Notes From Todd Simkin On The Knowledge Project

Link: https://fs.blog/knowledge-podcast/todd-simkin/

From the description:

Todd Simkin is Associate Director at Susquehanna International Group, a privately held trading and technology firm. During his 25 years with the company he has held a variety of roles, including responsibility for SIG’s firm-wide education and trader development, where he taught the company’s new traders what questions to ask and what criteria to weigh before making hugely impactful decisions for the firm.

He calls on experiences from his lengthy career in financial services and educating traders to help Shane understand how to make better decisions. On this episode Simkin breaks down all the influences that go into how and why we make decisions, why financial decisions are different than inter-personal ones, the strategies involved with teaching other people to make better decisions, what he looks for when he’s hiring, the value of asking the right questions, and so much more.

[FD: I started my career at SIG eventually spending 8 years there. I’m living proof of what Todd says in the interview: Traders are made not born. A statement famed Turtle Trader Richard Dennis, and Trading Places’ Mortimer Duke would agree with. So it must be true.]

This interview lifts the veil a bit on SIGs trader education program, but is more broadly a statement of SIG’s culture. We get things wrong all the time but we need to make decisions. SIG is like a think tank on the subject of decision-making. It’s a popular topic these days, in fact many of Shane’s prior guests have been experts in the field. SIG was an early adopter of institutionalizing concepts from behavioral science. And as we’ll see, this is really a team effort. Isolated attempts of correcting one’s own cognitive biases have shown to be nearly futile and Daniel Khaneman has himself lamented how awareness of bias doesn’t seem to inoculate us from it.

In addition, to the decision ideas Todd talks about, I found this to be a masterclass in communication. If you are a parent, this episode is full of gold.

These are my notes organized by theme. You can find my Otter transcript here.


Decision-Making

SIG’s approach starts with humility

Our approach is to recognize that we, we are often on the bad end of informational asymmetry, that other people who are looking to trade in the markets frequently no more than we do. And as a as a result, we don’t want to back our own limited opinion against a more informed counterparty. Instead, what we want to do is take the information that we have coming from outside sources, and there are multiple outside sources, different types of products that are being traded, different options series, if we’re trading derivatives, and use that information to improve our own information set to then be able to allocate our capital in a way that we think will lead to a return.

How to manage information asymmetry — start with reasonable priors then update hard

There a few ways that we’ve tried to handle it. One is to is to build out research capabilities internally so that we do have sort of some basis for our initial opinion. But the most important thing, from our perspective, is to be willing to update that opinion, in a Bayesian way to use approaches that are that are going to be inclusive of all the information available to us. And only when we get to mutually exclusive information, or mutually exclusive signals. Can we say something here doesn’t jive right? It’s totally fine. If somebody says they think that the stock price is greater than 100, no, nothing else, I think the stock price is going to be greater than 100. Somebody else says they think the stock price is going to be lower than 105. I say, Okay, now I’ve got a market. Now I’ve got two sides. And then someone else says, Do you think the stock price is going to be lower than 97? Now we don’t have information that can coexist in the same universe. I don’t need to know who’s right. But I do know that it can’t both be above 100 and be below 97.

I have used a similar analogy. Trader’s are not acting on some thesis or worldview about the future. They are simply looking for contrary pieces of information that are unlikely to be simultaneously true, and take counterparty to both sides. If the Warriors are 20 bid to win the NBA Championship and the field is 85 bid this is a strong-form example of “can’t simultaneously be true” aka arbitrage. In reality, the process of finding opposing propositions requires:

a) casting a wide net for information

b) normalizing the information (see Measurement Not Prediction)

c) communicating & outputting the cleaned information back to decision-makers

This process underpins many business flows. Trading is just one example of a type of business. Performed methodically, what SIG is doing is a business not an investment strategy.

Bayesian Updating Applied To Trading

Options derive the value because the future stock price is not going to be the same as what it is today. And there’s some probability that it’s going to be higher or lower. And knowing what that forward looking probability distribution function looks like, leads to the ability to price the options to come up with the fair value based on their expectancy. And one of the determinants of sort of how much a stock can move is what we call its volatility. The volatility is just the annualized percentage return on the stock in any given year, or really for a time slice because it can change that can change over time.

So if I think that the fair value of an option is say, $3, because of all of the assumptions that I have built into that, and then someone comes and wants to buy 10,000 options from me for a price of $3.10. There are two things I could do one, I could say, well, I know that all of my assumptions are grounded in truth, I know the future better than anybody else. So I know that over the long run, if I sell these options at $3.10, I’m going to make 10 cents in an expected return over and over and over again, that is not the approach that we take at Susquehanna.

Instead, I would say this option can be worth more than $3. Given some some possible sets of information about the future. Maybe this person knows something about the fair value of the underlying of the stock that’s different than what I know, looking at the stock market. And I can test that by going out and trying to trade stock. Maybe they know something about the forward looking volatility, the forward looking probability density function. And I can say, Well, if that’s the case, how wrong would I need to be to now be losing if I if I entered this trade? And this is where where Bayes Theorem comes in. Because I can say I have my prior assumption set, my prior probability distribution. Now, how much do I want to weigh this new information to come up with a new a new distribution that will allow me to come up with a fair value.

