Penn Jillette

1-pennjillette-001Penn Jillette (
@PennJillette) joined James Altucher for a rapid fire QA that covered a lot of good ground. Jillette talked about how to find your passion, the lessons of clown college, and sleeping in his car. The big points:

– The career advice in supermarket music.

– The clown college education.

– What you learn when you sleep in your car.

– The biggest magic trick is one anyone can do.

– How to do something great.

Let’s get started.

“If you don’t like supermarket music, make supermarket music.”

Jillette tells James this, and his logic makes sense, but before we look at that, let’s flip around to the easier expression – do what you love.

Actually, suggests Jillette, maybe not. If you love something then you probably already love someone doing it. This is where the problem lies. You can’t improve it. Jillette says that Guns ‘N Roses loved the Rolling Stones, but knew they couldn’t do it  better, so they didn’t.

Neil Gaiman has similar advice about writing. “Don’t read Tolkien if you want to write epic fantasies,” he says. Instead read different things and read them widely, Tolkien didn’t read Tolkien like books.

The quote above about supermarkets is attributed to Gary Panter, who wrote, “If you want better media, go make it.” This is Jillette’s point, find something you don’t like, and improve it. When Jillette and Teller first teamed up, they came up with the list of things they wouldn’t do. “What I really learned during all those shows,” Jillette says,  “was what Teller and I did not want to see in a show.”  By eliminating those, they created something else.

When Michael Lombardi looks acquire NFL players, he looks to eliminate first. When Astro Teller gave parenting advice, he said what not to do first. Nassim Taleb tweeted, “You get more info from “What failed People Do Before Breakfast” than “What the Most Successful People Do Before Breakfast”.”

Look at something you can do better, and do that. 

The Clown College Months

Clown college, Jillette said, was great because he found his scenius. He doesn’t literally use the term that Austin Kleon began to spread, but the idea is there. Jillette’s biggest opposition to college wasn’t the school part, it was the people part. “What I hated about high school,” Jillette says, “was drugs and bad music.”

It was the people he didn’t like. At clown college he found people he did. “This was really really important to me,” Jillette says when he learned that people could actually talk about what made things funny. It was a scenius.

Jay Jay French told a similar story to Altucher, only about music rather than comedy. He went through 11 versions of Twisted Sister before he met Dee Snyder to create the band we know today. That only happened, French said, because he and Dee were focused on the same thing, making great music. It was a scenius.

Nicholas Megalis learned this too and said, “find a group of people who are like minded who can help you achieve certain goals like production, composition, press. Everything is a team effort.” It was a scenius.

Clown college was Jillette’s first scenius.

What you learn, when you sleep in your car

Early in his career, Jillette spent a lot of time sleeping in his car. “Was there ever a low point?” James asks. Not really Jillette says. Why, because how much lower could he go?

“My needs were low,” Jillette says, “I was 19, single, and didn’t care where I slept or what I ate.” He didn’t have much money but he didn’t need much money. This is a liberating idea.

When Kevin Kelly talked with James, he said that after he lived in Asia, eating lentils and living in a house he built himself, he realized how much money he really needed. Not much.

Billionaire Mark Cuban said he had a similar goal. He just wanted to retire and was willing to live like a student if that’s what it took. Cuban knew he could have the life he wanted this way.

Simplicity for it’s own sake isn’t the problem. The problem comes when money leads to needs and needs lead to reaches. Once you reach you become off balance and fall. 

In his book, The Hour Between Dog and Wolf, John Coates writes about Wall Street traders who start to think risking a bit more so they can buy (rather than rent) homes on Cape Cod or Nantucket. Those influences start to nudge them to reach a bit further. Then a bit further.

The reaching often continues because it’s not just the house they want to own. It’s a bigger house, bigger lot, more water in the view from the bathroom window. It’s reaching more until they lose their balance. Then comes the fall. 

About three months after Jillette and Teller teamed up, they were making the same that their fathers did, and did what they loved. This, to Jillette, meant they were a success.

Jillette also says that he had few options. “That door was closed to me, because I couldn’t do anything.” Jim Norton said the same thing, “I personally left myself with no safety net.” When there is no where else to go, you have to move forward. It worked for Jillette.

The only magic trick you need to know

There’s one trick to magic Jillette say, and that’s to work harder than the audience thinks he would.

A recent trick he and Teller added to their act is  3 minute long and took 6 years to figure. Would you spend that long? No, but he and Teller did.

This led to the most memorable quote of the episode, “the most important thing is everything.” Jillette first saw this idea when he was in high school and had a substitute teacher for the creative writing class. That teacher, he recalls, said “no one wants to read what you write, so make it as easy for them as you can.” If there are misspellings, people are gone. If there are unknown words, people leave. Anything that doesn’t fit will dissuade them from continuing.

Jillette applies this to his act when they test out new tricks. They’ll have someone sit far off to the right and left. They’ll have someone in the balcony, at the bar, and up close. These spotters will call out, “nope, nope, nope” as they see things that don’t work. This is annoying, Jillette says, but you have to do it.


A final piece of advice.

To be great, Jillette says, you need two things; inspiration and skill. “You’ve got to be brave enough to do shit that is absolutely crazy and then you got to work hard enough to do it perfectly well.”

Thanks for reading, I’m @MikeDariano on Twitter. Here’s the trick James and Penn reference in the podcast.

Joshua Foer

Joshua Foer (@JoshuaFoer) joined James Altucher to talk about memory, his book Moonwalking with Einstein: The Art and Science of Remembering Everything, and a menagerie of other ideas.

The interview mostly focuses on Foer’s book, which is good. The book follows his path from a single article for Slate, to a chance to be the United States memory champion. But what can we take away from the interview?

– What is gonzo journalism? Do you like it? If so you should read a lot more of it.

– Memory is not wisdom. Wisdom is something different.

– Learning to learn.

– How to remember a name.

– Advice for your next birthday party.

Gonzo journalism

The interview begins with James saying, “I like the genre of journalist who become the stories.” I have to agree. Foer’s book is good and so are the Ben Mezrich books. People say good things about Neil Strauss too. Foer, though, says James, “took it to a whole new level.”

It started right after he wrote the article says Foer. At that point he had just begun his freelance career. After the memory championships, and a day with one of the participants, things changed. He started to see memory competitions  as something he might be able to do. Once he set that course and started to train for the United States memory championship he decided he was in it to win it.

“Why?” asks James. “Good question,” Foer replies.

James confesses that sometimes if he gets over invested in one area of his life it’s because he lacks something from another. I’m not sure how that relates to James, but I do know how it relates to rats.


Rats, specifically rat parks.

When rats are confined to a barren cage with one bottle filled with plain ‘ol water, and the other with plain ‘ol water plus morphine, the rats become addicted to the morphine and die.

But, here’s the good news. When rats are moved to a rich environment, as Stuart McMillen’s artwork depicts, they happily play, fornicate, frolic, and do other lab rat things – even though the morphine is still there.

The theory isl that the rats get their neurochemical fix from the things at the park rather than drug in the water.

Enriching environments are good for us too, as is the case for Foer’s adventure into memory competitions. Plus, it made a great book (though he still forgets where he puts his keys).

Memory and Wisdom, Apples and Oranges.

Memory is not wisdom. Or intelligence. Or smarts (street or otherwise). It’s just memory. “A mistake we often make when we talk about memory,” Foer says “is to think about it as a single monolithic thing.” Memory matters in context and this is the idea that you and I should – err – remember. How so?

Let’s look at chess players. We think that grandmasters are smarter than masters who are smarter than regular players.

Grandmaster > Master > Regular

So the thinking went, grandmasters must have a much better memory than everyone else, and they did, but only if the pieces were on the board in a way that could have actually happened. Makes sense. Now let’s tweak things a bit.

However, if the pieces were arranged so that that board configuration could never have actually happened. Imagine a five year old girl uses a chess set as an art medium. In those cases the 3 groups had about the same memory. What gives?

Context matters. We process information through different lens, patterns, and structures says Foer. He continued, “it goes on in all walks of life, a great memory comes with interest and rich neural networks.”

We can all become a grandmaster in our own field, but we have to dive deep and study.

Chess grandmasters study games. General Stanley McChrystal and Michael Mauboussin read widely.

It’s why Bill Belichick – 6 time Super Bowl Champion spent so much time early in his career studying film. In The Education of a Coach, David Halberstam writes this, quoting a coach who worked with Belichick:

“I think a lot of it came from the fact that he had not played big-time football and because of that he felt he had to work twice as hard as anyone else to prove himself, to prove his bona fides. He was someone who simply was not going to be denied. He was not very different back then when he was just starting out then he is as the coach of a team that has won three Super Bowls.”

Belichick’s study of football film is almost identical to the process of grandmasters studying old chess games.

Look also to Gary Vaynerchuk. He tells the story of showing up at SXSW  in 2007 to look for something to invest in. He found Twitter. Let Gary tell you what happened next.

“Don’t let anybody bullshit you. Everybody was like, this is the dumbest thing I’ve ever seen. This is stupid, who cares. Nobody cares if you eat a hotdog…and I was like, wait a minute, I think this is like email.”

Vaynerchuk noticed the similarities between a forwarded email and a tweet. He had run successful email campaigns for Wine Library, might this be the same? This wasn’t memory in the sense that he could remember the order of a deck of cards. This was memory in the sense that he noticed trends for what worked.

And it’s all the better if you like the process. It’s what Chris Hadfield said about becoming an astronaut, he might not make it, but the journey along the way would be good. It’s why Gary Vaynerchuk said that he loves the grind.

The process. The grind.The film, the books, the study. Those are the things that build the lens for where we create a powerful memory.

Learning how to learn

Foer charged forward. He started to practice more. He memorized entire sheets of random numbers, license plates, his credit card. His memory seemed to know no bounds, until he reached the “okay plateau.”

This is the point where something we do moves from the conscious and attentive parts of our brain, to the unconscious and pre-attentive parts. It’s a switch to autopilot. For many things  – driving a car, cooking a cheeseburger – this works well. For Foer it didn’t. He wasn’t in a competition to test whether or not he could do it, but how fast he could do it.

Foer had to focus on deliberate practice. In the book he explains it like this.

“The best ice skaters spend more of their practice time trying jumps that they land less often, while lesser skaters work more on jumps they’ve already mastered. Deliberate practice, by its nature, must be hard. When you want to get good at something, how you spend your time practicing is far more important than the amount of time you spend.”

Let’s pump the brakes for a moment. Deliberate practice and 10K hours (the father of deliberate practice) aren’t necessarily the solution to every problem.

Tom Rath told Altucher that if you have some natural ability at something – Lebron James in basketball, Neil Gaiman with stories – that you may need fewer hours. Robert Greene said that your hours might not need to include deliberate practice at all. Scott Adams admits he’s mostly mediocre at individual skills but world-class when those things come together.

