Dan McMurtrie with Howard Lindzon

Link: https://howardlindzon.com/dan-mcmurtrie-founder-of-tyro-partners-llc-joins-me-on-panic-with-friends-to-discuss-information-overload-and-behavioral-investing-ep-151/

About Dan: Dan McMurtrie is a 28-year-old founder, portfolio manager, and Twitter phenom more commonly known to his nearly 60,000 followers as @SuperMugatu. He’s an insanely funny, original and inspiring person who knows a lot about social media, maintaining an audience and the behavioral side of investing. Dan’s New York-based hedge fund, Tyro Partners LLC, focuses on trends and supply chains driving technology, healthcare, industrial, and consumer markets.


An insight common to making money and making people laugh

Something everybody knows it to be true but no one’s speaking up about it being true

On people struggling to make sense of the world

It’s a paradigm shift to a networked world…going from one-to-many media to many-to-many media, and having cycle times for communications go down to sub-second, meaning the number of cycles, the number of communications is going to infinity really fast. That’s leading to all these weird neurological effects because your brain is not used to having hundreds or thousands of opinions scattered at it. Your brain is used to thinking that an opinion from somebody means something, which is super wrong. And so I think this knee-jerk reaction to dismiss things that well-trained investors in the past three years have developed is actually the biggest weakness you can have, because everything now is like this kind of meta game of “it looks absurd but it’s actually not. Actually you shouting that it’s absurd, is what’s going to give it the audience that makes it real!”

The output of our quickly networked world is disrupting seasoned investors’ heuristics

It’s scaring the shit out of people. They’re looking at this and they’ve been around the block a few times, and their experience is betraying them because they’re seeing things that are so behaviourally horrifying to them that they don’t realize that they’re then becoming just instinctive and knee jerk, And they’re not running basic numbers [and asking themselves] “Is this a material amount of money?”.

[consider the lazy argument against Dogecoin that it has unlimited supply]

Is it actually unlimited supply? I’m like, “Yes, but is it unlimited supply forever. No. There’s a more nuanced point  that it’s not unlimited supply at any individual point in time, there’s a rate limiter on time with those points, which is why this pump thing is working. 

An example of how brains get hacked in this networked world, orchestrated by the guy that oversaw such hacking at Facebook

There’s a technique that I think Chamath does that I call “the 90% rule”. What you do is you say something that’s technically accurate, but like maybe 10% off of how a professional would say it, or maybe it’s 10% not correct, but it’s in the spirit of correct. For example, Chamath said something on Twitter — that he was up 120 basis points this year, and the market’s up 30 basis points, so he said he’s outperforming by like 300% or 400% or something. [Everyone jumped on Chamath for this], but do you actually think that Chamath doesn’t understand basic math. Do you think the guy who led monetization of mobile advertising for Facebook doesn’t understand the way things are reported. The guy who’s leading several SPACs, who’s talking to bankers every day, who has a sophisticated family office. You could dislike the guy for a million things, but basic numeracy is not one of them. And yet the knee jerk reaction [by people on Twitter] is that he’s wrong. I think the reality is, and here’s the brutal thing about Twitter, most people on Twitter are strivers. The people that are working really hard, they’re trying to make it, and candidly for most people it’s not working out. Especially the finance guys. The guys who went to finance, they’re not getting the money. It’s not working out. They’ve got the CFA, they’ve got the MBA, they worked at Goldman, they went to Wharton and they’re still not making a fraction what they thought they were. They’re not moving up. It’s not working out because of top-down industry dynamics which you’ve talked about ad nauseum, but that makes them really bitter. They’re really bitter because they feel like they’re getting screwed. And so when they see this guy, who’s making billions of dollars, making a beginner mistake, that would have gotten them fired, the amount of unrighteousness or injustice feels so massive. It overrides all logic and reasoning.

Nobody is immune from the brain-hacking that the networked world is doing, but the first step to understanding it is being aware of it.

My big thesis right now is technology is being used to program people, not the other way around. In the frickin documentary on Netflix [referring to “Social Dilemma”] is half of the stuff and [Chamath] is doing it. It’s crazy how effective this stuff is. A great example of this was when I tweeted a stupid joke that “no one actually knows what’s in chalk, they just teach you to accept the premise when you’re so young, and they just go with it.” And you have people, like real people with PhDs responding like I’m a fucking idiot. Everybody knows what chalk is. Don’t you see this as tweeted from my iPhone?! I tweeted this from a supercomputer in my pocket. Even if I didn’t know what chalk is, I could obviously put faith in it. [This is obvious if you think about this] for more than a split second but you have people who have multiple PhDs from places like MIT, who are completely hacked. Their brains are being hacked. And they look like fools, and they think they think that they’re smart because they’re speaking. Not to validate what they’re saying. They’re speaking to validate themselves, and that’s the weakness that all people have. This is the dark arts that you have to study now.

Change is occurring at an accelerating rate

There’s a concept called the Overton window, which, not to be like a dropper of concepts but Overton Window refers to what like types of political policies are acceptable to talk about in public. [A few years ago universal basic income was considered a quack idea], last year Donald Trump initiates universal basic income. Admittedly because of a virus so I’m not saying it was a wrong move, but you need to understand how insane that shift is society that that went from unthinkable to expecting it, and actually the people almost revolted. I mean I was in Richmond, Virginia when the protests were happening there. We were watching the breakdown of society happened, because there was some uncertainty around it that changed in a year.

You can’t put your head in the sand about the role of social media. The genie is out of the bottle. Dan sees evidence that some managers do not understand that reality.

The thing about Twitter within hedge funds or institutional endowments that nobody really wants to admit is, even if the CIO isn’t on Twitter, (and if he isn’t, it’s only because he’s too old) all of their analysts are! So, like there’s this huge issue right now of mass group gaslighting of mimetics and ideas spreading like viruses and if you’re a CIO right now, you probably don’t actually know what your firm’s sourcing mechanism is (unless you’re pushing all your ideas down). The number of times I meet with the senior guy who runs a fund, and he starts rattling off ideas I’m like “Yo, you know your analysts ripped all of that from Twitter right. And they’re like ‘What are you talking about?’ and I’m like, Look, there are these cliques of people on Twitter, I’m not even I’m not saying they’re bad ideas, but they aren’t original ideas. I’m just telling you. I’m not going to doxx your boy, I’m not going to get anybody in trouble, but I’m just telling you that you don’t know how your own investment process works. You don’t realize you’ve already been fully infiltrated by social media.”

Instead of fighting this new reality, adapt to it.

[You’ve been infilitrated by social media] but you actually kind of want that because if you are the only guy who’s not participating in these things [you are missing important context]. For example in January, and the end of December [during the stock squeezes]. I’m not particularly smart, especially relative to other hedge fund guys, but I was seeing where the liquidity was in the market and I was seeing the type of stuff happening on StockTwits and Reddit and all these other places I mean there was just gonna be just some crazy stuff happening. I went to my clients and said “Look, I’m not gonna play this game. I’m gonna take exposure way down. Yes, I believe I should be short half these companies, but I’m short the stock not the company. I’m not messing with this.” I had several people say I lack conviction, long-term investing blah, blah. Then the next three months it was just a hedge fund after hedge fund blow up. This is not going away, it’s not going back because it’s not 2000. This is not instant messaging. Last year was the first year that most waking hours for humans were online, and everybody was on one to five websites. Nobody really understands how significant that is. Everybody’s now networked, all the time 24/7.

The bar for what is considered table stakes is rising. Psychology and the repercussions of being highly networked should receive more of your attention to gain an edge.