And again, in isolation, it’s really hard for me just to say this person’s wrong. But if I have a similar looking option similar because it’s the same expiration, or because it’s the same strike and a different expiration, or that there’s something about the option that looks close enough to this, I can say, I can find disconfirming information. And only when I find disconfirming information, can I feel more comfortable about taking the other side of this trade

 

Confirmation and Attribution Bias Example In Discourse

There are lots of other things in your life, where you’re you’ve got ego tied up, you’ve got some part of your personality benefits from sort of the truth value of whatever position it is that you’re taking. So when you get disconfirming information, you’re going to discount it. I’ve been thinking so much about tribalism lately, like this is just something that’s been showing up in conversations I’ve been having all around. The thing that that’s very clear is that when people hear information that comports with whatever their tribe believes, or whatever their tribe supports, they’re willing to accept it without doing a lot of digging into the quality of the source, the quality of the information, the sort of the implications of the rest of the information that goes with it. And anything that challenges their tribe believes they are going to be more dismissive of whether or not it comes from a quality source. I’ve got children that that feel very strongly aligned with political parties. And, and I also have a quote on the wall in my office that I think is just such a good important quote, to, to help remind me about the importance of habits leading to, to behaviors, I shared the quote with with one of my daughters, my 16-year-old, and, and she said, that sounds kind of interesting. Like I sort of like that. And then I shared with her who the quote was from, and she’s like, alright, I don’t need it. And it was because it was from somebody in the other camp, it was from the wrong political party.

[Me: Reminds me of Paul Graham’s Keep Your Identity Small]

If you’re curious about the quote it was from Reagan espousing good habits. It’s an articulate way to say that “you’ll play like you practiced”:

The character that takes command and moments of crucial choices has already been determined. It has been determined by 1000 other choices made earlier in seemingly unimportant moments, it has been determined by all the little choices of years passed. By all those times when the voice of conscience was at war with the voice temptation, whispering the lie that it doesn’t really matter. It has been determined by all the day to day decisions made when life seemed easy and crazy seemed far away. The decisions that piece by piece, bit by bit developed habits of discipline or of laziness, habits of self sacrifice, or self indulgence. Habits of duty and honor and integrity are dishonor and shame.

Tribalism is the negative expression of an otherwise useful shortcut:

Heuristics are shortcuts that we take that are mentally freeing, right, it will be really hard to always work from first principles. So it’s so much easier. If you can have a heuristic that you can fall back on, that just sort of tells you what to do next, without having to stop and  think through the process. When your heuristic is, “I’m going to find people who are like me, and if I do what they do, then I’m going to sort of maintain my integrity, I’m still going to be like me, because this is what people like me do”, then it’s very easy to fall into the trap of not sufficiently contemplating each of those, each of those actions, each of those different behaviors.

 

Rules vs Principles: It’s not cut-and-dry. Context matters. Rules are amazing shortcuts for some things.

It’s so much easier if you have a rule than if you tried to have a principle. “I don’t eat dessert” is so much easier than each time that you have the opportunity to have dessert to say, well, I don’t eat a lot of dessert is this one of the times that I’m better making a change there.  I get up and do some type of exercise every morning. And I find it easy to exercise seven days a week, I found it really hard to exercise five days a week. And the reason was every morning the alarm goes off at 5am, it’s really easy to not have your feet hit the ground and get going. It’s really easy to say, well, I need to take two days off anyway, this can be one of the days that I take off. So on the “I don’t eat dessert rule”, I think that’s a great way to pre-decide. Lazy has a lot of value laid in it, to lighten your cognitive load. I don’t have to stop and think about everything if I’ve already spent the time thinking about it.

But you’re not part of a group of non-dessert eaters, right? This isn’t part of a broader identity that you’re now wrapped up in, where if you decide to change that rule and have dessert, you don’t have other people calling you a dessert denier, right? Who cares, right? Okay, so she used to eat dessert or used to deny dessert, and now he’s having an ice cream sundae. Good for him. Maybe it’s his birthday, whatever it is, this is a decision, that’s totally fine with him. And you don’t have to worry that you have now also contradicted all of the other tenets held by the people in the non-desert eating group.

If it’s something that is more tribal, where we are the type of people that do this and don’t do that, then a violation of one part of that removes you from this group.

Shane points out a paradox in cognitive science. Knowing our biases doesn’t seem to help us overcome them. This is a topic the brilliant Ced Chin has studied in depth. Ced told me that the literature suggests the only way cognitive bias inoculation works is via group reinforcement. I told him that was exactly the cultural DNA when I was at SIG which makes me believe there is a lot of value in being aware of bias. Anytime you replayed your decision process, it was a cultural norm to point out where in the process you were prone to bias.

Todd addresses why this works:

It is definitely true that it is sort of descriptive of the past. A lot of these heuristics and biases are things that we can see when we after we’ve already identified that a mistake has been made. And we say, Okay, well, why was the mistake made? Say, oh, because I was anchored, or because of the way the question was framed, or whatever it might be, we have a really hard time seeing it in ourselves.

But here’s the key:

We have a really easy time seeing when someone else is making that type of stupid mistake. A big part of our approach to education is to teach people to talk through their decisions, and to end to talk about why they’re doing what they’re doing with their peers, the other people on their team. If we can do that real-time, that’s great. Often in trading, you don’t have that opportunity, because things are just too immediate. But certainly, anytime things have changed. If you’re doing things differently, it’s a really good time to turn to the traders around you. And the quantitative researchers around you and the assistant traders and your team and say, Hmm, it looks like all the sudden Gamestop is a whole lot more volatile than it was a week ago. Here’s how I’m positioning for this trading. What do you guys think? And have someone say, oh, it seems like you’re really anchored to last week’s volatility. If things have changed that much, you need to move much more quickly than you’re moving right now.