What gives then? Do we need 10K hours or can we hack our way?

It’s a bit of both. When we find ourselves plateaued because our natural skill or practice techniques have stalled, we need the boost of deliberate practice.

Who we are born as and early parts of life contribute to expertise. Bill Belichick evaluated football game film with his dad at age nine. Those hours count towards something. If you want to improve, like Foer, you need to climb higher than the okay plateau. In those cases you need to be deliberate in your practice. It’s how Steven Martin succeed, and not as an actor.

stevemartingrammyMartin – in an interview with Charlie Rose – said that he’s asked all the time about how someone can break through in entertainment. But, he says, “nobody ever takes note of (my advice), because it’s not the answer they want to hear.” People ask Martin about how to get an agent or sell a script.

Brian Koppelman says the same thing happens to him when he talked with Seth Godin, who added he sees the same thing in business. People don’t ever want the real answer, they want the quick solution.

I’ll summarize what their answers are: do the work.

Martin won a Grammy award for playing the banjo. How does someone achieve so much in two time intensive fields like acting and music? By doing the work.

Martin says, “I couldn’t even play an instrument in high school,” and “my mother played piano well and my father sang, but I inherited neither. I guess I sang like my mother and played piano like my father.”

To learn the bango Martin would buy a record and play it at half speed. As it turned, he would pick along. Then he would do it again. “That’s how we all did it,” he tells Rose.

In Moonwalking with Einstein, Foer writes that Ben Franklin did the same thing:

”Benjamin Franklin was apparently an early practitioner of this technique. In his autobiography, he describes how he used to read essays by the great thinkers and try to reconstruct the author’s arguments according to Franklin’s own logic. He’d then open up the essay and compare his reconstruction to the original words to see how his own chain of thinking stacked up against the master’s.”

When you need deliberate practice, those are two places to start.

Here are a few other tips for learning.

  • Sing. “It’s the oldest technique in the book,” says Foer. Song features layers like alliteration, rhythm,  and rhyme (among others) that create more mental connections.
  • Stretch yourself. Foer says, “I only choose to work on long pieces where I’m uncertain how I’m going to pull it all together.” These moments create enough of a challenge that it moves him to stretch further and move off the okay plateau.
  • Write about it. “Writing requires a depth of thinking we don’t usually practice,” Foer says. Both Michael Mauboussin and Maria Popova extolled the importance of this as it related to learning.
  • Make it interesting. Two thirds of teens can’t guess the start date of the Civil War within 50 years Foer says. Why, history in school isn’t all that interesting. Instead we need to make it more interesting. Maybe take Tyler Cowen’s advice about travel, which he says can teach us more than most books. (The Civil War began in 1861)

How to remember someone’s name.

Finally, something we can really put to use. “The key,” says Foer, “is to figure out how to make an association between something about the person’s physical presence and the sound of their name.”

James said that “Altucher” is like “I’ll touch her” said quickly. “Perfect,” Foer responsed. To remember this he’ll look at a picture of James and imagine he’s acting like a creep around some woman. That is memorable.

Foer’s name is even easier. “It’s pronounced like the number four,” Joshua says, “so imagine taking a steak knife and carving a bloody four into my forehead.” Also memorable.

Each of these examples emphasizes the bizarre, novel, and unforgettable hooks that can help us remember things.

Soon after I read this book I ran an orientation weekend at a local college. There was one girl, Hanna, who I pictured in a banana costume. Each day when she came in she must have thought I was in a good mood because I always smiled. I was happy she showed up, but really I imagined a student dancing into class dressed like a banana.

These tricks are good for names, but we don’t need them as much as we used to. Memory techniques mattered much more when we had to remember not to eat that plant or go near that animal.

Today we need the ability to read often and broadly. Tyler Cowen likens it to managing the water out of a firehose. If you can handle the flow, you’ll have more of an advantage.

Landmarks of life

How does what we know about memory translate into the bigger ideas of life? We can start to think of the unique events as landmarks and populate our experience with more of them. Ed’s – a character from the book – 25th birthday is recounted as this:

“Glittery textiles hung from the rafters to the floor, dividing the barn into a collection of small rooms. The only way in or out was through a network of tunnels, which could be navigated only by slithering on one’s belly. The space under the grand piano was turned into a fort, and a circle was formed around the fireplace out of a collection of raggedy couches that had been stacked on top of tables.”

Add in a room where balloons were stacked “neck deep” and you have a truly memorable event.

You and I may not need to have this sort of investment into an event, but we can takeaway the idea that novel and new things are easier to remember.

Thanks for reading. I’m @MikeDariano on Twitter. If you enjoyed these notes do pick up Foer’s book, Moonwalking with Einstein.

If you were inspired at all about doing the work to become a grandmaster in your field check out Steven Pressfield’s Do the Work: Overcome Resistance and Get Out of Your Own Way

Pressfield writes about movies, memorials, art, and more but it’s all an analogy. If you want the blueprints for a better career, for the path to grandmaster, it’s there.

Michael Mauboussin #2

Michael Mauboussin (@MJMauboussin) is back, this time with Barry Ritholtz (@Ritholtz) on his Masters in Business podcast to talk about luck, skill, and alternate histories. The interview occurred in 2014 when Mauboussin was promoting his book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Mauboussin also spoke with Shane Parrish (more recently, 2015) and that interview was also very good.

Some of my favorite conversations that Ritholtz conducted were the Howard Marks and Richard Thaler ones.

Mauboussin is a smart guy, and we can take a lot away from his talk with Ritholtz. A few things we’ll try to answer:

– How to get lucky, in general.

– The answers to the Big Fish, Little Pond – Little Fish, Big Pond question.

– How anyone can think like a great investor.

– What does “ugh” really mean.

– Two short thoughts on better statistics.

“We’re up all night to get lucky” or Watch out for Fortuna at the club

I like to imagine a world where the goddess Fortuna comes to earth and dances at a Daft Punk show. Neil Gaiman would write it. It would be awesome.

Luck, from ancient Greece to the song of the summer (2013), is a feature of life. Mauboussin makes the case that we can think about it analytically and wisely and maybe dance to the music a little more.

There are three components of luck Mauboussin says.

  1. It could happen to you or your business.
  2. It could be good or bad, but not necessarily equally.
  3. Another thing could have happened.

It’s this third that we can dive into and start to think about more, because it’s a hard thing to think about. Too often we think of what happened, but the list of options is far beyond that. Nassim Taleb writes about this in Fooled by Randomness.

“I start with the platitude that one cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the cost of the alternative (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories.

The classic example is that a of a cab driver who drives like a maniac. The outcome (you arriving early) isn’t how you should judge the situation. The alternative histories would be you getting into an accident and; at best being late, and at worst death.

Our problem is that we don’t see these possible outcomes, we just think that what happened once is the case for what might happen again.

In an outcome then, you need to figure out how much of what happened was luck. How do you compute what was luck? This, suggests Mauboussin, is quite easy. Figure out what was beyond your control. The weather is out of your control. The supply chain is in your control. Walmart can’t move hurricanes, but they are notoriously good at stocking stores immediately before and after a storm.

Luck is like the fog around an outcome and our job is to figure out how many outcomes we can’t see. If there are many, then the portion of luck in a decision is quite high. If there are few, then luck is low. 

The paradox of skill, or why you want to be a big fish in a little pond

That comes with a certain caveat. If you want to be the best at something, it’s easier to be the best in a smaller pond. When Lewis Howes talked to James Altucher he said that he chose to take up handball because he had a chance to make the Olympics team. Howes is athletic, physically strong, and mentally tough. He’s could succeed at many sports. He chose handball to be a big fish in a small pond.

We can see this in a normal distribution graph, and then with pizza.

bellcurvewithtailsWhen we find situations where skill matters less, we have a “wider” distribution or one with “fat tails.” In these instances there are more people that are 4 standard deviations above the mean. Mauboussin gives the example of Ted Williams, the last player to hit over .400 in a season.

Why was the distribution wider/Why did it have fat tails? The reasons Mauboussin explains is that the skills was watered down. Baseball drew from a smaller pool than the population at large. 

As more, and better players, entered Major League Baseball, the distribution got more narrow. More narrow meant fewer people 4 standard deviations beyond the mean.

Okay, with the statistics out of the way, let’s turn to pizza. If your town has one pizza place there’s not a lot of incentive to create better pizza or dining for your customers. No owner is willful about bad food, but a lack of competition is a lack of innovation. 

This gets back to Peter Thiel’s idea in Zero to One. You don’t want to enter a competitive market because the distribution has narrowed. You want to play in an industry (era) with easier conditions (baseball, 1940’s & 1950’s).

That’s why – in part – these blog posts are so long. There are a lot fewer sites that feature infrequent long posts, and better opportunities for success.

  • Lewis Howes in handball rather than football, is a big fish in a little pond.
  • Ted Williams playing in 1945 rather than 2005, is a big fish in a little pond.
  • The lone pizza place in your town, is a big fish in a little pond.

Each succeeds in relative terms because the competition is less.

This effect is bemoaned each time Bill Simmons talks to anyone about soccer. His podcasts with Marc Stein – at ESPN/Grantland prior to 2014 – always included the question, what if our best athletes played soccer? The best American athletes don’t play soccer. Hence the United State is less good at soccer than other sports. If you want to succeed in relative terms, it’s better to be a big fish in a little pond.

Let us pause in a moment of silence for the deceased.

All this talk about success leaves the question, well what happens to everyone else? If Ted Williams was 4 standard deviations above the mean, what about the guy 4 below? The answer is that he dies.

Not usually literally, though sometimes this is the case, but we don’t learn from him. This is the survivorship bias, and one we should be mindful of. In the Peter Diamandis and Steven Kotler interview I noted that their list of examples is a who’s-who of internet search results. It sound great to learn from Jeff Bezos and Elon Musk, but to what extent can we mimic them?

We can learn some things, but probably not everything. Go back to Taleb’s comments about alternative histories and we can easily imagine a situation where Amazon’s lack of profitability doomed the company and Walmart filled the void.

Mauboussin’s focus in on investing and if we bring things back around to it we can see why he looks at luck. Investing has gotten more dependent on luck, but it’s not luck entirely. When we see someone like Warren Buffett or Ray Dalio do well consistently, we should recognize that they do something in their process that lets them have better results. Mauboussin has some ideas how anyone can think like them.

How anyone can think like a great investor.

Great investors, says Mauboussin, do three things especially well.

1. “Focus on process and no so much on outcome.” The best investors understand the dance with luck we just talked about says Mauboussin. They use this to frame their decision making models on process not outcomes.

