The Restricted Actions Section

Shane Parrish on Capital Allocators:

“Even during the pandemic, there are tons of public health guidelines out there where people are telling you what to think, how to think. You need to filter that and digest it. You can’t just rely on it. They came out and said that masks don’t matter and then said masks do matter—well there was no downside to wearing a mask. You might look like an idiot in the short-term but there’s no downside to it.”

Shane Parrish

One theme in Shane’s great conversation with Ted Seides was how much the cost of looking dumb restricts possible actions. About his podcast Shane said he’s just an idiot with a microphone.

But restricted compared to what? An idiot how?

Restrictions differ by scale and is much like the old political joke: I’m a libertarian at the national level but to my dog I’m a Marxist.

This idea surfaced in Bill Brewster’s podcast with Dan McMurtrie.

“I was somewhat bold enough to call out a transaction that some people have been burned on. But when I started to get inbounds from real mutual funds and managers and as I listened to why people weren’t buying I was like ‘Oh, I’m gonna fucking win on this because I don’t have the constraints.”

Dan is super good in the interview and together they address the four levels of constraints.

  • Macro culture (society). For instance, it’s taboo to talk about sex, or at least the dating market.
  • Micro culture (office). In another Seides podcast, he spoke with Ben Reiter about culture.
  • Position (job). Certain institutions have mandates about size, moral, or industry situations. ESG is a literal example.
  • Psychology (self). In the podcast Dan and Bill joke about investors who say “See’s Candy is my fav WEB investment”. That’s a psychology restriction.

So what? Why do constraints matter? Because they limit what a person can do. Dan again:

“I never want to compete against Stan Druckenmiller in timing the market. I never want to compete against David Einhorn in valuing a company. I never want to compete against Dan Loeb in writing an aggressive letter to a board. Where I might compete is where the environmental factors means that fighter is not able to perform at their best.”

It’s not more options that are better, but different options. Having good ideas (‘Go’) that also look good (‘Show’) is twice as difficult as just having a good idea. Or, can you look a bit like an idiot?

Correlated Decisions

“We use quantitative methods to put together diversified portfolios that don’t blow up over time. We have technical guys who are very sophisticated, one guy was the MIT chess champion. We need these guys to balance our portfolios, but they’re not picking stocks. I pick those guys because they have no idea how to pick stocks and I don’t want to know what they think about picking stocks, that’s for our researchers.”

– Joel Greenblatt, Capital Allocators.

The JTBD of diversity within an organization is uncorrelated decisions. If we’re all thinking the same way, the expression goes, nobody is thinking.

Early in the episode with Ted Seides, Greenblatt cautioned that there’s always more correlation in a portfolio than someone expects. This is consistent with the idea that most financial issues are liquidity issues.

If there are 3 ways to spend your day then we should be wary about the feed, the search, and the trends. For instance, the September 1 – December 1 BTC search trends. When Coinbase emailed me “Why Bitcoin is in the News.” I thought, this might be a good time to sell.

Google Trends for “bitcoin”.

Trends, searches, and feeds aren’t bad, but they are correlated.

The best solution to uncorrelated decision making is to use a bit of decision making advice from Rory Sutherland. When we select one at a time, we choose the average item. When we choose multiple things at a time, we choose a variety.

Rather than consider a best option then, we can consider a basket of options. With finite resources it’s hard (impossible?) not to prioritize but it does lead to new ideas.

It’s neat to hear that Greenblatt’s operation is like a newsroom: editorial and news, research and technical. Division is balance. The worst outcomes aren’t when something goes against us but when everything does.

How we decide

Our first boil, 2019

Moving to Florida in 2018 has been mostly positive. Y’all and ma’am are great and I use them each day. The weather is wonderful. We also make a boil.

A low-country boil (minus the pesky crawfish) is a holiday and weekend staple. Boil water with seasoning; add potatoes, corn, onions, sausage, shrimp, enjoy. The ratio of work to taste is very low. It’s a good deal.

But making it the first time was hard. We had friends over and I didn’t want to be the person who gave everyone food poisoning or served potatoes that tasted like dirt. The whole meal went great, if not a touch spicy, and each subsequent preparation has been slightly easier even for serving a crowd.

There’s a lot of other options we could do as well. We made a lot of chili when we lived in Ohio. We could order out, make sausage stuffed potatoes, or any number of things. But we don’t. We make a boil.

A boil is familiar. It’s easy. The opportunity cost is opaque. Will <other meal> be better? We don’t know. Let’s make a boil.

A lot of decisions are like this. Opportunity costs are hard to quantify.

During the late teens one bit of regular startup advice was that a product had to be 10x better than the existing option. While JTBD offers a slightly different approach, the idea is a good one. People do switch from one thing to another all the time but it’s often because the decision to do so is easy.

Making a boil in Ohio: hard.

Making a boil in Florida: easy.

Organizations then can consider how to dial the friction up or down. To keep serving people, make it easy for them to stay. To serve new people, make it easy for them to switch.