People don’t realize how fast these big changes happen and so when I just look at some people who think we’re gonna, we’re gonna be good investors because we do more conservative discounted cash flow analysis than the other guys I’m like, “You’re like a dude with a horse and a saber walking into WWII. You’re about to have a really bad time. Like I can’t even explain to you the ways in which you’re going to get beaten down, and you’re not psychologically prepared to deal with any of this stuff because it’s gonna seem random. It’s just gonna be chaos. There’s gonna be bombs dropping and machine guns and you’re not gonna know what either of those things are. It’s just a really weird time to be an investor and I think you have to move the psychology stuff up in how you’re relating to the world into a really forefront position. Or these systems are just going to eat you.

How Dan’s fund is adapting

We’ve continued to zoom in on this behavioral stuff. Everything else is table stakes. Of course, you need to know how to value something, you need financial analysis, you need to be able to read transcripts, and do value research. But that became commoditized sometime between 1995 and 2010. Look at the number of people who have CFAs or how many people went through banking here or internationally. Companies like thedeal.com. You can go online, hire somebody anywhere in the world in like 10 minutes with a contract and a 1099.

Right now, I think the markets become a pure metagame of the game. Where does it go from there? The thing is humans are still very human, and actually, the rise of passive means the humans are a smaller percentage of the market. When they move at once they have a bigger price impact, because it’s just everybody running out the fire door of a theater. It’s as old as the hills. It’s all the same stuff again but remixed and much faster. It’s still music but it’s going from jazz to dubstep, way more aggressive, way faster, with all these different games being played. So we spent a lot of time trying to understand the fundamentals and what’s going on in these businesses and what’s going on in the supply chain, but also what is the psychological game going on in the market.

You must find a lineup where you’ve got great fundamentals, good business improvement, a really long-term runway, and you have some really distracting psychological thing that’s distorting the price. Or more importantly, maybe in this era, mandate arbitrage. As more and more capital is just driven by somebody’s investment policy statement, or an endowment investment policy statement or the S&P index rebalances. Those legal mandates are really powerful and just getting bigger. So we want to see a clustering of understanding why the opportunity exists. Because of legal mandate, because of agency costs and behavioral things like [where investors] can’t go to LPs and own it because they are going to get upset. If we see that plus it’s a good business [that becomes a potential opportunity].

This bit reminds me of the style of trading I’m more accustomed to where we don’t predict so much as try to “see the present clearly”. I’m more accustomed to measuring what is happening now than predicting tomorrow. (An example from my world would be owning optically expensive volatility because it’s carrying well)

We don’t try to predict. We try to observe. We might have a starter position on but when we see thesis confirmation, we’re going to add. What we do not really like to do, is make a big bet because we think x is going to happen. I don’t think it’s necessary because I don’t think the market adjusts to new information as well.

Dan loves Warren Buffet but scoffs at his cargo-cult imitators

I’m a huge Warren Buffett fanboy. My favorite people in investing are Warren and Charlie and then my least favorite people in investing, generally speaking, are people who tell you that they’re fans of Warren and Berkshire.

A great filter is to ask them “what’s your favorite Berkshire business?” If they say See’s Candy, you know that they know nothing. Nothing about Warren Buffett or Berkshire Hathaway. The reason is Warren Buffett is probably one of the greatest marketers to ever live. He’s built this brand. He’s built this brand that’s hyper-consistent. That allows him to not answer any critical questions, because he doesn’t actually have to defend objectively right or wrong. He just has to defend consistency with his brand.

There are several value investors that really market themselves as like Warren Buffett or Charlie Munger brands. Baby Buffetts. They all have kind of good records of not losing huge amounts of money but none of their records would stand on their own in a vacuum. They live off this same narrative. Recently I’ve had some interesting interactions with a couple these people. You ask them “How do you think about your business?” They’re very candid. “Look, I am looking for somebody, where that’s what they want. They want to feel that they’re investing in a long-term, conservative thing. They’re not going to lose their money. They will compound well and they get to feel like they’re part of the church of Buffett.”

At the end of the day, what are they selling is a psychological safety blanket. They’re not selling an investment product at all…they will only take inbound clients because they don’t want to go out and convert anybody. Look at how these [investors] behave. If you’ve ever studied cults, you see the exact same behavior. I don’t necessarily think it’s malevolent or bad, but I think that in the modern era, with everything that Warren Buffett did now being sped up 100,000 times, and on Twitter everyday with people doing these explainer threads and Substacks. These are all the same psychological manipulation techniques. It doesn’t mean they’re malevolent. If you really understand how Warren built his public persona, why he built it the way he did, and how he changed his business at every scale level of capital [out of necessity] you’d understand that the idea that Warren Buffett The Empire Builder, bears any resemblance to Warren Buffett The Ruler is naivete.

Why 2020 made Dan optimistic

Looking forward, I think the takeaway from last year, has to be a profound optimism for humanity. We just took a global pandemic on the jaw. As pissed off as everybody is we’re calling it the Five Aces Problem. It’s like you being dealt a poker hand with four aces and people are like “It would be good if we had a fifth ace”. There’s no fifth ace in the deck! You can tap something on your phone and have a pizza in 20 minutes! You can have a date in 5 minutes. You can have anything you want delivered to your house within 2 days. Like woe is you that you couldn’t get the specific dumbbells you wanted that week. During quarantine, we were living a better life than people in the 1960s were able to live. People in the 25th income percentile now live better than Rockefeller did. We’re going up a curve that is getting exponential so people are not understanding how insanely awesome the performance last year was of humanity. And sure we have some supply chain chokeholds leftover from last year. Yes, there are obvious knock-on effects. We’ve got some issues around the government explicitly putting all risk onto the dollar and making some big bets on modern monetary policy. Those are generally concerning things, but they are super obvious. I just don’t see how you can’t be optimistic about our ability to solve these problems.

I think one of the things people struggle with, I just wrote about this, is as the world gets better, as you go from being a caveman to being an office worker, your job is moving further and further away from the kind of base Maslow needs. You’re not hunting a saber-toothed tiger, you’re typing in data entry or doing social media posts. That’s why every generation looks at the next generation and thinks they’re soft as hell. You know “they had to walk both ways to school uphill in the snow.”

It always happens like that. That’s what progress is.

Darrin Johnson On Flirting With Models

Independently Shorting Volatility with Darrin Johnson (Podcast)
Corey Hoffstein’s Flirting With Models

Darrin Johnson is an options trader and the first independent trader Corey’s had on the pod. Considering Corey’s show focuses on institutional and cutting edge investment professionals, it says a lot that he had Darrin on the show. I’m not surprised, I’ve been following Darrin on Twitter for years and impressed by his understanding of options trading. I have always believed that option trading is an apprentice activity. I cannot imagine how difficult it would be to learn the game with the guidance of masters. Darrin has managed to cobble together that guidance from a variety of sources including Euan Sinclair’s books, Twitter, hiring grad students to walk him through the academic math, running countless simulations, and detailed reconstructions of financial products.

