependent on its numerical quality – it’s duration – but the level of uncertainty you experience during that wait…The human brain doesn’t care so much about duration as about certainty…Uber let us make stories about where our cab was.

“What makes Uber different is that when you phone for a taxi, in between that phone call and the taxi arriving, you enter the Twilight Zone of uncertainty. ‘Where is he? Why isn’t he here yet? They said five minutes. I can’t see him. Maybe he’s outside. Should we go outside and have a look? What if he’s left?’

“With Uber you watch the cab approach in real time on your map. And you go ‘Oh, look, he’s stuck at those traffic lights. I’ll make myself a cup of tea while I’m waiting.’ And you’re both happier, you make better use of the time but you’re also vastly less stressed in that period. Now, simply knowing that is really, really important. We don’t like uncertainty.”

Jason Calacanis agrees. He said that live maps is why Uber worked and previously similar services didn’t.

Companies with cheaper products need to account for this storytelling. One of our simple-and-useful-but-not-perfect heuristics is that expensive is better. That’s not always true. Sutherland jokes that a king of yore would give you half his land for a flat screen television. Things get better and cheaper. Homo-economicus celebrates this. We do not. Instead, we think:

“There must be something wrong here. Even though that product seems better, if it’s cheaper that must mean it’s shit in some dimensions I don’t currently understand.”

“Marketing is much more complicated than people realize. It’s not only justifying a higher price but it may also be about de-stigmatizing a lower price.”

Sutherland praises the way low-cost airlines have approached this. They fill in the story for us. It’s cheaper because there’s less.

Look at this Southwest Airlines advertisement. The “no-hidden-fee zone” is the explanation for the price. The implication is that the other airlines are more expensive because they have hidden fees whereas Southwest is upfront about it. They tell you a story.

This isn’t just about dollars, it’s about sense too. Sutherland recalls taking a flight and, rather than unloading at the gate, they unload via stairs and take a bus into the terminal.

“Every single passenger on a plane, in those conditions, generally goes, ‘Aw shit. I’ve been shortchanged here. I kind of paid you for that service. The least you can do is at least connect me to a proper gate with a tube. Now you just dump me on the tarmac and putting me on a bloody bus.’ Partly because ‘bus’ automatically creates the assumption of second best-ness in our mind.”

However, Sutherland had an insightful pilot. After announcing the change, he said that the bus would take the passengers straight to the passport control so they wouldn’t have to walk far with their bags.

“Hold on. That’s always true isn’t it? When you get a bus, it takes you right next to passport control so you don’t have to schlep passed 700 yards of duty-free shops in order to actually get to your luggage and then get to the arrival zone.”

The facts are the same but the rationalizing is what makes an experience great – or not.

“Here’s a case where you can take something that’s bad, redirect our attention to the good bit of it, and we now think it’s good.”

One other example is the Nespresso machine. How do people rationalize using this machine?

“Objectively they are insanely expensive. If you had to buy Nespresso coffee in a jar like Nescafe, per equivalent dosage of caffeine, a jar of Nespresso would cost about sixty pounds. You’d look at that on the shelf and you’d go, ‘That’s insane!’ I could buy Nescafe for only five or six euros.

“But it doesn’t come in a jar. It comes in little a pod. So the frame of reference isn’t Nescafe, it’s a coffee shop. You think, ‘In the coffee shop I’d be paying one pound twenty. This little pod cost me twenty-eight cents. This machine is practically making me money!’ Our perception of things is relative. What you compare something to matters much more than whether the thing is expensive or not.”

We aren’t rational but we don’t need to be. Rules of thumb work for a lot of things. For other decisions, we satisfice to avoid downsides and rationalize after the fact. Producers can use this information to help people tell themselves these stories. This is done by framing (coming tomorrow).

Thanks for reading.