So you don’t realize that you’re anchored, that’s the whole nature of being anchored, is that you don’t recognize the outsized importance that the anchor has on your decision, but somebody else who’s a little bit more distant from it can. So if we’re good at encouraging communication, then we’re going to be really good at getting other people to help improve your decision process.

[Me: There it is. The key — communication. It’s not some magic formula. Even after I left SIG I spent my whole career working with SIG alum. This culture and these types of communications happen all day on the desk. Despite the common perceptions of “trading”, I have always found it to be a team game and communication skills are paramount.]

Speaking of teamwork, the next quote is money:

I know that you are fond of pointing out that you are the sum of the five people that you spend the most time with. So if the people that you’re spending the most time with are your co workers who are thinking about trading the same way you are, then maybe you’re going to combine the same types of errors, it’s certainly better than then trying to act on your own.

But even better is if you have a culture that rewards truth finding, as opposed to rewarding action.

If nobody feels personally attacked, because of somebody else pointing out their error, but instead feels like we together have now done more to get closer to, to some truth to the better way to act or the you know, the more accurate, fair value of this asset that we’re trading, then everybody feels like it’s a win. And they will therefore encourage the involvement of the people around them.

Shane asks what the most important variables are for being a better decision maker. He expects Todd might say probabilistic thinking but Todd’s answer was fast and blunt.

Talk more is number one, that beats probabilistic thinking that, that beats sort of anything else.Truth finding is, is being able to bring in other people in the decision process in a constructive way. So finding good ways to communicate to improve the input from others. 

Thinking probabilistically I think is definitely a very, very important piece of trying to diagnose what works by trying to think of where where things fall apart, where people fail.

The other place that people fail is falling in love with their decision process and not being open to being wrong. So in openness to to feedback to finding disconfirming information to actively seeking out disconfirming information, which is really uncomfortable. But that that I think is the other piece that is is super important for being a good trader.


Education

In 2009 Todd moved over to the education side of SIG where he focused on teaching decision-making under uncertainty, option pricing, finance and how to apply this knowledge to markets. SIG’s training is legend for good reason. In hindsight, I recognize just how  well-designed it was. It felt intense yet forgiving, competitive yet nurturing.

When I went to SIG “class” as it was called you’d spend 3 months at the headquarters. 20 years ago, it was a bootcamp that included:

  • 4 weeks of theory (including 4 hours of deriving Black Scholes assumptions and 4 hours of deriving the formula. Went mostly over my head)
  • 8 weeks of mock trading in an on-site simulated options pit.
  • Interspersed where lectures by various business heads
  • You were also required a minimum of 100 hours of poker and the class winner was chosen by Sharpe Ratio

Todd pulls back the veil on SIG’s education philosophy:

Susquehanna has always had a very growth mindset perspective on teaching trading, you know, before Carol Dweck, had even shared her views on growth mindset. It has always been the company’s position that traders are made not born. We’re now over 2000 people worldwide, and we still have a small company mindset of we’ve got to make the best of what we have.

The way that we’re training people today is certainly changed from what it was originally, but there are a lot of things that have stayed the same. And among that is, is this idea that if we have smart people that are educable, and vocal about their thought process, so that we can improve it and willing to be wrong, then we can teach them about trading.

The principles from Todd’s background in linguistics and deaf education informed how SIG designed their training.

When I was originally studying education, I was thinking that I might be teaching sixth-grade deaf kids how to do math. Instead, I’ve got MIT graduates who certainly understand math, but don’t know trading. And I’m teaching them how to make these asset allocation decisions with imperfect information. But the approach is still the same.

The approach is still this one of modeling the process, finding out where somebody is, and finding out what they can grow to and providing the appropriate support so that they can grow to be a better decision maker. 

SIG rejected Piaget’s approach that suggests learning unfolds at pre-determined developmental stages.

Piaget had, you know, a pretty rigid framework for the stages that you move through how you move through them. And that education effectively ended at adolescence. And because he said, Now, that’s kind of bunk. That’s not how any of this works.

SIG’s approach adheres more closely to Russian psychologist Lev Vygotsky. Notice the engine at work:

All of education is socio-cultural, all of education comes from interaction with others. And those others in order for them to be educators have to be more knowledgeable than you are. And that when you have interaction with more knowledgeable others, what those people are able to do is recognize your zone of proximal development, you have a zone of things that you know, and then you’ve got a zone that is just too far out of your reach that, you know, no matter what if I were to sit down my six year old nephew, and try to explain linear algebra to him, he’s not going to get it yet, he just doesn’t have the fundamental tools to do that.

But somewhere outside of your zone of mastery is this zone of proximal development, the zone that that you can move into with appropriate support and that support in the Vigotsky literature is referred to as scaffolding. And you want it to be the minimal amount of support necessary to appropriately move somebody to be able to handle the next level of mastery. Over time, you can dismantle that support, dismantle that scaffolding and that zone becomes part of their zone of mastery, and you’ve just pushed out where their zone of proximal development is so that over time you can you can move them into an area where they’re learning more and more and they’ve got greater mastery and competence in whatever area is that that you’ve been teaching them. And eventually, they become more knowledgeable than other people around them. And they can provide the scaffolding as the more knowledgeable other for their peers as well.