Here are some of my favorite aspects and insights from the interview (with my commentary):

  • Darrin’s entrepreneurial path before he even found his way to trading is worthy of an interview of its own.
  • The importance of building sims instead of backtesting as a way to get more samples. For those of us who trade for firms, we benefit from the collective osmosis of many traders discussing trades and situations in detail. All those morning huddles and afternoon meetings help us build a mental library of counterfactuals. Darrin did the next best thing…build simulations, knowing that a backtest is a single version of what could happen. This is crucial to get a fingertip feel for how positions behave.
  • The idea of pricing out financial products to the penny. Darrin called it “back-office” kinda stuff that retail traders don’t do. Corey said he does this too. This is exactly what you do at a mm/arb shop. As a clerk I remember building giant spreadsheets to price fair value for ETFs. This is not optional work. You will use those skills to attack new products and understand the frictions to arbitrage.
  • At around the 40:00 minute mark Darrin explains why he concentrates his selling on at-the-money or meaty options not the wings. He makes the correct insight: when you sell tails, you need to capture the entire premium. The hit ratio of selling tails is high but when you lose you lose many multiples of the premium. If you fail to collect the full premium, it will not make up for the losing trades. The difficulty of selling tails is even trickier yet. Darrin explains how betting against longshots leaves you uncertain if you have an edge in the first place. In my words: good luck differentiating between a 50-1 shot vs a 100-1 shot. That’s the difference of 1 probability point but it’s massive in payoff space. I discuss further in Tails Explained.
  • Here’s a more subtle insight from the interview. Darrin tries to find the structure that has the best payoff to his vol forecasts or thesis. Notice the subtext. If there’s a “best” there must be a “worst”. This is the basis of relative value trading — buy the best payoff and sell the worst payoff contingent on the vol forecast coming true. For example, if you thought skew was cheap in the oil complex compared to macro backdrop, you could buy the cheapest puts across the oil and products suite. You could buy some ratio of oil puts and selling RBOB or HO puts depending on how how you think the macro stress plays out. Now you might want to be outright long the vol forecast coming true so you might not want to turn this into a basis trade (the advantage of a basis style trade is you can likely do it bigger). Or you could choose to buy oil puts and say sell puts on an equity index where the stress has been priced in. Because you’d be taking an even larger basis risk than staying within the oil complex, you would size the trade smaller than the oil basis trade, but perhaps larger than an outright long oil vol position. The point is there is a lot of creativity on trade expression that balances edge and basis risk.

Since the interview was so good, it got passed around quite a bit on Twitter. In one of the ensuing discussions, I offered my down-to-the-studs view of what options trading really is:

There’s nothing magical about options trading. Paraphrasing Darrin, the intellectuals who are drawn to it prolly need a more blue collar view. Step back and think about what the market needs. What risks doesn’t it want to hold? Obsess over the who and why, not moments [of a distribution]… For years the “job to be done” in vol was be willing to pay theta The marketplace was bidding for that role and vol folks that filled it did well. The market “bids” for different roles all the time in vol-land and the job of a vol trader is to fill it. Simple not easy.

@TheSpeculator0, who trades for a firm, astutely observes: It’s not easy to catch the regime change that switches up the roles.

My response:

That’s why risk management is key. The nature of market-making, even if you don’t explicitly have that title, is you lose on the regime change. So you adjust and hope the next regime lasts long enough to pay you for the [money-losing] transitions.

If you want a fuller discussion for the raison d’etre of vol trading, you probably won’t do better than Corey’s podcast with QVR’s Benn Eifert who describes the job as “bringing balance to the force”. I took full notes for you…Flirting With Models: Benn Eifert (Link)

Bubbles: Knowing You’re In One Is Not Even Half The Battle

Select excerpts from Aaron Brown and Richard Dewey’s paper:

Toil and Trouble, Don’t Get Burned Shorting Bubbles (SSRN)

It was not a mystery that there was a bubble in subprime from 2005-2008. That did not mean shorting it was an easy trade. With the benefit of hindsight, we can learn about the risks of shorting frothy assets that may even be a bubble.


From the abstract:

Bubbles are among the most puzzling and controversial phenomena of financial markets. Although rare, their cumulative impact on both investor returns and the broader economy can be great. One particular question that has motivated research is why shrewd short sellers don’t prevent excessive price increases. The “limits to arbitrage” idea argues that correcting inefficient market prices is neither easy, cheap nor riskless. The “rational bubble” literature identifies situations in which being long the bubble is a better trade than being short, even if investors know for certain the bubble will pop.

We examine the “short subprime” trade from 2005 to 2008 to evaluate these and other explanations. We argue that the short subprime trades had more risk than is commonly appreciated. We discuss how the opaque and illiquid nature of subprime mortgages deterred some investors from purchasing CDS contracts and note that other investors assessed the risk of counterparty failure, government intervention and unknown time horizon to be sufficient enough not to purchase CDS contracts.

Talking to investors who saw the bubble and passed on shorting it, instead opting for alternative strategies:

We interviewed and analyzed the internal research of several investors who evaluated the short subprime mortgage trade and decided not to purchase CDS contracts and present some of their reasoning below.
    • The Basis Trade: Magnetar Capital in Chicago.

      Magnetar did not cooperate with the media, so their story has not been widely told. Magnetar reportedly employed a strategy whereby they purchased the riskiest equity tranche in many CDOs which often offered double-digit returns. They used this positive carry to pay for protection on the AAA tranches that most investors assumed were safe. Magnetar appreciated that the correlation between the safest AAA tranche and the lowest quality equity tranche would be close to one in a crisis due to the way these securities were constructed.

    • Picking-up-the pieces trade: Soros and Tepper

      Soros

      Perhaps the safest way to profit from the subprime mortgage meltdown was the time-honored method of picking up the pieces at the bottom. George Soros and his Chief Investment Officer Keith Anderson smelled opportunity and hired two ex-Salomon Brothersmortgage experts, Mason Haupt and Howie Rubin.

      Tepper

      David Tepper purchased shares of Citi and Bank of America near the bottom, helping his Appaloosa fund return 120% in 2009 on $12 billion in capital.

    • Convex-listed hedges correlated with a downturn: Talpins and Dalio

      Ray Dalio at Bridgewater and Jeff Talpins at Element Capital are rumored to have purchased futures or options on government bonds that would rise in value if the Fed aggressively cut interest rates. Many on Wall Street believe that Element purchased Eurodollar options in 2007 that helped his firm generate returns of 26.4% in 2007 and 34.9% in 20083. Talpins has posted annualized returns north of 20%, without a single losing year in the decade that followed. And simply being long volatility in equity markets, fixed income or currency markets paid off nicely for many traders. The key to these trades is that they removed some of the unattractive aspects of the subprime trade, by using more liquid instruments, waiting for the crisis to materialize or constructing more nuanced expressions.

The collection of people that did these trades: George Soros, David Tepper and the team at PIMCO are investors with long-term track records. They made their money quietly, in sensible trades over several years, and were also able to put large amounts of capital to work.

The sobering difficulty of the short subprime trade:

Betting against subprime mortgages worked, but it was somewhat of a Goldilocks trade: it required default rates to get high enough to generate profits on your insurance, but low enough that the banking system survived to pay you and that the government didn’t help out borrowers at your expense.

Current backdrop:

As we write this analysis in the first quarter of 2021, financial market pundits are calling bubbles in everything from cryptocurrencies and TSLA to SPACs, high-end real estate and, most recently, stocks hyped on Reddit.

My takeaways:

    • Shorting subprime looked like a hero trade but the path was painful and uncertain. You needed to weather the negative carry and margin calls on bilateral trades with banks for years. And you needed to bet against on institutions that were not bailed out.
    • Taking a bubble on straight ahead looks like foolish risk reward, especially if the bubble is “rational”1 and has no clear correcting catalyst.
    • Need to think about the risks and incentives of the system. For example, if you believe bonds are currently overpriced and shorting them, even with their low-yield and therefore relatively small negative carry, you cannot ignore the possibility that the rules can be tampered with in the name of the system. Just as banks were bailed out, it’s not impossible to imagine a yield curve control policy (YCC) similar to post-WWII would cap any upside on a short Treasury trade.
    • The paper describes what you are up against eloquently:

      The reality is that structuring good trades is often every bit as difficult as forecasting. This is particularly true if a trade is contingent on a crisis materializing, when pricing is less reliable, liquidity dries up and contractual obligations are sometimes not honored. In these instances, trade construction is everything. Even if an asset price bubble can be confidently identified ex-ante (no easy task), making money from the bubble is perhaps equally challenging….

      This separates opinion havers from risk-takers. Getting the right odds on the right contingent payoff in the state of the world that matched that payoff. And then actually being able to collect. Having an opinion on markets is like have a business idea but no ability to execute.


Graham Duncan’s “What’s Going On Here, With This Human?”