We can apply this to many parts of our lives. Adam Carolla asks how you might act if you got a ticket for rolling through a stop sign. Will you question your ability to drive? Probably not. That’s a focus on process not outcome.

Carolla said there’s been 2,000+ shows rejected since his first one was declined. But, he did his best work and that’s all that matters. For Carolla the process – the work he does – is more important than the product – whether his show gets ordered or not.

2. Have some sort of an edge. A lot of great investors have some kind of edge says Mauboussin. They evaluate data better. They have a peaceful home life. They have the fortitude to examine something more than others. It may even be where they live.

Mauboussin says that successful investors live all across the country, not just in New York City or Boston. Warren Buffett’s success may be partly thanks to living in Omaha. These geographies, Mauboussin says, “don’t have the cacophony.”

Scott Adams – creator and drawer of Dilbert – says that his edge comes from leverage of his mediocre skills.

“I’m a perfect example of the power of leveraging multiple mediocre skills. I’m a rich and famous cartoonist who doesn’t draw well. At social gatherings I’m usually not the funniest person in the room. My writing skills are good, not great. But what I have that most artists and cartoonists do not have is years of corporate business experience plus an MBA from Berkeley’s Haas School of Business.”

There needs to be something different about you. Ritholtz said that he can name 20 books that 90% of Wall Street trades have read. If you read the same things and think the same way, how can you be different?

3. Have longer time horizons. Great investors think long term, something that is apparently harder and harder to do on Wall Street. It takes time to do anything worth doing the saying goes, and it’s been true for other interviewees.

“Success is something you do over time” says Jack Canfield, author the Chicken Soup series of books. Brian Koppelman said the same thing about trying to get the movie Solitary Man made, “I knew I had to do something everyday.” And it doesn’t have to be something big.

Bonus They read widely. It’s similar to what Stanley McChrystal said in his interview and it comes up time and again here. Read, and read widely.

How to avoid emotional swings.


Howard Marks had told Ritholtz, “The biggest investing errors come not from things that are factual or analytical, but from those that are psychological.” It’s us tripping over our own feet, selling on the way down and buying on the way up. Unlike clever computer programs that can terminate a function if something goes wrong, our emotions are a runaway train.

Or are they?

There are a few things we can do to tackle the emotional surges we feel without suffering negative consequences.

We can start if we know the name of the thing. This is the Rumpelstiltskin Effect and it’s apparent in many places. It’s why Elon Musk suggests people look at the semantic tree of what they are studying and it’s how Adam Savage figures out the exact item he needs.

Like a spike in the stock market could be the needle that Sleeping Beauty pricks her finger on, our knowledge of what follows is akin to the prince’s kiss that will wake us up.

  • Know what’s happening. In his book, The Hour Between Dog and Wolf, Wall Street trader turned neuroscientist John Coates, writes that our hormones may work against us. If we make a positive trade, writes Coates, we get a dose of testosterone which increases our risk taking. When we lose money we get a dose of cortisol which may make us too timid. 
  • “People chase a face,” Ritholtz says, and not kindly. We think that if we follow someone who knows what they are doing, we too will do well. Maybe, probably not. As Nick Murray talked about, that person may just be above the mean, thanks to in part, luck. At some point their luck will change, and if they had good luck prior to that, it won’t be so great after.
  • Stick to your plan. You can’t, said Nick Murray, chase both gains and follow a plan. It just can’t be done. Instead you need to spend the time upfront with a plan and not get caught up in swells. 
  • “Know that your emotional tugs will be in the opposite direction of what your actions should be.” Mauboussin said this as it relates to rebalancing your portfolio. This is when you sell high and use those proceeds to buy low. Murray says this rebalancing should happen at least annually. It means selling $AAPL (Apple) high and buying $CAT (Caterpillar construction) low. It doesn’t seem like the right thing to do, but more often than not, it’s a profitable and safe way to create a better portfolio.

Let their “UGHS” show you the way

There are a lot of people who use certain signals to help guide them. Ramit Sethi has certain words he likes to see on employment applications, Barry Ritholtz has them for clients. Van Halen had no brown M&M’s, banks have questions about guard dogs, and Stephen Dubner wrote an entire chapter in a book about these ideas.

If we can create situations where certain signals mean something, we can gain a lot of information from one small question. Here’s another one we can add.

If you go around the office with a certain idea and everyone says “ugh” to it, it might be worth exploring. This goes back to the central point above, it would make you a big fish in a small pond and give you an edge.

Now this may not work, but Ritholtz has anecdotal evidence. He was pushing to buy Apple when it was at a pre-split price of $15/a share. “Every single one of the ughs,” says Ritholtz, “was giving the consensus view and emotion.” Ughs are where the small pond is. They are the front that Colonel Blotto orders you to take. They hint at Zero to One.

Better statistics

Like Midas before (and companies now), if all you want is gold (data) then you too will die. Data is nothing. “Statistics are often telling you what the questions are, not  the answers,” said Tyler Cowen.

But in his interview Mauboussin provides a context to grade data. “Not all data is created equally,” he tells Adam Grant in a Wharton interview, “and there are two things we want from our data.”

  1. Persistence. “The statistics are correlated from one period to the next.” Are sales high and then low? Do they match seasonally? There should be some idea of whether the data is consistent period to period or not.
  2. Predictive value. “Statistic is correlated to some result.” That is, if the data matches what happens. Sales may fluctuate, but does it match revenue?

You can see more of Mauboussin’s interview with Grant here: 

Thanks for reading, I’m @MikeDariano on Twitter. If you couldn’t tell from the movie references, I do indeed have two young children.

Stanley McChrystal and Chris Fussell

Stanley McChrystal and Chris Fussell (@FussellChris) joined Tim Ferriss to talk about how to create your own Army Ranger school, what a Red Team is and why you can’t be on one, and obstacles through life. It’s a great conversation and it epitomizes why I write this blog. We have access to a four star general and Navy Seal. How crazy wonderful is that? We can learn from people who’ve had incredible success in life.

  • Want to know how an NBA billionaire thinks, read the Mark Cuban notes.
  • Want to know how a NYT best-seller thinks, read theA.J. Jacobs notes.

There is so much to learn, let’s get to it.

Ferriss has many other great podcast interviews besides McChrystal, my notes for his interview with Chris Sacca was one of the most popular posts on this site.

Ferriss has also been interviewed by James Altucher twice. You can read those here and here.

Even though McChrystal and Fussell are both ex-military guys, the interview has a lot of good takeaways that overlap with things other high achievers have said. McChrystal for example, says that he’s always exercised. He tells Ferriss that part of the reason for that is because there’s an expectation in military culture that you’ll do it. Even after he went away to Harvard for a year, a comrade said, “if you come back out of shape, we’re going to have a word for you and it ain’t gonna be doctor.”

It’s similar to Carol Leifer’s conversation with Altucher. Leifer is still surprised that people approach her to ask a favor or connect for work, and yet they have almost no idea about who she really is. Altucher only connected with her because he reached out over common ground about something Leifer cared about.

It’s good to know things like this. Know that Brad Feld and Chris Sacca both have done endurance races. If you want to pitch them, that’s a good starting point for what you should know.

The McChrystal, Ferriss, Fussell interview covers a lot of ground and these notes will only touch a fraction of it. These are hopefully the juiciest parts that you can take today and apply to your life. Some will work, some won’t. Neil Strauss suggests this simple test, ask, “does this make my life better?”

Big ideas:

Know thyself. The sooner you figure out how your body and mind are inclined, the sooner you can get to doing your best work.

– Understand the role expectations play in life. McChrystal’s life changed once the expectations were.

– Create your own Army Ranger School. What are the three key things that you can do.

Be there. Why you sometimes have to be there. Technology is great but will never substitute for “boots on the ground.”

How to Red Team. “Red teaming” is a method to figure out what will go wrong before it goes wrong. Here’s how anyone can do it.

Okay, ready?

Know thyself.

The interview begins with, of all things, a question about food. Ferriss asks McChrystal if it’s true that he only eats one meal a day to which he replies – yep. But it’s probably not what you think.

Fussell says that it’s not some show of strength or willpower, it’s just how he’s wired. McChrystal also snacks, and there’s a good story in the episode about how someone tried to match his schedule without snacks and what he did when he found out about them.

In what he eats – and how he exercises, reads books, and lead – McChrystal has settled on a consistent view of himself. It’s something that many other interviewees have talked about.

Scott Adams writes about his diet and daily habits in how they fit him best. Brad Feld said, “my inner self threw a shit fit,” before he changed his daily routines. Gretchen Rubin lists many this or that ideas about self in her book, Better than Before. For example, are you an abstainer or a moderator. I’m an abstainer, it’s better for me to have none of something than a small bit. Rich Roll realized that he had to be addicted to something. Only when he switched it from drugs, alcohol, and work to health and his own business did he become a contented person.

Fussell adds that this self-knowledge is important because it can guide you to opportunities that fit you best. If you wanted to work with Fussell in Joint Special Operations Command you had to apply. Some of the questions asked during the application process were about whether or not you were right for the job. If you know yourself you’ll preempt these weed-out questions and find somewhere else you fit best.

When expectations changed for McChrystal

As the conversation ebbs and flows, Ferris asks about a turning point for McChrystal. He was returning to school for his junior year when he was assigned a new tactical officer (similar to a residential advisor), Major Baratto. This, says McChrystal, changed his his path.

During his freshman and sophomore years, McChrystal was caught and punished for all kinds of things. Not bad things per se, his peers were doing much the same, just not getting caught. McChrystal’s record reflected this. Combine the sketchy record, self-doubt, and challenges of life at West Point and things didn’t look good. But that’s not what Baratto saw.

Baratto said something that changed McChrystal’s life. McChrystal recalls a meeting where Baratto took out his file and said, “I’m looking at your record here and I think you are going to be a great army officer.” What?

“You must have the wrong file,” Mcchrystal joked, but Baratto said no he didn’t. He saw the “slugs” (demerits) that McChrystal had earned, but he also saw the high peer reviews. He expected more from someone with a record like this.

Expectations matter. In one classic study from education, researchers devised a devilishly plan for teachers. They decided to inform the teachers what they should expect from certain students next year. “Jim is a good reader, and Tina is good with math, but Jacob needs help,” the report might say.

The teachers read this and taught the students based on their expectations, and the results reflected the expectations, If a teacher expected a student to do well, they did well. If they didn’t, they didn’t. And here is where things get interesting, it was all fabricated.

The researchers randomized what student got what label. It could be a delayed reader or struggling math student that was labeled as high achieving. Guess what, the students became the things they had been labeled. Expectations matter.

What else helped McChrystal was a stable home life. He began to date the women who would become his wife and other parts of his life settled down. Brian Koppelman said that marrying the right person made a big difference in his life. Tyler Cowen said to not underestimate the effect that a stable home has on your life.