[cross reference from ScienceDirect about the zone of prozimal development (ZPD) and the difference in approach between Piaget and Vygotsky:

This use of ZPD defines ‘teachability’ of the child in a specific activity or in problem solving. If an activity or problem can be accomplished by the child with the help of more capable others, this activity or skill is considered possible to teach the child. If, however, the activity or skill cannot be accomplished by the child with the help of more capable others, it is considered not useful to teach to the child.

Unlike Piaget, who believed that instruction should follow development, Vygotskij argued that guidance can, should, and does lead development. They would differently define what is currently called ‘developmentally appropriate curriculum.’ Piaget insisted that learning is essentially an individual endeavor and that adults can only facilitate by providing an enriched stimulating learning environment and opportunities for children to share and discuss their egocentric thinking with each other to promote disequilibrium in the child’s thinking. Adults should not interfere in the child’s individual thinking because it can only lead to imposition of the adult’s ideas onto the child—what Piaget called ‘sociocentrism.’ In contrast, Vygotskij encouraged adults to provide guidance and help and to engage students in activities that are beyond their individual levels of competence (‘performance before competence,’ Cazden 1992)…
A student’s teachability depends not only on the student but also on the teacher (and broader communities in which the child participates). Thus, no test of the child alone would accurately determine the child’s teachability—the teacher always counts.]

How SIG mitigates hindsight bias and “resulting” which is the practice of having an outcome dictate whether you made a good decision at the time with the information you had at hand:

We do everything we can to shield, the person we’re giving feedback to from knowing the results. I’m not going to tell you whether or not this trade worked out, I will tell you the information that was available to me at the time that I made the trade, and then what I did, and you can give me feedback on that process. So the identification from this less formal setting comes from from knowledge about about how trading works, or how this particular risk taking works. In our education setting, it’s something that we control a whole lot more cleanly. We don’t have to present a very complex trade and see who can figure out the pieces of it until everybody in the trading class is ready to get there.

In Being A Pro And Permission To Be Serious I argue that a hallmark of being a professional is the equivalent of “watching film” to get better.

Here is Todd describing a Socratic learning process:

We can build from from smaller pieces up to up to the larger concept, and see who along the way, isn’t processing that smaller piece appropriately. And a big part of how information is passed from the mentor to the mentee is by modeling the decision process, it is not enough to say you should have raised the vol by two points when this trade came in. Instead, it’s so much more important to say, okay, when this trade came in, I remembered that earlier in the week, somebody had traded this other structure. And when they did, I updated my possible outcome space to look different. This trade confirmed with that other trade did so so now I was I just more heavily weighted this other outcome. And the result was that I took volatility up two points, then someone knows not only what to do, which is really not the important thing to take away. But how to do it, which is very much what we’re looking to teach…

We’re really discussing how we would behave in a situation and modeling what the conversation should look like and will disagree with each other. The answer to just about every trading question is “it depends”, which is a really hard thing for someone to hear when they’re first learning because they want the answer. They want to know, when I’m in this exact situation, again, what is the optimal thing to do?

The interesting part of the conversation comes in the what it depends on. All of these questions lead to the some type of answer of what you could do. And there’s some things that are clearly wrong. And it’s important to talk about that, too. So when we’re talking about it in a trading context, it’s really nice that one teacher can say, “I think that I probably would have shown a bid for this price and this amount”. And someone else says, “Well, I don’t know that I would because this broker has behaved this way before. So I think that this might be a time where I’d be afraid that I’m opening myself up to selection bias if I if I were to price it that way, so I would do this.” And you have these senior traders who are disagreeing. And so there’s this really nice modeling of how to think about how to improve the process, so that you can reach an answer that you are tentatively more comfortable with.

His technique for extracting the most out of an interview is clearly influenced by SIG’s educational approach. I’ll let you see the quote first then explain my experience when I interviewed there.

The best outcome for me in an interview, is if the candidate walks away, and wishes they could have part of the interview back. That means that I did not spend the entirety of the interview in their zone of mastery, where they just got to show off  in front of me. Then I’m left to decide whether or not they would have the skills to do more. And I did not spend the entire time in the zone of frustration, where they couldn’t do anything. And it’s like, “okay, I didn’t expect you to know how to do that anyway but if you could, that would have been great to see” and still make a hiring decision.

Instead on on multiple dimensions, I’ve been able to find the place where, with a little bit of support, they could do a little bit more. A big part of the reason I like that is exactly this thing that we’re talking about, which is this openness to feedback.  I’m giving them feedback, because I’ve successfully mapped out their zone of proximal development, and now I’m providing a little bit of scaffolding to see what they can do with support.

You will find that some people embrace it and say, Oh, I think I see where you’re going. Let me see if I can take it from here. That’s a great answer.

You will find some people who are just waiting for you to give them more of the answer. Who will just wait for you to map out the entire selection process and then they’ll just fill in the numbers.

I think you’ll find some people who are totally resistant to it, who will shut you up, who will put their hand up and say, no, no, no. Let me work on it my way. And they’re always not working. Yeah. And I know why it’s not working. And I can help direct them away from it. But they don’t take the feedback. I don’t want the person who doesn’t take the feedback. And I don’t want the person who’s waiting for more feedback. I want the person who is hungry and eager to use the tools that are presented and available to them to then do the work themselves. That’s what’s going to be successful when they’re trading. And they get to have a small opportunity of doing that in the interview process.