Excerpts from Graham Duncan’s “What’s Going On Here, With This Human?” (Link)

Interviewing is really a narrow application of a broader art. Duncan begins:

The philosopher Kwame Appiah writes that “in life, the challenge is not so much to figure out how best to play the game; the challenge is to figure out what game you’re playing.”

When I try to figure out what game I’m playing, I see that for the last 25 years I have been playing a game of strategy applied to people, a game where over and over I try to answer the question “what’s going on here, with this human?”  In this essay, I make recommendations about candidate selection based on thousands of assessments I have made and my somewhat obsessive interest in the topic.

My goal in this essay is to help others make better decisions on a potential hire, business partner, or even life partner as quickly and as accurately as possible.  It’s made up of suggested action steps and some of the ruminations that underlie them. At the end I include my own assessment of different personality assessments and some of my go-to interview and reference questions.

These notes are select excerpts from the essay that I want to keep as a reference. My favorite line from the entire essay:

One of the greatest gifts we have for each other, for our children and spouses, for our teammates, is the positive feedback loop we can put someone into purely by believing in them, by seeing their genius and their dysfunction clearly and then helping them construct conditions for the former to flourish.

That emphasis is mine. I consider this to be one of the cheapest forms of human capital and this essay is ultimately about allocating that capital.


From the introduction

My summary: When we interview someone for a job we are looking for signs that they will do the job well. But when our goal is to “see someone clearly”, our focus shifts to finding the best role for them.

Excerpt

It can be useful, when interviewing someone, to take Rumelt’s cue and ask explicitly: what’s going on here with this person in front of me?  The more I’ve done it, the more I realize that what most people think of as the hard parts of hiring—asking just the right question that catches the candidate off guard, defining the role correctly, assessing the person’s skills—are less important than a more basic task: how do you see someone, including yourself, clearly?

Seeing people clearly—or at least more clearly—matters not just when finding the “best” hire, but in identifying the best role for them. Even looking at those of us who are lucky enough to have a high degree of choice about what we do with our work, I’ll bet that as few as 20% of us are in the seat that best optimizes our talents and skills at any given time—the seat that makes us feel at home in the world. That’s not good for the 80%, and it’s not good for their teams either.

The poet David Whyte describes the unfolding of life and career as a “conversation with reality”:

Whatever a human being desires for themselves will not come about exactly as they first imagined it or first laid it out in their minds…what always happens is the meeting between what you desire from your world and what the world desires of you. It’s this frontier where you overhear yourself and you overhear the world.And that frontier is the only place where things are real…in which you just try to keep an integrity and groundedness while keeping your eyes and your voice dedicated toward the horizon that you’re going to, or the horizon in another person you’re meeting.

Whyte captures how hiring can be an art form. When you see people clearly, you see the transcript of their conversation with reality up until that moment of your meeting, and you glimpse the horizon that stretches out ahead of them. And then sometimes you can help them overhear themselves and overhear what the world wants from them, whether or not that includes working in the role that you had initially imagined for them.

Part I: Seeing your Reflection in the Window

My summary: The role of being an interviewer can affect your judgment in ways in which you are not aware.

Excerpt

If I picture my thirty-year-old self doing an interview, I see him as the friend looking through the window: not seeing the way his mind was constantly making snap judgments about the candidate, creating stories with the slightest bit of material, “I like this,” “I don’t like that.” He would project his reality onto the reality of the other person, missing that, for instance, often even very senior people are not their usual selves in a formal interview setting, that there’s a power dynamic that he should not take lightly. He would not yet be aware that while his sensitivity to being hustled is a gift, it also creates a blind spot that causes him to mistakenly pass on a particularly good sales person or someone who is earlier in their career and still relies on jargon or cliché.

Part II: Seeing the Elephants in the Room

My summary: There are meta-techniques for overcoming your own blindspots

Excerpt

So let’s reframe the interview process: there are two elephants in the room, yours and that of the person you’re trying to see. The bad news is that you’re mostly blind to both elephants. The good news is that there are a lot of other riders who’ve traveled alongside the other rider and elephant. If you take your perspective on the rider and your glimpses of his or her elephant, and add everyone else’s experience of the rider and their elephant, and then control a bit for your own elephant and the references’ own elephants, you can get a good sense of how the candidate’s rider-elephant combination behaves.

Diving into techniques:

  • During interviews, I try to create a stillness that helps separate signal from noise, elephants from riders.

    During interviews, I try to create a stillness that helps separate signal from noise, elephants from riders. The easiest way to create conditions of stillness is to talk very little. It also helps to have the candidate you’re trying to see clearly ask you questions. Questions have very high signal value compared to most anything else you can get from a candidate. This is harder to do in practice than you might think—you need to make the candidate feel safe enough to ask their true questions, and you need to answer concisely or you’ll run out of time (which is particularly hard if the person asks good questions). I write down each question and sometimes respond with “I’ll answer, but first I’m curious, why did you ask that?” I’m looking for the felt sense of a “hungry mind” based on the way their questions flow. That’s very hard to fake.

    I like asking up-front, “So what criteria would you use if you were the one hiring someone for this role?” I love this question because of how unexpected the answers are. Some are tactical when you expect abstraction. Some improve your own criteria. Some use jargon that may indicate they are playing someone else’s game versus authoring their own. All are quite revealing.

  • I now consider in-person references with someone who knows the candidate well 5x more valuable than an interview. They can be 10x more valuable when you are already in a high-trust relationship with the reference-giver, and the reference-giver is in a position to see the candidate clearly, with no agendas and few blind spots of their own.

    • Given the importance of references, the highest purpose of your own interview with a candidate might be to improve your ability to conduct reference interviews, where you hold your own view as just one in a collection of views. This requires an ability to hold multiple perspectives at once. This is difficult to do because your own impressions from the interview are so vivid and multi-sensory, and everyone else’s views are mainly conveyed through language. In my experience, holding your own perspective alongside those of references should feel slightly uncomfortable and disorienting, or you’re doing it wrong. You should find the candidate confusing at times. If you first see their dysfunction, you should know you have yet to find their genius, and vice versa.
    • I try to conduct references with an eye to quirky forms of excellence. When I’m on the receiving end of reference calls, I notice that the caller is often subtly framing the exercise with a mildly suspicious “gotcha” vibe (“so why did George leave after only two years?”). I don’t find that particularly effective; it tends to make me shut down as a reference giver. Instead, when I’m calling someone, I try to imagine myself as head of people operations for the entire hedge fund or private equity ecosystem, that I’m agnostic as to where they should sit and just trying to help them get to the best spot.  That mindset seems to allow me to size up people more generously and accurately, and to accommodate more quirkiness…I also try to stick to the default assumption that “everyone is an A player at something.” It’s a more effective and more dynamic way to approach an interview—a live, fascinating puzzle to discover what the elephant and the rider do well—rather than going in with the purpose of determining whether someone is an A player in a binary, Manichean way. I prefer to imagine that I’m trying to find the candidate the best possible job for them; it may be the job I had in mind, or something else altogether.
    • As your sample size of references goes up, you can begin to calibrate on the credibility of the reference giver (what’s their sample size? What are their biases?) as well as to tune into what a “table-pounding” reference sounds like. Fourteen years later I still remember a reference I did for our CFO hire: the woman who had worked with him had a tone of “why are you wasting your time talking to me and not spending your time trying to convince him to join you?”

    • The hardest part is understanding the dog that doesn’t bark. If you don’t hear that table-pounding from someone who knows the reference well, is it contextual in some way (the person is tired, you caught them right after a tough conversation, they are jealous, etc.) or is there signal there? It’s one element of the process that requires the 10,000 hours of practice to get calibrated.

 

Part III: Seeing the Water

My summary: After making best efforts to illuminate your own blindspots, you also need to consider the context from which the candidate you are evaluating emerges.