Create your own Ranger School

Ferriss is clearly – clearly(!) – fascinated with the military as a young padawan might have been around Steve Jobs. He wants to parallel what works for them in his own life and business. He asks McChrystal, if you had people with the right physical attributes, how would you train them for Ranger School?

There have been three things, says McChrystal, soldiers report as being the most helpful.

  1. Learning to push themselves.
  2. Live fire training. (which we’ll get to under Red Teams)
  3. Dealing with uncertainty.  Let’s figure this one out now.

Uncertainty is something that everyone deals with in their lives and something that McChrystal and Fussell advise on now. They lay out a process we can tease out:

First, get comfortable with discomfort.

In an interview with GQ Stephen Colbert says that you have to learn to fail:

“It took me a long time to really understand what that meant,” Colbert said. “It wasn’t ‘Don’t worry, you’ll get it next time.’ It wasn’t ‘Laugh it off.’ No, it means what it says. You gotta learn to love when you’re failing.… The embracing of that, the discomfort of failing in front of an audience, leads you to penetrate through the fear that blinds you. Fear is the mind killer.”

Colbert is an alum of Second City, the comedy troupe from Chicago. There they are told to bomb. Free comic nights at Second City are notorious for the crickets. This is where people like Amy Poehler, Stephen Colbert, and Steve Carell (among many others) learned.

The point at Second City isn’t to learn to tell funny jokes. The point is to learn how to get on stage and be uncomfortable. Once you get to that point you can start to be funny. It’s why comedian Carol Leifer said, ““you should be failing in your career because everybody fails and if you’re not failing then you’re not doing something right. Because it’s through these failures that you really get better.”

Gary Vaynerchuk says, “I’m very driven by the climb, I don’t like winning, I like losing, I like the struggle. I don’t give a shit about the stuff that comes along but the game, the game is my drug.”

Do yourself a favor and watch the whole talk (~6 minutes).

Second, learn to wiggle within constraints.

McChrystal gives the example of a simulated fire fight. Like most simulations, conditions rapidly changed. Whereas the team entered the simulation thinking there would be ten bad guys, there were quickly one hundred.

Most of the Rangers tried to remove the constraint, McChrystal says. They’ll try to call in reinforcements or air support or change the mission. None of these options work. The point of constraints is to begin to think in new ways.


Not-so-clever haiku’s aside, many successful problem solvers have said that constraints work and work well.

  • David Levien said the clipped train ride to work help him to write a better novel.
  • Amanda Palmer wrote, “limitations can expand rather than shrink the creative flow.”
  • Austin Kleon said, “people overestimate what they can get done with huge chunks of time.”
  • Kevin Kelly said, “lack of money is often an asset because if forces you to be innovative.”

Constraints, limits, and “not enough” of something are fulcrums for leverage.

Third, review what you learned.

“We’d have long after hour reviews after these simulations,” McChrystal said. Michael  Lombardi said the same thing about how he evaluates football games. It takes time to do these things, but these things matter. Fussell said that he got out of the military in part because there isn’t enough time to dive deeply into them. Unlike the NFL, “you can’t take time out study these things in the military,” Fussell said.

But not every situation is good for review. If you published a book that bombed is it because the book or something else? This is what Neil Strauss had to deal with. His book, The Game, came out when Hurricane Katrina hit New Orleans. Not a good time for a media blitz. This was a clear example of luck rather than something to learn from.

We can create a system that better operates in our review mode – and we should have seen the source of this after the Richard Thaler post – it’s Daniel Kahneman.

In Thinking Fast and Slow, Kahneman explains that situations have to be regular enough with repeating patterns and have opportunities for immediate and accurate feedback. Lombardi can do this with football, McChrystal can do this with simulations, we can do this with our lives. Start by reading this post by Shane Parrish at Farnam Street.

Even though we may not be Army Rangers, we can cull from their decision making toolkit to make better choices in our own lives.

Be there

“Sir, I don’t think you understand the situation,” McChrystal read in a report while he was in Afghanistan. A situation had to be seen for itself, so McChrystal went to see it.

It was at a vineyard, but not what you might imagine. In Afghanistan they don’t have wood and metal to trelles the grapes so they use mud. This creates a labyrinth of six foot mud walls three and a half feet apart and forty feet long. It’s a bad place to be when people want to shoot at you.

It wasn’t until he walked though that McChrystal understood the situation. Being there and seeing things make the nuances more apparent.

Half a century before Samuel Zemurray saw the same thing. As he grew his company from a single cart that sold “ripes” to one that would conquer the industry, he had to be on the ground. In the book, The Fish that Ate the Whale, there’s this passage:

“Zemurray worked in the field beside his engineers, planters, and machete men. He was deep in the muck, sweat covered, swinging a blade. He helped map the plantations, plant the rhizomes, clear the weeds, lay the track. He was a proficient snake killer.”

Later on the page it continues.

“He ate outside – shark’s fin soup, plantains, crab gumbo, sour wine. His years in the jungle gave him experience rare in the trade. Unlike most of his competitors, he understood every part of the business, from the executive suite where the stock was manipulated to the ripening room where the green fruit turned yellow. He was contemptuous of banana men who spent their lives in the North, far from the plantations. Those schmucks, what do they know? They’re there, we’re here!”

Being someplace matters. Even for something as small – in relative terms – like education. Forget books, says Tyler Cowen, read one book and then go someplace. You’ll learn a lot more.

Red Teaming

One of my favorite ideas from the interview was that of red teaming. You should figure out where the holes in your plan are, says McChrystal, because “as you fall in love with a plan you dismiss the shortcomings with it.”

This has been a big idea on this site as of late. We all have biases and those biases hide key answers or solutions. One way to figure out what you don’t know is to think about things from a different perspective.

McChrystal calls this “red teaming” a situation and Fussell adds that a two day off site each quarter or year will go a long way to create branch plans for what to do.  One way you can I can do this is have a funeral for the project.

This “pre-mortem” is shared in Kahneman’s Thinking Fast and Slow and goes like this, “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”

Lombardi said they do this with the football teams after they figure out what went wrong last week (see above, third point).

The reason we need to do these things is because we get what Stephen Dubner calls “go fever.” Once we get deeper and deeper into a project we want to see it completed more and more. The trouble is, says McChrystal, “it’s hard to red team your own plan.” If we create plans from a pre-mortem, film summary, or red teaming, then we can avoid the emotions that build us up to fast and lift us up too slowly.

In his book, The Hour Between Dog and Wolf, John Coates hypothesizes that it’s the steroids in our body that tilt us too far one way or another. Coates, with experience on Wall Street and a Ph.D. in neurology thinks he’s found something. When we win a game, make money on a trade, or defeat an enemy, we produce testosterone in larger quantities and that boost may contribute to risk more to win more. This positive feedback may lead us someplace too risky.

On the other hand, if we lose a game, money, or a battle we get an influx of cortisol which makes us more risk-averse and may cause us to “huddle the troops,” more than we need. Anecdotally McChrystal saw this when a coalition partner suffered a helicopter crash and suspended their combat operations for 72 hours. They had to find their footing, maybe in part, because of the increased cortisol.

If we remove the emotional aspect because we have plans in place for certain conditions, we can remove some of the emotional pitfalls.

Books from the episode

There was lots of bibliophilia in this interview. “Gates of Fire by Steven Pressfield is “highly read in the special operations community,” said Fussell who also likes anything by Walter Isaacson and The Innovators. “Isaacson’s biography of Franklin is also outstanding,” said Ferriss.

McChrystal often recommends Once an Eagle to others. “It’s a little simplistic, but complex as well with the nuances of Army life.”

Thanks for reading, I’m @MikeDariano. If this interview leaned more on what General McChrystal said more than Chris Fussell that’s my fault. Both had many great things to say to Ferriss and I – had to – cherry pick some. If you liked the notes do give the entire interview a listen.

Richard Thaler

Richard Thaler (@R_Thaler) joined Barry Ritholtz (@Ritholtz) on the Bloomberg Master’s in Business podcast to talk about his new book; Misbehaving: The Making of Behavioral Economics, the story of both Thaler and BehavEcon’s paths to prominence. Thaler is also the author – with Cass Sunstein – of Nudge. Both books are great.

Thaler noticed something odd early in his career. One day he gave an exam to students. The average score was 72, and in general the students were not happy about it. They let their professor know.

Thaler thought about the test and concluded that it was fair, but what could he do about the grousing? What if, he wondered, the total points changed. Rather than be out of 100, the exam was out of 137 points?

He implemented the new exam and the new average score was 96. Now, here’s where things get interesting. Even though it was a lower average score (70% vs. 72%) almost no one complained about the difficulty.


What gives? Standard Economic Theory says that there should have been more complaints. It’s not taught in college statistics but everyone knows that; exam scores are inversely related to exam complaints.  The model didn’t work and Thaler’s career discoveries began.

Models and theories are good, but not perfect and something we should remember. In Filters Against Folly, Garrett Hardin writes that we can use systems, (synonymous with models or theories here), but that we should evaluate the components as well. Principally, we should remember that systems/models are only as good as the combination of human and technology. Hardin expresses it this way:

(Technology reliability) x (Human reliability) = (System reliability)

My iPhone works only as well as the engineers who programed it. The Apple Maps hoopla in September 2012 demonstrates this. The technology to navigate existed, other apps had done it for years. My iPhone had done it with Google Maps. The problem was with the Human Reliability variable.


This set of notes will rest as much on the book as on the interview. Thaler’s talk with Ritholtz was good, but even better after I read the book. Your takeaway value will vary accordingly.

That’s not to say we won’t learn anything though. Questions we can aim to answers.

  • Why are we bad at big decisions?
  • Are Econs and Humans the new Odd Couple? (step aside Felix and Oscar)
  • When should you buy stock in $CUBA?
  • What’s the newest modern architecture? (Hint: it’s not Deco)
  • Why do you love a good deal on Beats headphones?
  • Why does it feel so bad to lose those headphones?
  • Why should you never buy basketball tickets from someone who had to camp out to get them?
  • Why does someone who drives a Lexus want to save money on gas?
  • Why is Daniel Kahneman so brilliant?

Let’s learn. 

Decision making – Why are we bad at big decisions?

We stink at making big decisions says Thaler. It’s not really our fault though, we don’t get much practice. I know what kind of ice cream to get (Pistachio or chocolate), but not what career to choose (freelance or higher education). The infrequent choices though are often the most important ones. If there were some way to get better at making those, then we might see some big improvements in our lives.

It’s not a short list either. Whether to take a job, whether to transfer, whether to go back to school, and whether to work when your kids are young, are all big(ish) choices just for your early career. Add in relationships, investments, and life or death moments and we get a Pandora’s box of options.

But, the good news is that we can get better at making decisions. There are many tools, one of which is to ask, does this solve the smallest possible problem?