In my first round, on campus interview, I struggled with 2 out of 3 questions. You can see the types of questions they ask in Interview Questions A Market Maker Gave Me in 1999. But I’m almost certain the only reason I was asked back for another round was because I was fascinated by the questions and asked what I could read to learn more so I would better prepared. Quantitavely I was a below-average hire but knowing that probably help me take learning more seriously. I don’t think I ever took learning very seriously in school (I took grades seriously). But trading sounded so interesting, I really wanted that job (see For Fun, My Career Origin Story).

As Todd was preparing to go on Jeopardy, we get this entertaining story that epitomizes SIG’s values and culture.

Before I went on the show, I knew that there were some things that I needed to really brush up on. Shakespeare comes up in ways that I knew that I didn’t have a deep enough knowledge of. I wanted to make sure I knew all the presidents and vice presidents in order, things like that. And Jeff Yass, one of the founders of Susquehanna, the Chief Risk Manager at Susquehanna, came into my office before I went, and he said, “Todd, nobody cares if you know anything about American history. But if you screw up the the betting on the Final Jeopardy and Daily Doubles, don’t even bother coming back.”

This was a lovely reminder that I couldn’t embarrass myself by not knowing trivia. And a very good reminder that what I do as a profession is put money at risk. So I should probably make sure that I’m thinking pretty clearly about about how I’m gambling in the game. And when I got back, he came in my office, close the door behind me said, “I know that you’re not supposed to share the results until the show airs but tell me how much money you had, how much money everybody had in Final Jeopardy, and I’ll tell you what you should have wagered”

And that’s all that he wanted to talk about when I when I got back. I won one night, so made it back to Final Jeopardy and he approved my wagers on both. 

 


Communication

On being a more constructive communicator:

Adam Grant recently was talking about how to get feedback from people who are lower on the the corporate echelon, direct reports or their reports. And one of the things that he talked about was to lead with an honest acknowledgement of your shortcomings. That’s really constructive, because that allows for feedback. It invites it in an open way where you’re clearly challenging behaviors and not the person and then has the open ended piece of asking the important “what else?” question.

Non-constructive ways are seeking out “Yes, man” answers. Like, “Hey, I just won $10,000 on that last trade that I did, seems like that was pretty good. Can you think of any ways I could have improved that?” It’s really hard to follow that up with, “Yeah, I think you probably should have won a lot more. Or you could have done it in a much less risky way. Or you won because you flipped the coin and it came up heads. Stop patting yourself on the back, this was not all that impressive.”  You haven’t really opened up for [constructive criticism] if you frame it as “why my trade was good.” Instead, tell me why this piece of my decision process was good.

The other important thing is to actually change your behavior when you get the feedback. If you get feedback, and then don’t do anything with it, people are going to stop giving you the feedback. It’s not just not helpful to ask for feedback and not change. It’s actually hurtful.

The theme of modeling behavior as the key to learning recurs throughout the interview. I’m also a strong believer in this idea (I don’t remember it being explicitly discussed at SIG, but it’s quite apperent that we learned by breathing in the culture). I am extremely concious that my kids learn from what I do more than what I say. 

I was delighted to hear Todd’s approach to teaching his children and it’s the primary reason to return to this episode. 

“You’re not going to get this unless you hear how I’m approaching this decision”.

I think about this a lot more with my own children, that this is something that I think about a lot as I’m, as I’m raising adults into the world, they frequently come to me and my wife and ask for advice. The important thing for us to show them is not what the answer is, because we’re going to be wrong. But how we think about the answer which is probably going to be much more important for them as they go forward making decisions when I’m not going to be standing next to them, but they can have sort of the proverbial dad on their shoulder whispering in their ear. “Have you thought about this? Did you consider it this way? What is the cost of this? What are the benefits of this? Is this a decision that you can change after the fact?  Or is this one that you’re sticking with?”

All those questions that I would ask in trying to reach a decision, instead of just sort of asking it to myself and then and then handing over the the outcome? I share the process and sharing the process leads to more constructive conversations with my children and with and with our traders.

Reflective listening:

Something that I learned while I was in college, from a book called Teacher Effectiveness Training. When I read it in the book, and we talked about it in class, I said, this is the dumbest piece of advice anybody’s ever put down on paper. And it was around reflective listening. And the idea was that instead of trying to step in, and problem solve, instead of trying to reframe instead of trying to provide context or or dig deeper, all you do is tell the person what you heard them say.

So that night, a friend of mine was over at my apartment for dinner. And she was talking about a problem that she was having with a roommate. And I was like, just for kicks, I’m going to give this a shot. And she’s, you know, salting the chicken or whatever it was, and she’s like “my roommate never puts her dishes away, and it bugs the hell out of me.” I reply, “So it sounds like you’re really bothered when she doesn’t put away your dishes.” She says, “Yeah, and it’s not just that, it’s also that she doesn’t appreciate it. When I do clean up.” Then I said, “So it sounds like you know, part of the problem here is that you’re not feeling appreciated.”