Excerpt

I now believe that there is no such thing as an A player in the abstract, across all time, in whatever ecosystem they end up in.

Considering the candidates’ context:

  • When you’re taking someone from one ecosystem to another, changing their context, you have to try to see the water in both.

    • It’s disruptive and risky to take someone out of the setting in which they’re thriving, since there are a lot of subtle things going on in the original that may not be immediately obvious. How much of their success depends on the water in the first ecosystem?  Was there someone there who believed in them that set a positive feedback loop in motion that may not persist across systems? Try to understand as much as possible about “what’s going on here” in the candidate’s prior ecosystem. For instance in the investment management context, often a portfolio manager will run a large idea by their boss and subtle reactions (a raised eyebrow, a long pause) will cause them to actually size the position smaller.  That constant tension is constructive, and if you take the portfolio manager out of that container they will not perform in the same way in the absence of the tension. This particularly applies to people who leave to start their own companies—in part because they may have a hard time recreating the culture and context that allowed them to thrive when they worked in a structure designed by someone else.

    • It’s even possible that strengths in one context become weaknesses in another. Take someone who is super motivated and who loves to win, but because of this competitiveness doesn’t give as much as they get from peers. In one ecosystem they develop a reputation as a talented “taker” that people are wary of, while in another they are celebrated without reservation.

    • It’s even possible that strengths in one context become weaknesses in another. Take someone who is super motivated and who loves to win, but because of this competitiveness doesn’t give as much as they get from peers. In one ecosystem they develop a reputation as a talented “taker” that people are wary of, while in another they are celebrated without reservation.

Discussion of Personality Tests

The Big 5 or OCEAN personality test

My summary: I have noticed this is a favorite of the tech world. Marc Andreesen addresses the focus on ‘concientiousness’ in his interview on education (my notes here). Founder Slava Akhmechet says the Big 5 personality traits “are kind of like Myers Briggs, except real.”

Excerpt

There are thousands of studies using the Big Five. Within psychology, it’s the equivalent of gravity, and at this point, nearly everyone in academia finds it a useful mental model for personality. Sam Barondes’ book Making Sense of People is a great introduction to the Big Five. I tracked down Sam and asked him about the book’s raison d’être. He told me that he wrote it because he knew the Big Five was solid as science but had noticed that, in his own hiring in the medical department at UCSF as well as among the fancy tech CEOs he counseled, no one was actually using it in practice.

ghSMART 

My summary: A high-signal form of interviewing described in Geoff Smart’s book Who and his father Brad Smart’s book Topgrading. 

Excerpt

“Resourcefulness” is the meta competency:  

Resourcefulness is the single most important competency, so here’s my advice: look for evidence of Resourcefulness 100% of the time as you evaluate candidates. Imagine that you have special magical glasses that register through the lens whether the candidate is, at this moment, revealing Resourcefulness and maybe then it flashes green, or lack of Resourcefulness and maybe then it flashes red. I’m making the point that Resourcefulness is not a competency you first think of after the interview while you’re reviewing your notes. You must constantly ask yourself, “Does that example, what I’m seeing, what I’m feeling, what I’m hearing, show Resourcefulness, or lack of it?” 

I sometimes imagine I’ve dropped the candidate I’m interviewing on a desert island and I come back five years later. Some people I’d worry about, some people I wouldn’t. The Y Combinator application question “what’s a system or game you’ve hacked in the last year?” is a good arrow in the quiver when exploring the resourcefulness dimension.

Guide to References

  • Preparing for reference calls

    Before calling references, Duncan and his team review these points:

    • There are two kinds of information: public information and private information. Our personal assessments of our peers and former employees are firmly in the bucket of private information. That’s both what makes references valuable, and what makes them hard to get.
    • Your mission is to collect as many private assessments on your candidate as possible.
    • Remind yourself that your base case is that you will not proceed with the candidate despite the fact you’re at the stage of doing references. You want to create a default mindset that listening to the references is going to actively make you change your mind to make the hire. “Let the references speak” is our mantra.
    • For each candidate there is often one reference that is the motherlode, the Yoda reference—the unbiased, calibrated, no bullshit, clear-eyed reference, someone with “acerbic good taste” who has experienced your candidate with limited ego baggage of their own and is willing to transfer that private information to you. Sometimes you get them on the first call, sometimes it’s on the 20th call. Have you found that reference giver yet? If not and the context permits, do not proceed with the hire, allow yourself to hold the uncertainty.
    • Assess whether the reference giver is calibrated—what’s their sample size and do they actually know what excellence in this role is? (Assume 80% of people are not calibrated on the Michael Jordan of this thing.)
    • Assess whether you find the reference givers themselves credible. Identify any biases. Would you hire the reference givers or want to work for them? If not, make sure you weight the content of the reference slightly lower.
    • Try to mess with the expected “script” of a reference conversation, where the reference giver reads a LinkedIn testimonial and you read from a check-list of questions. Skim the questions below in advance in order to have them in mind, but try not to read from the list because it creates a different dynamic, more interrogation and less creative exploration and appreciation of someone’s idiosyncrasies.
    • The dog that doesn’t bark is the hardest thing to assess and requires calibration / a big sample size —what could they say on the positive side but are not saying?
    • Do references in person if you can, Zoom is second best, phone is third best.
    • Start with an opener that makes it safe to convey private information: “Thanks for taking the time. I’m trying to find the right seat for Jane and I’m investing the time in speaking to people who know her. Everything you say will be off the record, and I don’t plan on conveying any of it back to Jane.”

  • Reference questions

    • How would you describe Jane to someone who doesn’t know her?
    • What’s your sample size of people in the role in which you knew Jane?
    • Who was the best person at this role that you’ve ever seen?
    • If we call that person a “100”, the gold standard, where’s Jane right now on a 1-100?
    • Does she remind you of anyone else you know?
    • If Jane’s number comes up on your caller ID, what does your brain anticipate she’s going to be calling about? What’s the feeling?
    • Three attributes I like to keep in mind are someone’s hunger, their humility, and how smart they are about people. If you were to force rank those for Jane from what she exhibits the most to least, how would you rank them?
    • What motivates Jane at this stage of her life?
    • If you were coaching Jane, how would you help her take her game up?
    • If you were going to hire someone to complement Jane doing the same activity (NOT a different role), what would they be good at to offset Jane’s strengths and weaknesses?
    • How strong is your endorsement of Jane on a 1-10? (If they answer 7, say actually sorry 7s are not allowed, 6 or 8? If the answer is an 8, “What is in that two points?”)

Guide to Interviews

  • Preparing for interviews

    • Remember that your mission is primarily to get to know the person well enough to do effective reference checks
    • Can you glimpse the person’s elephant as distinct from the rider, who is speaking to you?
    • Can you establish enough safety to allow the frame of “how can I help you find the best job for you in the world?” instead of “are you an A player, are you a fit for this role?”
    • Interrupt often to establish a fast cadence and avoid monologues

  • Interview Questions

    • What criteria would you use to hire someone to do this job if you were in my seat?
    • How would your spouse or sibling describe you with ten adjectives?
    • I think we’re aligned in wanting this to be a good fit, you don’t want us to counsel you out in six months and neither do we. Let’s take the perspective of ourselves in six months and it didn’t work. What’s your best guess of what was going on that made it not work?
    • What are the names of your last five managers, and how would they each rate your overall performance on a 1-100?
    • What are you most torn about right now in your professional life?
    • How did you prepare for this interview?
    • How do you feel this interview is going?

Notes from Marc Andreessen on Education

Link: https://a16z.com/2020/09/10/education-myths-monopoly-oligopoly-cartel-costs-past-present-change/


The education system is based on model that pre-dated the printing press. It has had little innovation in light of the technological advancements. Yes there are experiments like Lambda School and its ISA alignments. There are MOOCs which offer micro degrees. But in 2020, distance learning as necessitated by Covid, has accelerated the questions we have about a system whose costs were already outpacing inflation. We are left to wonder who our current system is serving and if it is time to examine more efficient possibilities.