It’s easy to get caught up in big problem because those are the ones that seem worth solving. Small problems don’t matter until they build up into big problems, and then we have a serious situation to solve. Much like unraveling a single pair of headphones is annoying, but doable. Once 10 or 100 get entwined then things get quite messy.  Within any big problem are lots of small problems to untangle first.

When Mark Ford worked for a financial newsletter company he was focused on doing it right. Ford, the editor, spent about half his time to create a formatting guide for the writers to use. That way, his newsletter would be distinct, professional, and consistent. Guess what? No one cared.

Ford realized his mistake one day. The readers didn’t care what the style was. They didn’t care that there was a tone or how it was unique. Ford quit working on the style guide and began writing better articles and that’s when the publication grew. Ford was solving a big problem – what type of writing do people want to read – rather than the smaller one – what do our subscribers want to read?

Fellow writer James Manos was in a similar situation. In 1998 Manos was hired to be a writer a new television show. It was a new kind of show and it might turn into something big. Manos though didn’t worry about any of that.

For Manos the secret wasn’t to think about any big ideas around the show or its role in culture at large, he said his only focus was to write compelling characters. That’s the smallest possible problem for a television show writer, how do I make these characters ones people will watch?

Manos succeeded – along with the other writers involved. That new show was The Sopranos and the episode Manos wrote was College – one that many people think is the best episode of the show.

Gretchen Rubin was with a friend who complained about her job. “Well, what is it you don’t like?” Rubin asked. After a list of mostly inconsequential things – stuff anyone complains about – her friend focused on the real sticking point – the commute. Rubin suggested she listen to audio books and now her friend loves it. Solve the smallest possible problem first

The Odd Couple, Econ and Humans

Thaler’s experience with his student’s test results (and replies) combined with his economic understanding brought up an interesting question. Why do the models suggest one thing but life looks like another?

The models, says Thaler, assume that people operate like “Econs.” This super-rational person is one who will maximize her retirement and, Thaler’s words, “are as smart as the smartest economist.” That is not who we really are.

We don’t save enough for retirement, we don’t have hangover free weekends, we don’t make the optimal career and education choices. What gives?

These situations are “a piece of cake for econs,” says Thaler, but as humans we have bounds to what we can and do think about.

Thaler began keeping what he called, “The List.” A collection of instances where standard economic theory diverged from human behavior. The list examples began to include things like “bounded rationality” (we are rational, to a point) and “hindsight bias” (of course you knew all along that a thing would happen). At the start of his career (~1976) these were new ideas. Now we use them all the time.

Mark Cuban says that hindsight bias is something that his team sees a lot, and tries to remove from their decisions. Like a single hair can ruin your soup, a single bias can ruin a decision making system.

After one particular trade Cuban says they got “crushed” by the fans and media. The fans and media of course knew better, they were the wise ones who foresaw the debacle and knew that the team was too old (hindsight bias against the trade). While that season ended poorly, the next one didn’t as Cuban’s team won the NBA championship, thanks in part to the veteran leadership (hindsight bias in favor of the trade).

These were the sorts of things Thaler noticed 40 years ago. The trouble was, how could he prove his point.  The answer was lots and lots of work into the headwinds of long head beliefs. 

Efficient Market Hypothesis – $CUBA stock shenanigans

Another stone in Thaler’s academic shoe is that the stock market is efficient. This idea includes the assumptions; 1, we can’t beat market and  2, prices reflect intrinsic value. That some people do beat the market and that prices which should be the same are actually different seem like counterpoints. Let’s start with $CUBA. 

In late 2014 the stock jumped from $7 to $14 in two weeks. The catalyst was President Obama’s announcement of the change in diplomatic status for the country. Hooray!

It makes sense that $CUBA would increase, the fund was created for such a situation, with holdings in companies that would benefit from this news.  But, here’s where things get interesting, that jump was too high. The stock was trading 42% higher than Net Asset Value.

This would be like walking into the Gap and looking at one of their mannequins and saying to the eager teen with a headset, “how much for the outfit.” The teen – speaks into his and types on a tablet that seems a bit unnecessary – will reply that the outfit is $140 and your size is bagged and ready at the checkout. Just one thing, you can’t wear the clothes until next year.

Hmm, you say, the price is a touch high, the convenience is nice, though the timing is a bit restrictive. Wanting a good deal – you’re at the GAP after all – you ask, “how much if I just find the items myself?” To which the clerk replies, “then it’s only $100.”

This is the story of $CUBA, a closed end fund with a basket of assets you could buy on your own – and it’s an example of why markets aren’t perfectly efficient.

Another story is the one of Long Term Capital Management. In 1998 with a Russian default and communal (hedge fund) leverage predicament, LCTM was stuck in a hard spot. They wanted to sell some positions to have more cash for others but there was one problem, everyone else was in the same boat. The boat had all sellers and no buyers. Which drove prices down, which furthered LCTM’s problem. 

There was nothing wrong intrinsically wrong with some of their positions. One of which was a bet that the stock prices of Royal Dutch Petroleum of the Netherlands and Shell Transport of England would converge. Why would someone think that the prices of the two companies would come together? Well, their income was from the same source. Unfortunately for LCTM, but fortunate for people who like good books, that trade – and many others – took too long to converge.

As the Keynes quote goes, “markets can remain irrational longer than you can remain solvent.”  

All that said, this detective work is really hard to do. In his book, Money, Tony Robbins wrote about many famous figures (Dalio, Buffett, T. Boone Pickens, etc.) that are really smart and work really hard and only a handful make big money. Thaler – also smart – adds “the part that you can’t beat the market is mostly true.”

So what do you do?

Warren Buffett’s advice is this; buy a low cost index fund and treasuries. This is literally what he tells Tony Robbins he would tell someone to do for his wife if he passed away. If you aren’t going to be a full time investor who dives deep, that’s the only thing to do.

James Altucher, who once ran a fund of hedge funds writes this:

“Warren Buffett, Steven Cohen, all the great investors go outside every day and they want to take your wallet, steal your diamonds, maybe slash your face for fun, and then after they’ve gotten everything they can get from you, they are going to shoot you in the head in front of your child and run off into the dark of the night. Good luck fighting that kind of competition.”

The takeaway is this: markets are not entirely efficient but you’ll need at least brains, luck – and the LCTM lesson – and humility to find those flaws.

Choice Architecture – The Modern Architecture

Thaler’s next move wasn’t to beat the market, but to think about how to get people to make better choices. If we aren’t Econs but are Humans and if the efficient market is full of bubbles, what can we do?

We can nudge people.

In his book, Nudge, Thaler and Sunstein define choice architecture as an, “organizing context in which people make decisions.” To understand this you have to start with the start, someone has to choose.

Ritholtz says that he saw a nudge at a Brussels airport escalator. One one side are painted feet that mimic standing, the other side walking. This nudge helps people figure out which side to walk on and which side to stand on.

Or, think about when you order a new computer from Apple, someone there has to decide on a shipping choice. In some cases people may not want to pay extra for immediate shipping (though “the best piece of advice” below says they will) and can use their old computer for a few more days.

Other people will be there because their old computer broke and they NEED a NEW one NOW. There isn’t a shipping option fast enough. If you were the person at Apple who designed the checkout process, what would you choose as a default?

These were the situations that Thaler wanted to find and make better. His angle is that nudges are nice for things like escalators and shipping speed, but not that important. We get enough experience with ordering things from place like Amazon that we know how fast we need something. That’s small potatoes.

What we need help with, says Thaler, are with the big choices like retirement. Once he realized a way people consistently acted differently from the optimal choice, we could get people back on that course with a nudge.

The best example is Thaler’s Save More Tomorrow program. This system encourages employees not to save more for retirement today, but to invest their next raise. We like to eat dessert today and plan to exercise tomorrow, and in effect that’s what the system does.

Because it operates out of sight, (how often do you look at your check?) it works well. This out of sight, out of mind method of optimization can work for a host of reason.

Subscription services do this quite well with their recurring revenue model. Rather than have to pay each time, and see the cost, have the payment automatically withdrawn.

In his book Mindless Eating, Brian Wansink showed how well it works with food too. If we keep food out of sight, even if that just means an opaque rather than clear bowl, we’ll eat much less of it.

Transaction Utility – Why we love Beats headphones.

One of my favorite ideas that Thaler explains is “transaction utility.” I’m glad it has a name. Transaction utility is the excitement you get from getting a deal. It’s why people tell you what they paid for that great vacation before they tell you about the vacation. The deal is part of the thrill.

It reminded me of the podcast between Brian Koppelman and Seth Godin where they talked about headphones. Godin said that he sees the placebo effect with regards to people and their headphones. People pay more for a brand (Beats in this case) they think are good and because they think they have a good pair, they have a better time. This is clearly the placebo effect Godin says, and there’s nothing wrong with it.

Koppelman – as an audiophile himself – uses a much better brand, but even in that Godin says there is some self trickery afoot. Godin says that Koppelman not only likes the headphones, but likes to know that he’s the kind of person who knows the difference among different kinds of headphones.

We love to think we are getting a good deal.

We use ideas like “transaction utility” as the fulcrum for our logical levers. Thaler says, drive by any Costco and count the cars worth more than fifty grand. There’s plenty of them. But do they buy in bulk to save money?

No, they buy in bulk because they like to be someone who buys in bulk to save money or who needs to buy in bulk because it’s convenient.

Another nugget of transaction utility is to have a membership or season pass. When our family goes to the zoo it feels free-ish because our annual membership (paid each Christmas, thanks Grandpa!) covers the price of parking and admission.

But the deal is really for the zoo. I have a hunch that the zoo gets a bit more money in total because these trips feel free. Anecdotally, we seem to have ice cream or souvenir treats (especially if grandparents accompany us), in part because of the “great deal” to get in.

Loss Aversion – Why we hate to lose those headphones.

Man we hate to lose things. Losing anything is worse than gaining the same thing back. Psychologist call this “loss aversion.”

And the thing is –  it hurts more than it feels good. The good vibes for finding a $20 bill are offset by a loss of only $10. Thaler says that we’ve always been wired this way. I’ve known about this theory a long time, and never had a good understanding of it until I heard the pyramid comparison.

pyramidOne thing economist do agree is on that the next thing is less valuable than the previous thing (called “diminishing returns”). Your first car is great, your second one is nice to have. 

The same can be true for dollars, chocolate cake, and vacation days. Now that we agree on this, or at least demonstrated its commonality, let’s make a pyramid.

Image that how much you value the first thing is the base of the pyramid and each subsequent (because we value it less) is smaller. This works as we go up the pyramid, each dollar/piece of cake/vacation day we add is nice though it’s niceness is smaller than the previous one. As we build our pyramid we can start to see how loss aversion might work.