She’s gonna think I’m the dumbest guy that she’s ever known, right? Like, all I’m doing is, is repeating what she’s saying. And I was like, well, this, this certainly feels dumb. And I guess at some point, I got to call myself out on and point out that I’m just doing this stupid thing from the stupid book. And that’s, and then she turned to me and said, “Todd, this is the most beneficial conversation I’ve had about my relationship with my roommate ever. I feel like I’m coming away with this understanding myself better and her.”

Her experience was totally different from mine! She felt heard, she felt seen. And she felt like she now had the power to make a better decision about her relationship going forward. And I thought, Okay, well, maybe this guy’s not so stupid. Maybe this book isn’t so stupid. And maybe these methods work in places that I wouldn’t have thought they would work. And it’s not always the solution. But it’s a much better solution than I would have thought it would be. And it’s something that I find myself doing with my kids all the time, and it no longer feels forced to me It no longer feels fake. To me, it’s very clear that what I’m doing is allowing the space for for them to finish their own thought. That’s one of the things that I do with my kids that I think has been been really beneficial.

“How do you feel about that?”

His daughter’s friend was venting to his daughter. Here’s what happened:

My daughter said, “Well, how do you feel about that?” And, and her friends said, “that is the most Simkin thing that I could hear you say at that point? Instead of asking what I want to do next, you start with, ‘how do I feel about it’, which is something that the friend and my daughter have heard from me and Shelly, my wife, over and over again.

Again, it’s really hard for us to jump in and start providing advice, if we don’t even know where the child is coming from. If we start saying “well, it sounds like that other kid was being a jerk?” and then your kid is like “no, that’s not what I was saying at all. How do you not get me? How do you not understand what this is just starting with?”

So we say “How do you feel about that?” It feels like the Freudian psychologist sitting back, you know, while you’re lying on the couch mumbling something, but turns out to be really helpful.

This is really very similar to understanding truth, that if you don’t have an understanding of what’s really happening as a starting point, if we can’t sort of agree on the facts, then then we’re not going to be able to reach a good decision trading or interpersonally.

The principle of charity in life and in trading [this principle is 1 of my 3 Simple Rules For Social Media]:

When I’m modeling decision processes for my classes or kids, I use the principle of charity. When somebody says something, assuming that they’re not an idiot, assuming that they’re coming from from a place of sincerity and good intentions, and giving them the benefit of the doubt.

On the trading side, this principle of charity is really giving somebody credit for knowing what they’re doing when they’re trading against you. This is what sort of protects you from from being run over by somebody who has better information than you do.

On the interpersonal side, this gift to the other person, is an assumption that that they are well intentioned and smart and approaching this for the same purpose that you are, and therefore you’re going to end up being aligned in your process to reach a resolution to a conflict or to come to an agreement about whatever it is that you guys are talking about. Every single negotiation is a cooperation and collaboration.

We’re never in a situation where the person has to negotiate with you. They have some alternative, they can walk away, which means that the only reason anybody’s going to engage you in a negotiation is because by doing so they’re going to get a better outcome than by not doing so. If that’s the case, then every negotiation is collaborative. Having a favorable outcome for yourself means that you have to have a favorable outcome for them as well. Otherwise, they’re not gonna be part of this conversation, and definitely not future conversations.

It’s easy to see where Todd gets his approach to parenting. This story of how his father modeled decision-making is brilliant but also so loving a thing to do when it might have been easy to just roll over. The setup was Todd was frustrated with lacrosse in high school and decided to quit.

Let’s follow along:

My father said, to come into the living room sit down, I want to talk to you. So I sat down in my towel and thought that this was going to be a couple seconds of  “You can’t quit lacrosse”, which which would have made some sense. A sort of  heavy-handed edict.

But instead, he said,  “Yeah, I’ve been thinking about it. It’s really been bothering me thinking about the fact that you’re quitting. It really bothers me because I haven’t heard why you want to quit, other than the fact that you’ve been frustrated with your coach, there’s not enough here. Like it doesn’t make sense. So you’re gonna have to explain to me in a way that it makes sense in order for me to be supportive of this.

In hindsight, I recognize that this was such great parenting happening here, which was not saying, here’s what you have to do, here’s what you can’t do. But instead, it said, if this is a reasonable and rational choice, or even an emotional choice, which isn’t necessarily rational, but if it’s an emotional and consistent choice, I’ll back you up on on doing this.

If it’s not, if this is rash, and it’s going to have long term implications for you, which it is,  you can’t quit the team and then three days later, go back and say you’ve decided that you want to rejoin, then there are big implications here. So you need to make sure that you’ve given this appropriate weight and appropriate thought, before following through with the decision that you can’t change. Tell me what you’re thinking and tell me what your plan is. If you do this, you’re gonna have an extra two hours every afternoon, you have an extra 10 hours a week. What are you doing with that time? How are you better off having that time, not on the lacrosse field than when you were on the lacrosse field.

The way we left it at the time was with me feeling a bit frustrated that I was not able to convince my father that this was the right choice. And because I couldn’t, I realized that maybe it wasn’t the right choice. Maybe what I needed to do was wait, and waiting was the low cost option, right that at the time, I didn’t know what options were. But in the way I sort of frame and think about the world. Now I recognize that this is what we would refer to as a real option that that there is a cost to it. It does cost me something, it costs you something in terms of my frustration level. And the fact that I’m tired after running for two hours straight. And I’m not as fast as the other guys on the team. So I’ve got to play catch up a lot. But that’s day by day, and in return, I get this upside of maybe there’s some benefit to me sticking with this longer term.