Recently Google dropped the requirement that new hires need college degrees and it’s expected other large employers will follow suit. It begs the question, what were degrees good for?

The CEO of Figma, Dylan Field, interviews Marc Andreessen to hear what the cost/benefit of our college system is and how recent developments will test theories about what college is good for and what alternatives may serve those requirements better or more cheaply.


Purpose of college

Overt purpose: A bundle of actual education/skills acquisition, social/dating service, network building, “attached to a hedge fund” (in the form of an endowment)

Cynical purpose: Outsourced personality and IQ testing (via SAT) as these screens have become either socially undesirable or illegal for employers to perform.

The personality dimension being tested for is known as conscientiousness 1 which has 2 components.

  1. Industriousness: Basically self-starting energy
  2. Orderliness: Attention to detail, time management, organization

The “sheepskin effect”

Somebody who goes to college for seven out of eight semesters does not receive seven eighths of the income of somebody who goes for eight out of eight semesters, they receive half the income of somebody who goes for eight out of eight. So the diploma signals your conscientiousness by evidence of you clearing the 4 year hurdle.

A diploma tells employers you are a smart kid who can get their work done, signaling conscientiousness, rather than being about knowledge acquired.

Testing the purpose of college

  • Covid-19 will tease out how much people are willing to pay for an online education which will hint as to how much of the value proposition derives from the degree, from the social, and from the actual learning (this acting as a constant). International enrollment which is unsubsidized would be an especially useful clue as you would expect the loss of social network effects would impact those students the most.
  • The test of college as an outsourced intelligence test will naturally occur as leading universities shed standardized testing requirements

Understanding the source of the student debt crisis

We need a conversation about value given vs value received of college from an economic lens because it is subsidized by Federal and state government. If the ROI is not there the victims are tax payers and the students who cannot discharge the debt via bankruptcy.

How did we arrive at a mountain of debt that cannot be serviced?

The system is a hostage of a govt sponsored cartel.

  • K-12 education is compulsory and state-run. Captive audience.
  • Hallmark of monopoly: real dollars spent on education have 3x in 40 years and outcomes are unchanged
  • Funding is monopolized
    • Accreditation: Loans are subsidized by the government and are only available to accredited institutions that are certified by the govt. Accreditation or admittance to the cartel is nearly impossible.
    • University research funding comes from the government. Can’t remember the last research university to come into existence
    • Operating a university is taxed as a non-profit
    • Endowments are taxed as non-profit

    Meanwhile between sports programs and endowments these institutions have more in common with for-profit businesses.

The spiraling costs are exactly what you might expect from a monopoly and to be contrasted with perfectly competitive businesses such as manufacturing that have led to goods disinflation.

Basically what the government does to education is just like what they do in health care, it’s just like what they do in housing. A two part strategy for managing these markets. They restrict supply. And then, and then restricting supply causes prices to rise, because there’s more kids that want to go to school than can get in. And then on the other side rising prices create political pressure which they resolve by subsidizing demand.

(This was part of his anti-govt rant. I haven’t fact checked any of this. He also points out that spiraling costs without an improvement in service is also the hallmark of 2 other heavily govt influenced areas: housing and healthcare. The story of the ultra-liberal Cal professor who called for subsidized housing while he votes against development to maintain “historical charm” came to mind.)

The value proposition of university for people in “show your work” fields is changing.

One of the most basic revelations the internet has surfaced is the different nature of professions.

Internet has made the largest difference in “show your work” professions: occupations where it is valid and easy to demonstrate your value online. For example, coding, design, music, art, game dev, animation. Open source projects and writing, democratized, pure examples of “show your work” fields.

From an employer’s point of view conscientiousness is a proxy for being a good employee. But this can be circumvented by just showing your work online. This erases the value of a degree that derives from employer demand.

GitHub has like an internal ranking and rating system for software code, and for programmers. So you can actually build an actual professional reputation as a software developer on GitHub without ever actually being face to face with another human being. People all over the world today who were basically taken advantage of this to be able to basically build these incredible track records as a software developer and make themselves more employable. Employers like my venture firm. We recommend that our employers spend as much time on GitHub looking for good programmers as they do on LinkedIn, or going to college fairs.

YouTube, blogs, Figma for design all play a similar role as GitHub does for software developers. He tells the story of South Park as an early example of a viral video that was able to spread organically through a distributed technology. The show born from Matt Parker and Trey Stone’s irreverent holiday card which made its rounds as a downloadable Quicktime vid!

“If you can go to college, go to college”

  • Even jobs that probably shouldn’t require degrees require them.

I think it’s actually quite dangerous to give somebody, somebody as an individual the advice, don’t go to college, like in the current system that we have that’s basically saying don’t prove that you’re smart don’t prove that you’re industrious, and conscientious and then basically be prepared to settle for fundamentally lower income for the rest of your life.

  • Understand the proposition

Gates and Zuckerberg notwithstanding, if you go to college finish college. Get the piece of paper.

  • The 2×2 matrix of what to study and where to study.

The spread of outcomes for technical degrees is not that wide. If you have a technical degree your choice of school matters less. This is exactly the opposite of what you find with liberal arts degrees. Since the output of a liberal arts degree are more subjective or uneven the school issuing the diploma carries more weight. 

Possible explanation: in absence of concrete skills, the network from a top school is valuable.

Tips for those in college or considering college

Execute on the opportunity — take the hardest course load you can. Get the skills (obviously get good grades but focus more on getting the skills).

If you are at a sub-tier college taking liberal arts, de-risk by acquiring marketable technical skills.

For those considering alt paths

At this point Marc, still recommends college and acquiring technical skills but if you choose an alt path be aware of the trade-offs. For example, if you choose to do open source work recognize it’s better to make major contributions to one project (as opposed to minor contributions to multiple projects) because that really demonstrates what employers are looking for. Put yourself in the mind those who will be evaluating you years down the road.

Consistent work demonstrates conscientiousness and the nature of the work is an embedded intelligence test.

What should a software developer do? Unquestionably the answer is create an open source project or go become a member of an existing open source project and make successful high quality sustained contributions to that project over time. At this point I think that’s clearly a better credential than getting a computer science degree. I’d hire people like that myself and the great thing now is you can do that from all over the world.

So what matters to Andreesen when they hire or fund someone?

The good news:

They do not care about a degree or GPA or test scores and in fact question if too much conscientiousness means you are too much of a rule-follower.

The tough news:

They measure you by what you have actually done. Building companies requires being able to do things so that is the capacity they are looking for. List of things a founder will need to be able to do:

  • Building an actual product that somebody will actually pay for.
  • Figuring out a way to actually sell it to them
  • Actually collect the money
  • Actually service the customer so they actually have a good experience
  • Actually tell their story so that anybody will even know that they exist
  • Run a finance function so that they don’t lose all the money
  • Run a legal function so they don’t get sued all the time
  • Actually get others to work with them.

There are many talented people so the way to stand out is to actually demonstrate the ability to build or create.

Steve Martin best career advice ever: Be so good they can’t ignore you.

Developments to watch

  • New credentials2 to replace bachelor’s degrees (ie Google certification program, coding tests, and math puzzles)

  • Still early innings of “show your work” online as way to qualify yourself



Notes on Trading Volatility: Correlation, Term Structure, and Skew

Trading Volatility: Correlation, Term Structure, and Skew
Colin Bennett

http://trading-volatility.com/Trading-Volatility.pdf


The book is a broad reference on basic option theory, dispersion, and exotic options. It includes practical insight into managing a hedged book with a focus on correlation, term structure, and skew.