Imagine you’re at the top of the pyramid and instead of being handed the next smallest dollar/piece of cake/vacation day, you’re told by someone on the ground that they want the previous one back. That previous one is bigger than the one you were about to put on, and so you give away something nicer than the next thing you would get. That’s loss aversion.

The good news is that this problem isn’t written in stone, even though our analogous pyramid might have been. Loss aversion lies in the loosey goosey world of emotions. Much like funhouse mirrors can reframe a situation, we can create conditions that make us feel better. We might not get over feeling bad about loses, but we can reframe loses into deals.

Josh Brown wrote about a trick during the 8/24/15 equity correction. According to Brown, here’s a surefire way to feel better. 

Step 1: “I pick five or six of the best stocks in America that I’ve missed out on – the ones that have always bothered me. Everyone has their names. A contemporary list might include Netflix, Amazon, Facebook, Disney, Celgene, Starbucks, Chipotle, Goldman Sachs, etc.”

Okay, find the things you always wanted to invest in but were too expensive. Got it. What’s next?

Step 2: “Now I go to my quotes screen to see where they’re currently trading and I come up with utterly absurd prices at which I would buy them.”

Okay, they’re still quite high despite the correction, but we can imagine a price that’s too good to pass up. Got it.

Step 3: “I create GTC (good till cancel) Buy Limit orders for a handful of these stocks at the exact absurd prices I’ve come up with. The Buy Limit order will not allow my trade to get executed until the price I’ve specified is reached. I won’t end up with the long position unless it’s on my terms.”

Ah, so we program the computer to buy those stocks if they actually reach sale prices. If we get to buy that low we can be proud of our investing acumen. Ha, rather than lose, I win!

Just one thing, don’t get too attached to those stocks, and if you buy them get ready for your next bias, the endowment effect.

Endowment Effect – Duke basketball tickets edition

We humans are so silly. Let’s look at just one way. When Dan Ariely, a fellow misbehavior, was at Duke, he wanted to know how students really valued basketball tickets. Duke has this quirky lottery where students camp out the night before for a ticket lottery that gives them the chance to get tickets. Some win, some don’t, but anyone who camps out hopes they might.

Luckily for Ariely this provides a great natural experiment.

You see, says Ariely, we have basically two identical groups (undergraduate students at Duke University who were college basketball fans who were also willing to camp out in hopes of tickets) that received different treatments. One group received treatment “ticket,” the other treatment “no-ticket.” The question is, would these groups value tickets the same amount? If not, the only difference appeared to be whether or not they got a ticket.

At this point you probably expect a twist, and you’re right. Thaler saw this twist a long time ago when his professor would restrain from drinking or selling his expensive wines. Because he owned them, they meant more to him. The same was true for the Duke basketball tickets.

Ariely and his researchers began to call the students under the guise “we may be able to sell you a ticket.” Their average buyers prices was about $170. Then they called the students who had won tickets and their average selling prices was about $2400. Yep, a 15X difference.

Ariely writes about this study in Predictably  Irrational:

“What was really surprising, though, was that in all our phone calls, not a single person was willing to sell a ticket at a price that someone else was willing to pay. What did we have? We had a group of students all hungry for a basketball ticket before the lottery drawing; and then, bang— in an instant after the drawing, they were divided into two groups— ticket owners and non– ticket owners. It was an emotional chasm that was formed, between those who now imagined the glory of the game, and those who imagined what else they could buy with the price of the ticket.”

Thaler introduced the endowment idea early on in his book and writes, “although I had misgivings about some of the material presented in classes, I was never quite sure whether the problem was in the theory or in my flawed understanding of the subject matter.” It turns out it was the subject matter.

It’s partially why home owners overvalue their own homes. We tend to overvalue the things we own and the more hoops we go through to get it – like camping out the night before and making it through a lottery system – raise our value of those things.

The best piece of advice yet – Why Lexus owners want to buy cheap gas

For all the good ideas that Thaler and Ritholtz talk about, the most powerful on to me was the Weber-Fechner Law. It says that we only notice differences in proportion to the original. Simply, you’ll choose to save a dollar on a gallon of milk that cost $3.50, but won’t take any extra effort to save a dollar on a winter jacket. That dollar seems larger because of the small starting price.

Going back to our computer example, it’s also why we may choose to have the computer rushed to us. What’s another $20 on an $1100 purchase?

Robert Cialdini writes in his book, Influence, that we can use this Law to persuade people to buy more. He writes:

“Simply put, if the second item is fairly different from the first, we will tend to see it as more different than it actually is.”

It’s why it’s more common to sell someone a shirt after they bought a suit, rather than the opposite.

All the academic papers I’ve read on this focus on this sort of comparison, but how often do we end up in situations like that? My big purchases are infrequent and my desire to search for small savings slim. But I began to wonder, does it apply to non-monetary domains as well. So I asked Dr. Thaler

And he responded!

It matters then for our time as well. It means that on a short commute to the office, you’ll be more likely to drive fast to save thirty seconds than you will to drive fast to save thirty seconds on a long trip to the beach.

So, should we change our behavior?  I don’t know.

The best course, I think, is just to be aware why we do what we do. I eat ice cream because I enjoy it, but I know what would happen if that’s all I ate. Awareness, not exploitation or efficiency or econ-thinking may be the best course.

Tren Griffin writes that Charlie Munger uses a two track system where, “the second process involves looking at subconscious influences which can cause an investor’s thought process to malfunction.” Munger doesn’t change an action because of a bias, he just checks it.  Michael Mauboussin too tries to guard against these sorts of mistakes. Knowing about biases is like knowing the weather. They may not change your plans, but it’s good to have an idea about how severe they may be.

And speaking of biases, we now go to Kahneman.

Daniel Kahneman

Thaler says to Ritholtz, “I claim to have discovered Daniel Kahneman,” and while it is tongue in cheek, it’s worth noting. Kahneman’s Thinking Fast and Slow is one of the best book anyone can read about decision making. It might be my favorite book ever. It is wonderful. Rather than try to extract something here and reduce it to a clever internet point – just go read the book – here’s where else Kahneman has cropped up on this blog.

  • Michael Mauboussin is a big fan of Kahneman’s idea of base rates. This comes up in Thaler’s book too.
  • Peter Thiel’s post has a section on in/out group think. This idea also comes up in Thaler’s book.
  • Maria Popova’s post references Kahneman’s expression, “what you see is all there is,” about our conscious recall and the biases that stem from that. 

Favorite books

The interview ends with Thaler sharing some book recommendations. “Catch-22 is my favorite book of all time,” he says.  Thaler and Ritholtz also suggest anything by Vonnegut, specifically Galapagos is good. Douglas Adams’ Last Chance to See is good and Richard Feynman’s Surely You Must be Joking Mr. Feynman was wonderful – and the model for Thaler’s book.

Thanks for reading, I’m @MikeDariano on Twitter. If you know the source of the pyramid analogy as it relates to loss aversion, please let me know. I have a monthly newsletter where I share the things I read – like Misbehaving or Thinking Fast and Slow. You can sign up here

Tyler Cowen

Tyler Cowen (@tylercowen) joined Erik Torenberg (@ErikTorenberg) on the Product Hunt podcast to talk the future of education, data, the best kind of game (not chess), and when reading is overrated.

Cowen is one of my favorite online and offline authors. I’ve read most of his books and posts, and enjoy his new podcast. If you want to start reading Cowen, begin at his blog Marginal Revolution and with Average is Over. That book played an influential role in my post about the new career landscape with Adam Davidson and Taylor Pearson

I’m not the only who likes Cowen. Ryan Holiday clipped some of Cowen’s book and framed it on his wall.

Cowen’s conversation with Torenberg is wide ranging and the sequence of rapid fire questions was a treat. Do listen to it if you have time. For now,  here are 8 takeaways that we can use in our lives.

Stories + Data + Time  Truth

In the interview Torenberg asks Cowen what he thinks of of Steven Pinker and Jared Diamond’s work. Cowen says that both produce good work, but that neither makes the right conclusion with regards to all the data. Pinker’s error is (maybe) that the world wars were so close together, and that the next one will be much worse. This sequence could fit the same data, but isn’t Pinker’s conclusion.

Diamond, Cowen says,  points out the importance of distance from the equator as it relates to development, but underemphasized the importance. That single factor can account for much of what Diamond concludes. 

I don’t hold a candle to the flame of the intelligence of Pinker, Diamond, or Cowen, but will offer a mental model from Garrett Hardin as a way to think about their information. In his book, Filters Against Folly, Hardin suggests we look at situations through three filters: numerate, literate, and ecolate. Hardin writes:

“In summary, the three filters operate through these particular questions: Literacy:what are the words? Numeracy: What are the numbers? Ecolacy: And then what? No one filter by itself is adequate for understanding the world and predicting the consequences of our actions. We must learn to use all three.”

Right now we face a the predicament of too much data. As is often the case, if some is good, more isn’t necessarily better. You wouldn’t want a stool with one leg twice as long as the other two.

Malcolm Gladwell (2015) recently spoke to this idea and Cowen says something similar, “Statistics are often telling you what the questions are, not what the answers.”

Rather than just statistics, we need to see how the puzzle piece fits in the larger scale. That means using mental models that work in a variety of ways, not only mathematical ones. We need figure out the numbers (numerate filter) but also know the story (literate filter) and then ask, what comes next (ecolate filter).

Process over product

Throughout the interview Cowen mentions that he plays the hand he’s dealt in the game of life. I’ve read Cown, and he’s smart enough to play any hand, but he really focuses on what he sees are his strengths. One of his strengths is to not focus on the big picture. Cowen says,

“I’m bad with plans and goals. If I’m at the firehose, absorbing stuff and soaking it in, I have a presumption that good things will come from that.”

By firehose he means the rush of data through the internet, books, etc.  Rather than think about what the next thing is, Cowen seems to move along with whatever the task or mood of the moment is. Both his books, The Great Stagnation and Average is Over seem to come from this line of thinking.

This focus of decision making based on process (ex ante/beforehand forecasts) over product (ex post/outcomes) might just be the best way.

I saw this too closely during a recent iPhone repair.  I tried to remove some dust that was mucking up my camera but, after some unscrewing, prying, opening, tilting, spraying (canned air), praying, closing, and powering on – it did not power on.

Actually it did, but it looked like a glitch in the Matrix. Not the good kind of glitch that the movies are built around, but a real glitch. It was a good decision based on the process. The actual repair seemed simple and within my range of skills. The product of that process though was a mistake. 

Other podcast interviewees have suggested the same decision making philosophy:

  • Mark Cuban talked about how they used this mental model to look at successful basketball decisions.
  • Chris Sacca talked about how he used this mental model to decide on what to invest in.
  • Michael Lombardi talked about how he applies the “management of self,” to evaluate decisions.