I ended up reaching the conclusion, a couple weeks later, that I wanted that to be my last lacrosse season. But I would finish out the season I would finish out both the commitment to the team and also find the opportunity to fill that time with with something else that was going to also be productive and ideally more productive than playing lacrosse, which I couldn’t do midseason. I couldn’t switch over and start start playing on the baseball team midseason. But the process of having my father model, deliberate decision making for something that was consequential was really was really pretty beneficial early on.

How this still influences Todd:

I try to take the same care today that my father had then, which is that he never erupted, you know, his his reaction was never emotional. It was purely inquisitive. It was like, you know, help me understand better. And the question he helped me understand better is, is exactly the way I approach decisions that my children are making is to say, look, you know that I love and support you with whatever it is that you’re doing. But I can either provide context, or at the very least more support if I understand better where you’re coming from.

One of the one of the other teachers of the class at Susquehanna has such a lovely touch, he just says, Tell me more, and tell me more doesn’t have any value laid in it, it doesn’t have , any judgment in it. It’s just saying, go ahead and add more words to what you’ve already shared. You want to take this action against this type of order flow? Why? Tell me more. And effectively what my father was saying is the same as what as what Mike, my co- teacher says, when he’s talking to our students, which is just, I cannot reach a conclusion about what you’re saying, until I understand it better. So help me understand it better. Tell me more.

What stands out for me is the magic that can happen when we combine the principles of charity with a demand for mental rigor and vulnerability. 

This approach establishes very early, that we’re on the same side that we have, if not all of the same goals, we have alignment with our values and our goals, I want to support you says all I’m looking for is an excuse to make sure that you and I are facing the same direction and facing the world together. Help me get there bring me into alignment with you by by telling me more,

“I want to support you. I want to help you, but I need to understand you better”

 
 

 

 

Notes from Tom Morgan on Infinite Loops

Link: https://www.infiniteloopspodcast.com/tom-morgan-all-you-need-is-love-ep74/

Tom Morgan, Director of Communications & Content at The KCP Group, joins Jim O’Shaughnessy on Infinite Loops to discuss:

  • The trillion-to-one ratio of attention
  • “Love” as a compass for growth
  • Religions and Traditions
  • Enlightenment vs. Adulthood

On attention and the possibility that there is something beyond us:

Tom: I’m not going to paraphrase the whole thing [Usual Illusion], but the relevant piece that we probably are aware of 60 bits of information at any given moment, but there’s 11 million that are potentially available to us. If I say to you, “Wiggle your big toe,” you’re suddenly aware of your big toe. That information was coming to you all this time.

You are having a conversation with a cocktail party with one person, and you hear someone else across the room say your name and you swivel your attention to that. You were taking that information in some way, it just wasn’t being served to your conscious awareness. It’s a filtering process. That feels like something that’s intuitive and is easy for us to understand. The bit that took me a really long time to understand is the idea that outside of that million to one ratio, there’s a trillion to one ratio of things that we’re never aware of and never can be aware of.

When you think about an earthworm, an earthworm has never seen a sunset and it will never see a sunset because it has not evolved to see a sunset. We will never experience the way a Bloodhound does with 200 million receptors in its nose because it’s not relevant to us. So the reason why that’s important is that if you think about a trillion to one ratio of things outside of us, the things that we’re aware of, the idea that there wouldn’t be a force influencing us that was hidden goes from a possibility to, I think, a probability.

How the powerful were able to shut down threats with might and control of information in mid-sixties to mid-seventies

Jim: Watch the music videos from that time. Again the artists were at the forefront. They were the tip of the spear in this and the spear scared the shit out of the left-brained dominant society and the man, so to speak. Psychedelics were broadly being misused in many cases. But all of the elements required for a phase change to happen successfully were in place in the mid-sixties to the mid-seventies. The man in this case, Richard Nixon, but everyone in control, and I’m speaking pretty specifically about the US here. But it happened in the UK too. And it happened in Germany. It was a global phenomenon. They made drugs, almost all of which are the non-addicting drugs, illegal. Fed max prison for going. They made an example of Timothy Leary. He became the scapegoat for like, having a couple of joints in his pocket? They didn’t even get him with any kind of psychedelic. You got to remember this guy was a tenured professor at Harvard, who was a well-thought-of psychologist. And, so they made an example of him because, now this is getting into kind of my take on this, people are terrified of what the implications are for being free.

The conventional keepers of the social “truths” shut it the fuck down. And they did that because they could. They did that because back then there was no global communication network like we have today.

People, for example, didn’t know that Franklin Roosevelt was in a wheelchair. They did not know that. Can you imagine in our day and age? Even trying to comprehend that is wild. So they were the keepers of the “truth” and it was a narrative that everyone believed.

Bucky Fuller, on death and rebirth being a shocking or scary idea:

There’s nothing about a caterpillar that suggests the butterfly.

The balance of safety and vitality; bridging specific knowledge and control with the abstract

Tom: And at the moment we’ve optimized for safety at the cost of vitality. And if you want vitality, you have to give up certainty. You have to give up the certainty of what you want, and you have to give up all forms of security, but not all forms of security. I don’t want to overstate this. Everything’s a balance, right?  We’ve just gone too far in one direction. And I think that’s sort of the prescription. It doesn’t involve a huge societal meltdown. It just involves more of an awareness of our own vulnerability and our own holistic inclusiveness.