In addition its appendix includes the following topics and more:

  • a taxonomy of historical vol computations including and how they rank on “bias” and “efficiency”
  • shadow greeks
  • cap structure arbitrage theory

It’s an outstanding reference so I took notes. For public sharing I re-factored them by topic and tied some back to my own investment writing.

You can find these edited notes in my public Notion page. (Link)

My Favorite Takeaways From Derek Sivers On The Knowledge Project

Link: https://fs.blog/knowledge-project/derek-sivers/

Notes: https://podcastnotes.org/knowledge-project/derek-sivers-on-the-knowledge-project-with-shane-parrish/

About Derek: Musician, speaker, writer and entrepreneur



Allocating Time

  1. Hell Yeah rule: If an activity doesn’t feel like a hell yeah for you, then don’t take it.

(However, don’t use the Hell Yes rule when you’re just starting out in your career. In the beginning, try to say yes to every opportunity.)

  1. “Strategically, it’s better to do 5 bigs things with your life instead of 500 half-assed things”.

    Me: I’ve seen this advice from Josh Waitzkin and Marc Andreesen as well

  2. On curation and deciding what to read:

A lot of books are much longer than they need to be. Derek doesn’t want to read a 400-page book about diet, he wants to read one page on what to eat and what to avoid.

“If you trust the source, you don’t need all of the supporting evidence”

Me: This is a case I’ve made for curating your info sources carefully. Being thoughtful about your inputs takes effort but saves you time in the long run. This is the idea behind my post Build Your Own Cabinet

Delegation

“You know you’re a true business owner when you could leave your business for a year and come back a year later and find that it’s doing better than when you left. That’s when you’re no longer self-employed, you’re a business owner.”

The short term pain of training and delegating is acceptable if you take the long view.

Me: This is a critical point if you ever want to sell your business at a multiple. It’s a strategy that complements what potential acquisition funds look for. For example Brent Beshore’s Permanent Equity fund lists “Healthy Layer of Non-owner Management” as a one of its investment criteria.

Ideas Without Execution Are Dime A Dozen

Ideas multiplied by execution will tell you how much a company is worth.

Motivating Employees

Let employees own projects

When you offer small tweaks or suggestions to an employee who is taking initiative on an idea or project you steal some of their thunder. They lose a sense of ownership. The resultant loss of motivation is always larger than the value of the tweak. Resist the urge to make a suggestion.

A convenient development is the project usually ends up incorporating your suggestion organically as the work starts getting done and the direction becomes more clear.

Derek Has A Pragmatic, Even Post-Modern Approach To Life

“Whatever makes you take the necessary actions is the perspective that helps you. I’m never aiming for reality. I’m trying to make decisions usually based on finding the perspective that helps me take actions.”

Thinking From First Principles Is Thinking For Yourself

“To me, the world feels unnecessarily ceremonial, like people imitate others without questioning it enough, but I don’t want to learn their ways. I don’t want to be like them”

Me: I’m a big believer in the wisdom of markets, the wisdom of Lindy and that which has endured, and the value of thinking by analogy. But I think this type of thinking makes the most sense when it comes to tactics and strategy. But when it comes to choosing what you want to do with your time on Earth this is an obvious place to think from first principles. Don’t live someone else’s script.

An example of why I think this is my own experience with education where I generalized too much from the school environment to the life environment. I wrote about that in We Don’t Need No Education

The Inverted Recipe For Happiness

Inspired by Charlie Munger’s adulation of mathematician Carl Jacobi’s advice “invert, always invert”, Derek has a list called:

How To Stop Being Rich & Happy

1) Prioritize lifestyle design

Make all your dreams come true and follow your immediate gratification

2) Chase that comparison moment

Always buy that the new thing

3) Buy, not rent

Buy the house, boat, etc.

4) Internalize your new status

Celebrate your new status and relax

5) Be a connoisseur

Insist on only having the finest foods, drinks, etc.

6) Get to know your possessions

Spend more time learning about more possessions and getting them just right

7) Acclimatize to comfort

Eliminate all discomfort and blame others when life seems hard

 

(note: for more of a true summary of the pod you can read this version from Podcast Notes)



Finally here’s 2 short ideas from Sivers:
 

  • How To Start A Movement (Link)

    The insights he draws from this wacky little vid are tight.

    1. See how “the first follower turns the lone nut into a leader”

    2. Leaders should de-emphasize themselves by treating followers as equals. 
     
  • Keep Your Goals To Yourself (Link)

    This short talk goes against the conventional wisdom that announcing your intentions creates motivating pressure for you to follow through.

The Why And How Of Taking “Discoverable Notes”

I have been an active note-taker for years and a fan of how meta Tiago Forte gets about the process of taking notes. Tiago’s Building A Second Brain course is very popular in productivity circles. While I have never take it, I recently came across his essay Progressive Summarization: A Practical Technique for Designing Discoverable Notes. (Link)

It’s an outstanding framework for understanding the whys and hows of taking notes. I, by accident, have arrived at a very similar system so it was interesting to see someone explain it thoroughly as only Tiago can.

This is a summary of what resonated with me.


The Why Of Taking Notes


The Right Info At The Wrong Time

What you read is good and useful and very important, you’re just reading it at the wrong time.

The challenge is knowing which knowledge is worth acquiring. And then building a system to forward bits of it through time, to the future situation or problem or challenge where it is most applicable, and most needed.

Bridging The Acquisition And Use Of Knowledge

It’s too mentally expensive, if not impossible, to internalize all or most of the information we consume. A good system is intended to bridge the time between when you discovered the information to when you use it.

At that future point, when you’re applying that knowledge directly to a real-world challenge…By the time you’re done solving a real problem with it, book knowledge has become experiential knowledge [which you carry forever].

The How Of Taking Notes


Defining The “Second Brain”

An external, integrated digital repository for the things you learn and the resources from which they come. It is a storage and retrieval system, packaging bits of knowledge into discrete packets that can be forwarded to various points in time to be reviewed, utilized, or deleted.

Designing The “Second Brain”

Goal: You are trying to triage information in an organized way. You read something you know is interesting and you want to be able to reference later.

Challenge: You need to file it quickly, make it discoverable, and emphasize why it’s important so “future you” can make sense of the notes efficiently.

Tiago says:

A note-first approach to knowledge management means we have to think about design. You are, in a very real sense, designing a product for a demanding customer — Future You. Future You doesn’t necessarily trust that everything Past You put into your notes is valuable. Future You is impatient and skeptical, demanding proof upfront that the time they spend reviewing notes will be worthwhile.

Balancing Tradeoffs

  • Discoverable: Digestible notes. So needs to be compressed
  • Understandable: Context including sources, examples, details

Getting the balance between compression and context right is not a trivial matter. When the time comes for Future You to decide whether or not to review this note, seconds count.

When you fail, you successfully sent a packet of information forward through time, but not in a state where it could survive the journey… You have to summarize the note without knowing what it will be used for.

The Progressive Summarization System

  • Layer 0 is the original, full-length source text.
  • Layer 1 is the content that I initially bring into my note-taking program. I just capture anything that feels insightful, interesting, or useful.
  • Layer 2 is the first round of true summarization, in which I bold only the best parts of the passages I’ve imported. Keywords, phrases, sentences
  • Layer 3, I switch to highlighting, so I can make out the smaller number of highlighted passages among all the bolded ones. This time, I’m looking for the “best of the best”
  • Layer 4, I’m still summarizing, but going beyond highlighting the words of others, to recording my own…restating the key points in my own words
  • Layer 5 (as needed): Remix. for a tiny minority of sources, the ones that are so powerful and exciting I want them to become part of how I think and work immediately, I remix them. After pulling them apart and dissecting them from every angle in layers 1–4, I add my own personality and creativity and turn them into something else.