We can think of this big idea in other ways too. Scott Adams writes in How to Fail at Almost Everything and Still Win Big  that “goals suck.” Adams found himself on a plane, talking to the businessman next to him. That guy explained how he was always on the lookout for a new job rather than waiting for a promotion. Adams writes:

“This was my first exposure to the idea that one should have a system instead of a goal. The system was to continually look for better options.”

Goals are finite with finish lines and a constant state of presuccess.

“If you achieve your goal, you celebrate and feel terrific, but only until you realize you just lost the thing that gave you purpose and direction. Your options are to feel empty and useless, perhaps enjoying the spoils of your success until they bore you, or set new goals and reenter the cycle of permanent presuccess failure.”

Cowen’s terminology is not to think about ideas, but methods. “I’m not even sure what my ideas are,” Cowen says,  “when I spread an idea I’m really trying to spread a method.”


Travel, Cowen says, “is much better than reading.” Instead of a deep dive into book research, suggests Cowen, read one book and then go someplace.

This was the experience for John Chatterton when he wanted to dive a sunken U-boat off the coast of New Jersey. The only problem was that no sub was supposed to be there. Add in that it was in 200+ feet of water and the innards twisted around like a pile of spaghetti. There was no amount of reading that would describe the inside.

Chatterton luckily found out that a similar submarine was on display at the Museum of Science and Industry in Chicago. The book Shadow Divers explains his experience there:

“Chatterton moved slowly with the audio tour, pressing STOP on the player ever few seconds to orient himself and make careful mental notes. He studied the composition of shelves, components, gauges, and floors, envisioning each as it might appear covered in sea anemones and rust after fifty years on the Atlantic floor. He craned his neck around machinery and into off-limits areas, looking for anything – a tag, a builder’s plaque, a diary – inscribed with the U-boat’s number so that he might search for the ame in New Jersey. Everything he did annoyed other visitors. He blocked impassable aisles, backed up into children, wiggled around seniors. When a tour guide asked him to move along, he exited the U-boat, got back in line, and waited for another turn.”

He walked through seven times.

It makes a difference too. When Samuel Zemurray was began his small fruit business, being somewhere mattered a lot. His competition was with United Fruit, headquartered in – and rarely leaving – Boston. Zemurray though was on the docks, boats, and banana plantations. “They’re there. We’re here,” was his rally cry. The idea worked. Zemurray eventually turned his fruit cart into ownership of United Fruit.

2nd Level Thinking – Harvard Edition

When asked if he would let more students into Harvard, Cowen says he would. It sounds like a good idea, but if we stop there we stop at first level thinking. Of course Cowen, much like Howard Marks, can’t stop there. Yes, you can let in more students, says Cowen, but then what?

He starts to think about what effect that might have on the professors. Can Harvard find qualified staff for the larger student body? (This is a 2nd level question).

It goes back to back to the formula we opened this post with, stories + data + time = truth. Second level thinking like this comes from the time portion of our equation. It’s one tool that Howard Marks uses for his successful investments. It’s one of Ray Dalio’s decision making tools, where he writes, “the quality of our lives depend on the quality of the decisions we make.” We need to think forward in time and use our best guess for what might happen if we take one path and not another.

Scale effects

Torenberg asks Cowen what he would put on a billboard if had one in New York City. “I don’t know,” Cowen, says, “Would a billboard really convince anyone?”

Cowen settles on the suggestion of a new record album, but doesn’t think that would matter much. What might work best, says Cowen, is to advertise Coca Cola. To what extent does a billboard (sponsored tweet, blog sidebar, etc.) matter anymore?

We can see this online when someone like Christopher the Conquered was tweeted by Ryan Adams (who has 699K followers) guess how many sales he made from the publicity? Zero. Why? My theory is that people look who follow Ryan Adams don’t look for music suggestions as much as they look for backstage pictures or thoughts about songwriting. It’s the same reason I look at almost all of the books Cowen suggests, but none of the music. 

Twitter is a platform of one to one communication and scale effects. It’s bimodal. If Ryan Adams tweeted to only you – or Cowen reach out to only you – and suggested an album, would you listen? Probably, but the scale effects only work for certain messages. 

Chris Sacca seemed to have a good angle on scale effects with his investments. Specifically in his talk with Tim Ferriss they mentioned that people dismissed Uber as an app for the 1%ers. Not really, said Sacca. Torenberg takes this idea one step further and says that even things that start as high end luxuries (cell phones Cowen notes) trickle down to everyone.

Webs of nature, free will or will free?

It can’t be a The Waiter’s Pad post without some song lyrics. Rush, you’re up:

“You can choose a ready guide in some celestial voice
If you choose not to decide, you still have made a choice
You can choose from phantom fears and kindness that can kill
I will choose a path that’s clear
I will choose freewill”

Cowen’s response? “Free will is an absurd idea.” 

How do we reconcile Canada’s 3rd Greatest Band with Foreign Policy Magazine‘s 72nd best global thinker?

I think we need to side with Cowen on this one. We are embed in a world of webs, you right now on this interweb. In these webs we feel the tugs and pulls of others, and depending on our connection, the tugs and pulls move us more or less.

Hardin, who’s filter system we adopted for this post, writes, “we can never do merely one thing.”

I think Cowen’s point is that even the slightest nudge one way or another changes a cascade of decisions.

Much of Richard Thaler’s latest book,  Misbehaving, is about the the evolution of the economics profession to understand these nudges. Standard economic theory, Thaler writes, believes that we are all rational agents. In some ways we are. But in many ways we aren’t, at least on the surface.

We can look at the current (August 2015) stock market ebbs and flows and wonder what is going on. We don’t know, and we probably can’t tease out everything.

Thaler quotes Merton Miller who said, “behind each holding may be a story of family business, family quarrels, legacies received, divorce settlements and a hose of other considerations almost totally irrelevant to our theories of portfolio selection.”

This was the case in 1998 as well. Long Term Capital Management (LTCM) was the greatest hedge fund ever, until they weren’t. Their webs included two strong tugs.

In, When Genius Failed we see the story of their growth and death. The latter was influenced by guys who thought they could always do better. This tug was one where their perspective got pegged to a high figure of returns and they wanted to beat it. They couldn’t settle for “good” returns on their investments. They had to find “great” ones.

This led to riskier and riskier options, which led to the second tug, a domino effect.

You see, it’s informational to see how LTCM messed up, but they almost didn’t. If they had held one or two fewer positions, or got out of those positions near the top, they probably would have been fine. They didn’t and the lack of leverage in one area forced them to sell at the bottom of another which created a feedback loop that devalued the first. Their web of investments was too tight.

We are biased, go back to Ramit Sethi’s interviews for examples in business. The Jason Calacanis post has a footnote as well. Chris Sacca’s post explains how Charlie Munger hurdles biases.  The point is that there are all kinds of influence around us, and we should consider how and where that comes from. 

It’s like that mid-morning moment when you realize you’ve been tapping your foot to some musical beat. When did I listen to this you ask yourself? Oh, that’s right, it was some Rush song on the elevator this morning.


I wish that Torenberg got into what sort of signals Cowen uses, because I know he has many. One examples is; restaurants in strip malls, with lots of locals (who yell or talk loudly, to or at each other) is a signal for a good place to eat.

When Cowen interviews people he asks what their favorite novel is and why. This question and how they answer, he says, tells a lot about the person and how they think. We may not host a podcast like Cowen, but even our lives we can install signal questions, in fact, they help quite a bit.

  • Ramit Sethi installed signal questions to help him figure out who to hire.
  • Barry Ritholtz installed signal questions to help him figure out who to work for.
  • Van Halen installed signal questions to their tour rider to ensure the lighting rigs were set up correctly.

Signal questions won’t be perfect, but if they do a good enough job that’s all we need.

The new economy, and the big problem

One of Cowen’s newish (April 2015) articles was about the fundamental problem being immobility rather than inequality.

“Income inequality and economic immobility are often lumped together, but they shouldn’t be.”

“Consider the two concepts positively: Income equality is about bridging the gap between the rich and the poor, while economic mobility is about elevating the poor as rapidly as possible. Finding ways to increase economic mobility should be our greater concern.”

The people that I read  say “a new economy is coming.” Adam Davidson and Taylor Pearson talked for two hours about the same idea on separate podcasts. Cowen’s book, Average is Over focuses on this idea. James Altucher highlights this idea when he speaks and Mark Ford has encouraged people to become intrapreneurs.

The problem, as Cowen sees it, is not the total or relative wealth. “The fact that Bill Gates earns a lot more than some poor person doesn’t bother me,” says Cowen, “It does bother me that the poor person can’t buy a house in a good school district.” 

Thanks for reading, I’m @MikeDariano on Twitter. This interview felt a bit uneven as I wrote it, Cowen – and maybe Torenberg too – were all over the place (but enjoyably so). If this summary piqued your interest at all, do go listen to it. My favorite novel? American Gods. Why? I like the mystery that swirls around it. What does that say about me? Who knows.

Chris Sacca

Chris Sacca (@Sacca) joined Tim Ferriss (@TFerriss)  on The Tim Ferriss podcast to talk about investments, filters, influences and more.

Sacca is the Proprietor of Lowercase capital and has been involved in early stage investments with Twitter, Uber, Instagram and many more. His interview is good not only for the professional stories about a venture capitalist’s thought processes, but also because of Sacca’s openness about life and mistakes.

Many stories focus on the superhuman achievements and hero’s journey and we forget that life is about more than that. It’s about love, family, and whether we can make things better with what we’ve got. Let’s see how we can make things better.

How to Invest

Sacca is a venture capitalist and a pretty good one. He’s worth over a billion dollars. He’s had this sort of success because he has models for what to invest in and what not to invest in.

Models/heuristics/plans are something that many other guests on these digital pages have testified to. Peter Thiel looks for monopoly opportunity, otherwise he says no. Howard Marks asks what the future consequences are for a decision. Ramit Sethi suggests a system for our finances. Structure helps us make decisions.

Sacca explains his own rule for investing.

  1. “Only get involved in deals where I can personally make an impact.” This is similar to what Mark Cuban says about his Shark Tank deals.
  2. “Start with something already great that you can make more awesome.” Sacca says that he always thinks he can make something better but he needs to harness the power of “no” in many of those cases.
  3. “Be proud of every deal.” There are a lot of ways to make money online, Sacca says, but you should only do the ones that you are proud of.
  4. “What’s the worst that can happen?” Sacca said that he missed out on a lot of deals (AirBnB) because he thought about worst case scenarios. In the interview with Ferriss he sounds a bit reluctant about these misses, but I think in the end it’s good. Let’s jump off this list and see why those missed deals are no big deal.