An easy way to change your mind.

This idea is related to Tyler Cowen’s idea of ‘meta-rationality’ which you read about in this pay-what-you want pdf.

Perhaps there’s no better time to see, sort, and participate in over reactions than week one of the NFL. Though I only watch a full game or two a year, there are a lot of lessons from the likes of Mike Lombardi, Bill Belichick, and questions like, should running backs run the forty-yard-dash? (Narrators: meh).

So, after week one of the NFL, how much should someone change their mind?

There were two comments from Wharton Moneyball related this this exact question.

First, the hosts wondered why the small but powerful vitamin D study wasn’t getting more attention. Their guess was a combination of things including excessive dosing, strong priors, sample size, and general application (the participants were already hospitalized but went to the ICU at a much lower rate with treatment).

While people may have strong beliefs about the efficacy of vitamin D it doesn’t hurt to go for more walks, while the weather holds at least. Whether or not someone believes in vitamin D, walking can’t hurt.

Late in the episode, Cade Massey and Josh Hermsmeyer noted the impressive week one play of Gardner Minshew. While both are rooting for his success, there’s no ‘go-for-a-walk’ equivalent for updating beliefs. Base rates suggest we stay closer to home until Mr. Minshew racks up some road wins.

Lastly is this study about teacher expectations. “(U)nbiased (i.e., accurate) beliefs can be counterproductive if there are positive returns to optimism or if there are socio-demographic gaps in the degree of teachers’ over-optimism, both of which we find evidence of.” Want better results from students? Have higher expectations than the data suggests.

The easiest way to change your mind is to make changing your mind inexpensive.

The hardest way to change your mind is to attach ideas to yourself. Jason Zweig calls this thinking “identity protective cognition,” and said, “If you are not judging the validity of ideas by long-term, objective, peer-reviewed evidence then you are just protecting your own identity and it’s foolish.” 

If vitamin doesn’t affect covid health, it still doesn’t hurt. If high expectations don’t affect student results, it still doesn’t hurt. If extrapolation from week one of the NFL doesn’t predict season success it does hurt.

Related: Make small poker bets.

Gambling with CoVid19

Bias warning, My wife and I can work from home, my kids kinda like homeschool (but really miss their friends) and I wiped down the groceries in the garage. 

It’s always helpful to ask, has someone faced my situation before? The answer is often yes. Rory Sutherland thrives at this.

On recent podcasts from Deep Dive (#249) and Wharton Moneyball (April 1, 2020) there were two very good steps to understanding anything with uncertainty.

Wharton Moneyball takes its name from Michael Lewis’s Moneyball. That book shed light on using advanced statistics to find other ways to win baseball games, that walking to first after a full count was actually better than hitting a single to first on the first pitched ball. Moneyball thinking has extended to new areas like basketball, movies, and Jeopardy.

On Wharton Moneyball, Adi Wyner spoke with Alan Salzberg who mentioned that he’s starting looking at CoVid19 deaths rather than cases. The former takes longer to materialize in number form but is better than the former which is mostly a product of testing. It’s trading a sampling error for a time lag.

“It was what we would generally call ‘garbage data’. A confirmed case  might me it was confirmed because someone came to the hospital and was already sick.” Alan Salzberg

Ok, good so far.

We need good data (walks instead of hits) but then Alan goes too far. The virus is mostly airborne and mostly won’t bother someone if it lands on a surface someone might touch and then finds a path into their body. That’s a lot of ifs. “Is that enough,” Salzberg wonders, “It stays for a little while, but in my mind I don’t think that should be a worry. I think you should wash your hands, and I’ve been doing that and I try not to touch my face a lot. But I think being ridiculously uptight about it is kind of crazy.”

Ok, that’s fine if we had better data.

But we don’t. Instead of six feet we might heed caution and stand at least twenty-seven feet apart. What’s the R0? How long is someone infected and asymptotic?

Ok, those are good questions.

There’s a lot of unknowns here and on Deep Dive, Matt (@PlusEVAnalytics) talked through what we can do when there are so many unknowns.

Think of Tom Brady’s 2020 over-under passing line of 4,256 passing yards, or 266 yards per game. His last four years totaled; 4057, 4355, 4577, and 3554. But with Tampa Bay he’s got better receivers. And he wants to prove to everyone that he’s still got it! And he wants to do it without Belichick!! Yeah!!!

But how much do those things count for? Like how much we know about CoVid19, we don’t know. Matt gives us a guide though. Do the things we don’t know make one outcome more likely? With age, ambiguity, competition, injury and so on, the unknown makes the under much more likely.

Matt credits much of this thinking to Taleb but the concept of sports and gambling make it clear. It seems like the unknown parts of the CoVid19 pandemic tilt the outcomes in favor of what’s much worse. Good data is a necessary start but ambiguity must be considered too.

Latest book: Idea Trails, 50 ideas from blogging the last four years.