My Own Accidental Version of Progressive Summarization

  • Layer 0 is usually just the link without the text which is risky since the link can break. (With Slatestarcodex site being taken down I’m experiencing this firsthand)
  • Layer 1 same as Tiago
  • Layers 2 and 3 are combined. Mix of bold and italics.
  • Layer 4 is paraphrasing often drawing connections to other ideas. While time-consuming because it requires thinking I am rewarded by an easier retrieval stage. More selective about what notes I do this with.
  • Layer 5 usually means pasting the note in other notebooks when the content has multiple contexts

Notes from Capital Allocators: Annie Duke

Linkhttp://capitalallocatorspodcast.com/2018/02/05/annied/

About Annie: Professional poker player and author of Thinking in Bets


All decisions are a bet

When you choose x you forgo y. The decision is a bet that x is a better outcome than not x.

Beliefs are formed then confirmed

Dan Gilbert’s known for happiness research but his 90s research which is lesser-known was focused on ‘belief formation’. We are hardwired to not vet beliefs since beliefs are typically perceptual. Hallucinations and mirages are rare. However, abstract beliefs that emerge from our social interactions, language, symbolism are incorporated via this same mental machinery which was really designed to assimilate perceptual beliefs.

Gilbert showed that by default we accept the belief is true BEFORE we vet it.

Research shows:

    • We often fail to later vet the belief
    • If we do vet it, we are biased
      • Kahneman’s idea of “motivated reasoning”: our beliefs drive how we vet the belief
      • Confirmation bias
      • Blindspot bias
      • Smart people are often more extreme in their biases because they rationalize with a greater repertoire
        (This was tested by first evaluating subjects’ statistical prowess then comparing how they handicap a neutral versus emotionally-charged outcome)

How do we improve?

  • Frame decisions as bets. 

    1. Assigns probabilities to outcomes
    2. Define what we explicitly are evaluating
    3. Invites others into the truth-seeking process which is also good for social reasons
      • When acting very certain we can suppress or intimidate other’s views
      • Avoid the pitfall of confusing certainty with accuracy
      • Makes the communicator more believable
      • Avoids biasing others before they start the vetting process

  • Define winning as being more accurate inoculating ourselves against self-serving bias.

    • Use Mertonian norms which comprising the ethos of science (acronym: CUDO)
      • Communism: Standardize how data is presented so members of the community cannot present the group biased picture
      • Universalism: Ideas have objective truth regardless of the messenger; “Don’t shoot the message”
      • Disinterested: Do not infect the group with your beliefs
      • Objective Skepticism: seek counterfactuals and dissent
        • In groups, use ‘red’ and ‘blue’ teams
          Red team’s function is to rebut or dissent. This instantiates a role in which being a team player is actually to challenge.

  • Be aware of our tendency to “temporally discount”.

    • A dollar today appears worth way more than in a year
    • Tonight’s wine is tomorrow’s hangover (Seinfeld’s “Day Jerry” vs “Night Jerry”)

If we associate better-calibrated beliefs with better outcomes and a happier life we should strive to be honest with ourselves while reasoning even if it sacrifices our ego/fun in the moment.

Risk Management

  • Why we fail to apply the principles of Kelly betting:

    1. Garbage In/Out: Poorly calibrating the edge and/or variance
    2. Our ability to apply rational System 1 rules are compromised when we are in an emotionally charged state (“limbic system firing”), which is when the rules matter most. “Stacking Irrationality”.

  • The merit of risk limits irrespective of risk/reward or expected value:

While irrational, they are less damaging than allowing yourself to continue betting when your “emotionally unfit”. A bias which gives us the chance to play again tomorrow when we are not emotionally unhinged is adaptive for the long-run. (Me: Reminiscent of ergodicity discussions about maximizing compounded expectation)

Tells and body language

  • Good to follow: Joe Navarro. A FBI operative specializing on body language

  • How poker players read opponents:

    1. If never faced them before, start with base rates
    2. As you learn how they bet, Bayesian update base rates
    3. Merge tells with updated probabilities

  • Signs of being relaxed vs discomfort:
    • embodied by distance from table
    • self-soothing behavior

Li Lu on China-US Relations

Excerpts from part 2 of Li Lu’s series Discussion of Modernization:

A Look at the Future of Sino-US Relations

Link to paper

The paper traces the parallel histories of the land and nation known as the United States in the West and China in the East. An especially interesting thread was how Lu charts the shift from land to market economies. The backdrop and ensuing developments in the 20th century set the current stage and inform possible futures.


On America’s “Soft” Power

As the creator of the American Order, the United States has always retained the rights to make rules for the market, admit membership to access the market, and impose and lift sanctions on states that violate the rules. At the same time, it has borne most of the costs – military and economic – of safeguarding this global market. Rights and obligations together form the core of this American Order.

The United States has also established and promoted her set of ideological values, which we now know as her soft power. In Agrarian Civilization, imperial China established a political system structured around Legalism, and a belief system rooted in the values of Confucius and Mencius. This system of beliefs was intended to achieve the willing submission of its people through subtle cultural and spiritual influence. Similarly, the American ideology promotes freedom, democracy, human rights, constitutional government, the rule of law, free markets, free competition, free trade, and the sanctity of private property. These universal values are so powerful that they have been adopted by almost everyone in the world. It is the very combination of hard and soft power that has brought the United States such tremendous success.

On America’s “Hard” Power

America’s hard powers also include its global network of military bases, the sheer size of its economy, its huge domestic market, its open investment climate, its competitive tech sector, and its world-class universities. So, whenever a global financial crisis strikes, investors around the world will flock to the safe havens of the US Dollar and American assets. This remains true even after what happened in the 2008 crisis.

Whenever the US becomes less confident, it dispenses with the niceties of soft power, and unabashedly resorts to hard power. Those on the receiving end of American hard power are likely to conclude that while the US implements democracy at home, internationally it resorts to hegemony. As the creator of the American Order, its prerogatives include market access, market denial, and selective sanctions and penalties. These special privileges are constituent elements of American hard power.

 

Trump’s Lack of Subtlety In Wielding Power

The election of Trump has revealed the true nature of American hard power in the context of the American Order.

With China rising rapidly, areas of incompatibility between China and the US have become increasingly pronounced. In the global arena, China has presented a challenge to American dominance, and conflicts have arisen. On the economic stage, a China-led system of international institutions has been established and often without the participation of the United States. China has also pursued the militarization of the South China Sea. The US economy accounts for 25% of the global GDP, but it bears the lion’s share of military costs associated with the maintenance of the global market. From the American perspective, China’s share of global GDP is 15%, but her share of the cost is de minimis, making her a free rider. And to make matters worse, as bilateral frictions mount, the cost of maintaining the American Order has only gone up. To the US, China is becoming more and more like Russia.

One of US economic hard powers is the US Dollar as the default currency of global trade, finance, and settlement…This is why American sanctions are so effective, as evidenced by the developments following Trump’s announcement of America’s unilateral withdrawal from the Iran nuclear deal. ZTE and Huawei, two Chinese companies, have also fallen victim to American sanctions”.

4 Schools of Thought on China Policy

  1. Engagement
  2. Practical
  3. Hawkish
  4. Populist

The four schools have always had divergent views. But in recent years, in light of all the developments in China, there has been a gradual convergence. Whatever the case may be, the reality of Sino-US relations is that today the American perception of China is approaching its perception of Russia.

 

American Order Focuses on Economic Power

The American Order is mainly preoccupied with the rules of access to and exit from the global market. It doesn’t wield much power over other nations’ political choices. The UN Charter states “the Organization is based on the principle of sovereign equality of all its Members”. So in fact, under the American Order, different political systems may develop, provided that they do not directly challenge America’s superpower status. The rapid growth of China’s share of global GDP (from less than 2% to 15%) is proof of this. Indeed, there is plenty of room for sustained growth.

 


Outstanding follows for China coverage: 

Michael Pettis

Dan Wang