Nassim Taleb writes in Fooled by Randomness, that we can’t immediately think that Sacca’s system was bad because of the misses. Sacca’s system may be the perfect option in a series of “alternative histories.”

“I start with the platitude that one cannot judge a performance in any given field (war, politics, medicin, investments) by the results, but by the cost of the alternatives (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories. Clearly, the quality of a decision cannot be solely based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).

Not the results, but the cost of the alternatives. Let’s look at this one.

The biggest mistake anyone can make is to “blow up,” a permanent loss of capital (life). Taleb writes about it, Howard Marks talks about it, Ray Dalio wrote about it, Ferriss lives it.

So, what might have happened with Sacca’s investments had he not been cautious? Could Twitter have gone to zero?


Can Uber go to zero? Yes.

And it’s not that hard to think about how. In 2006 when Twitter started there were already blogs, MySpace, and Facebook. If you wanted to share an idea (though not food pics, yet) you could.  Twitter also began within SMS (text messages) limits. One year later the iPhone came out, two years later the “3G” version that brought data rather than SMS.

Twitter – successfully so far – launched at the only possible time it could have. It’s not hard to think of other conditions that would have cratered that product.

At the same time we can see how Uber might fall (or succeed). In his cautious approach then, Sacca may have found the only way to succeed. If he’s overly cautious, then he limits those companies that might go to zero. That’s the secret to investing (which Tony Robbins echoes in his book).

The Wisdom and Bias of Christopher Sacca

When talking about his investments, Sacca notes that he resisted investments in  Uber and AirBnB because he thought that they might have scaling problems. Principally, someone might kill someone else in a car or rental. Two intriguing points are nestled into this one observation.

First, that Sacca uses scale as a tool of thought is notable. That scale matters is a new observation for me. Phil Libin, founder of Evernote, mentioned this in his talk with Tim and it’s a key point in Garrett Hardin’s Filters Against Folly:

“From Plato’s time to the present, professional philosophers have too often tried to solve problems of “the good” without considering how potentialities, behavior and value are affected by scale.”

Bill Simmons applies this filter to basketball and idiots. If you have one knucklehead on your basketball team, says Simmons, you’ll be fine. But if you double that number to two, you’ve increased your problems by more than twice as much. Now the knuckleheads have one another to hang out with.

The opposite situation exists if you own pets. It’s takes some “investment of resources,” (time, money, learning, carpet cleaner) to own one dog. The second dog doesn’t double that.

Sacca has mastered the nuances of scale and figured out where and how scale matters. My guess is that he saw how simple a product Twitter was, and realized how it might scale. He also saw how large AirBnB might become, but also saw the downside of that.

“Someone who works at Walmart murdered someone last night,” Sacca tells Ferriss, as a way to make his point about scale. If you have that many people involved, someone will do something dumb.

That Sacca chose “murder,” is telling because Sacca seems like a pretty happy guy. Why does he go right to murder?  What’s happening here is the availability bias at play. Sacca said “murder,” because it was an easy example to come up with. He could have said drunk driving or breaking and entering (two acts more relevant to the talk about Uber and AirBnb) but he didn’t.

Murder doesn’t matter as the example, but just to prove a larger point. He could have said something about a beach or party, both of which happened alongside the interview. The key takeaway is to recognize that we say things like murder, beach, or party because of a psychological trigger.

If we can be aware of our mental shortcuts (not understanding scale as well as Sacca or overestimating something because of the availability bias) it can lead to better decisions.

Smart people do this double-check all the time. In an interview with the Wall Street Journal, Tren Griffin says that Charlie Munger makes investment decisions like this:

“He uses a two-track process. The first process is essentially an expected-value calculation; the goal is to be as rational as possible. The second process involves looking at subconscious influences which can cause an investor’s thought process to malfunction. He believes that through a process of applying a range of mental models he refers to as “worldly wisdom” and a couple of dozen principles related to “the psychology of misjudgment,” a person can reduce mistakes. Included in this are factors such as confirmation bias, the tendency to only seek information or statistics that confirm a previously held view, and action bias, the tendency or need to do something as opposed to being patient.”

Ask Knockout Questions

One aspect of modeling that anyone can start with right now is finding their “knockout questions.” Barry Ritholtz told Nick Murray that when they begin to converse with a client, they have questions that disqualify the clients from working with his team. These, you want a hedge fund, not a wealth management group questions work because they give up small short-term gains for long backend consequences.

Banks do this. Van Halen did this. Sacca does this too.

For his investments Sacca needs to see a founder that believes in the product unconditionally. It’s a red flag if, “in the pitch,” says Sacca, “the founder is trying to convince himself.”  This statement made me wonder how Alex Blumberg got an investment, because it did not sound like this in the StartUp podcasts.

Another knockout that Sacca uses is one that Peter Thiel also employees – don’t let initial use cases dissuade you. For Thiel this meant that even though Facebook was only for college students, it didn’t mean that it wouldn’t be used elsewhere.

Gary Vaynerchuk uses this thought process when he speaks about new services. “Don’t dismiss something because it’s all beach body pictures,” instead look past that to see how it could be used better.

For Sacca it meant seeing that Uber was more than a black car service for one percenters. Instead he saw a problem being solved. I would love to know why Sacca invested in Uber but not AirBnB. The companies seem so similar but one he passed on and one he didn’t. Was it just that Sacca was limited in time to investigate AirBnb? Was it a knockout question that led to a false negative? 

Whatever happened, it shows that knockout questions are difficult to get right. With all the data, brains, and experience that Lowercase leveraged, the team couldn’t even create a get in touch form that filtered people. Sacca could do this in face to face interviews, but not on his website. From the prospecting page of Lowercase Capital:

“This page used to have a handy link at the bottom for you to speed your pitch our way posthaste. However, after a couple of years of raking through thousands and thousands of notions, proposals, hunches, and hypotheses eagerly cluttering our pitches inbox, we crunched some numbers. Actually, we crunched one number: zero.”

What Is My Upside? What is My Downside?

Oh what a game Sacca has found to play. Venture capital investing is like going to a movie theatre on a hot day. You may end up seeing something great, but at the very least you are out of heat for a few hours. It’s a win-win situation.

For Sacca that win-win means he gets paid a little if his investments blow up, (a no,no – see above) but he gets paid a lot if they  go up. Sadly you and I are locked out of this opportunity because it’s only available to rich-silicon-valley-multiple-home owners.

Ha, ha, no it’s not. We may not invest in Uber, but we have the power within us to create win-win situations everywhere in our lives.

Chris Hadfield shows how to do this with our careers. If Hadfield wins big – he goes to space as an astronaut. If he “loses” he merely has a rewarding career that pays well and provides for his family.

Andy Weir followed a similar plan. He enjoyed writing his book and put it online for free. That was his “downside.” The upside was that his book was turned into a movie with Matt Damon.

Getting to Yes is the negotiation book that implores you to think win-win rather than zero sum.

We can do this. What if you are dating someone? Create a win-win. What if you go to work and hate your job? Create a win-win. Become an intrapreneur and start to build more skills.

How to Learn

MBA programs? A joke says Sacca. Law school? Ha, not worth your time. The opportunity to learn has never been better, it’s just in new places. Read Brad Feld’s Feld Thoughts or Josh Kopelman if you want to learn more about early stage investing, say Sacca.

Sacca’s book suggestions include; Not Fade Away, How to Get Filthy Rich in Rising Asia, and I Seem to Be a Verb by Buckminster Fuller. Head over to Amazon, they are ready for your purchases.

Screen Shot 2015-08-13 at 8.06.18 AM

Another common attribute, Sacca says, is to have is the desire to learn. Evan Williams and Matt Mullenweg are always learning more by asking questions and reading books says Sacca. Reading books? Now where have I heard that before?

Why Bill Gates is Like the Corner Brownie

There are some people in this world – we will call them “crazy” who only prefer the corner brownie. These people have even invented contraptions that allow them to bake all corner pieces.

Why on earth you wouldn’t want a crumbling middle piece is beyond me, but if the crazies want to selectively slice and dice a sheet of brownies then more power to them. 

Bill Gates is like this to Chris Sacca. A man that he grew to dislike during his time at Google and whose antitrust work is dubious at best, Sacca saw a man he admired. Well, not a man, but a philanthropist. How does that jive, that you like one part of someone’s work but not the person?

Take what you want suggests Sacca. He looked at Gate’s charity work and took those ideas to apply to his charity of choice, Charity Water. We can do this too. Select the best pieces (from articles like this) and use them. The rest, leave like the middle part of a brownie pan.

The Advantage of Adversity

The benefits of difficulty are nearly endless. Sacca weighs in and tells Ferriss about “sweet and sour summers.” Each year his parents would assign one fun or cool job (sweet) for the first part of the summer but then a construction job (sour) at the end.

It showed Sacca the value of hard work and a philosophy about why he wanted more than a 9-5. He’s applied this to other parts of his life (completing a triathlon) and work (aiming to hire people who have done hard things). A challenge creates something inside you and makes you a different, and probably better, person. A few others have mentioned this:

  • Peter Thiel said he looks for people who have done difficult but not impossible things.
  • Rick Ross said growing up on the street taught him how hard he had to work.
  • Neil Strauss said he only gets better when he leaves his comfort zone.
  • Ryan Holiday said “The Obstacle is The Way.”
  • Carol Leifer said her comedy only got better when she failed.
  • Marni Kinrys said guys who never failed suffered from “pretty boy syndrome.”

To Get More Done, Get Away

Sacca tells Ferriss that he fled to Truckee California so he could “stop playing defense and start playing offense.” The problem was that as Sacca was more successful, more people wanted to spend time with him. “I was reacting to everything,” he tells Ferriss, so off he went.

But not alone. Sacca’s family went with him (of course) but people came too. The only difference was that the right people came and they did so temporarily. His hot tub, (no I didn’t believe this at first either), is known as the Jam Tub and has a Foursquare checkin. Being away meant that Sacca had to invite people up to see him rather than people invite him for coffee. 

David Levien told James Altucher a similar story about his writing career. He was in Hollywood because he wanted to write movies. Guess what, Hollywood is distracting. Levien’s career only took off after he moved away from the parties, the industry, and the industry parties.

I wrote these posts from rural Ohio, but it doesn’t matter. They start in the minds of someone like Gretchen Rubin or Astro Teller, filter through mine, and come to you. Location matters less and less, especially when it comes to ideas. 

Thanks for reading, I’m @MikeDariano.

I’m facing a big problem right now and I hope you can help. There are far too few women represented on this site. If you hear a good interview with a female thinker, leader, business owner, c-suiter, comedian, author, etc, please tweet or text me – 559-464-5393.

Ferriss has talked with James Altucher twice, and you can find his notes here and here.

// The photo is from Sacca’s talk with Pando Monthly.