Jim: It’s not like we haven’t been thinking about this as human beings. Forever we have, and we let traditions, and I’m not anti-tradition, but I am opposed to traditions which have osified and are not serving us anymore. And it’s like our school system, it’s like every, this is the kind of the main central heart of the great reshuffle. All of those old systems are broken or breaking. And we need to make new ones. And making new ones is going to be scary, but the only way you do that is to understand vitality.

Tom: I think any kind of reductionist theory is always going to be incomplete. You can get to the Higgs boson, but the Higgs boson isn’t going to tell you how to live your life. Right? You need values for that. I think there are actual universal values. They may be expressed in a Ten Commandment or something like that. But there is some sort of metaphysical truth out there. But the root to that individual creativity. That way you co-create with the environment around yo is intrinsically unique. And that sounds incredibly saccharine. Because it’s like, everyone’s special. Everyone’s got creativity inside them. Again, terrible words, right. When I heard “creativity”, I think of finger painting. And when you talk about reading poetry and listening to songs that just annoys my intellect.

But you have to remember that your intellect is fiercely resistant to all of these ideas because it requires giving up the steering wheel.

[Still] you do need to be is actually practical, because spiritual regressiveness and spiritual bypassing gets us nowhere in the same direction. So you need to be looking for people that are building the bridge from science back to spirituality.

Intuition or wisdom as evidence of a good filter

Tom: I read a resonant quote, two days ago, wisdom is knowing what information is important. Well that’s simple and incredibly profound, right? And to go back to the Usual Illusion example: you can’t take in 11 million bits, you’d be burned out like a light bulb in a nuclear reactor. You can’t take in a trillion bits, you’d be jello.  So all this is about, is all we’re talking about is how do you calibrate your filter to get the full range of human experience, including the shit stuff, which is the problem. If you hide in your intellect, as a lot of people I know have, it’s typically a coping mechanism to prevent yourself from experiencing the full range of human emotion.

And if you do get blown open, a blowing open experience tends to be incapacitating and overwhelming. And that’s the point. You’re not supposed to have a direct experience of that, right? Too many crazy psychedelic experiences make you too open. You believe everything, you need a good filter.

And that’s the definition of wisdom. And I think that George Soros example is brilliant. So like, for those of you that don’t know the George Soros anecdote, it was that he used to give all these really clever, retroactive reasons why he did things and then his son gave an interview I think to the Irish Times where he was like “Oh no, it’s just his back hurts when his portfolio positioned wrong.”

I thought about that for a long time. And my interpretation of it, whether right or wrong is that, we lay down a whole bunch of information from pattern recognition and he laid down a whole bunch of information from seeing an enormous number of different trading scenarios play out. But those recognition patterns run in the background. Because if they’re running in the foreground, you’re not going to get anything done. You’re going to be using your 60-bit consciousness to act in the world. But when something trips that, because it’s not running in your intellect, it’s running in your unconscious, you’re going to feel it as a sensation first.

And that’s the point. You need to be in tune enough and embodied enough that when you feel that, you don’t just feel it and discount it, you feel it and know what it means. So you are serving the correct emotions, you’re serving the correct physical sensations to your consciousness. And then you are able to interpret them and act on them in the correct way. That is a well-calibrated filter. It’s not about feeling everything all the time, because then you’re just going to be mush.

Notes From C.Thi Nguyen Interview About Games and Society

Link: https://www.preposterousuniverse.com/podcast/2021/10/18/169-c-thi-nguyen-on-games-art-values-and-agency/

C. Thi Nguyen received his Ph.D. in philosophy from the University of California, Los Angeles. He is currently associate professor of Philosophy at the University of Utah. He has written public philosophy for venues such as Aeon and The New York Times, and is an editor of the aesthetics blog Aesthetics for Birds. He was the recipient of the 2020 Article Prize from the American Philosophical Association. His recent book is Games: Agency as Art.

I only excerpted topics of particular interest to me so you should listen to the podcast for a fuller understanding. Anything bold is my emphasis.


Intro by host Sean Carroll

One of the good things about the artificiality of games, you know when you’ve won or lost, unlike life. But…that clarity of knowing when you’ve won or lost is very seductive outside the context of a formal game. It’s very seductive in life.

Thi has developed this understanding to study things like echo chambers and cult leaders. A cult is in many ways like an echo chamber. In both cases, it’s not just a filter bubble where you prevent information you don’t want from getting in, but it’s like a strategy for preemptively undermining claims from outsiders that the cult leader or the echo chamber doesn’t want you to believe in, right? You give people ways to discount outside information.

One of the reasons why cults and echo chambers are so seductive is that they bring clarity to values and moral reasoning, maybe a little bit too much clarity: They make it too easy, they make things cut and dried in a way that the world itself is often not so cut and dried. So he has a whole understanding of why we’re so seduced by conspiracy theories, by cult leaders, by echo chambers, and how it relates to this seductiveness of clarity that we get from thinking about games and point. We get points, we get likes on our tweets, we get steps on our Fitbit. This engages our brains for interesting evolutionary reasons, and that feature of human psychology can be gamed, if you like, by the leaders of cults or echo chambers.

Games

What is a game?

The notion of a game is really disputed in philosophy. It’s very storied. In philosophy, it’s a particularly famous concept, because when Wittgenstein was like, “No, you can’t define concepts,” his example of an undefinable concept was a game.

There’s an amazing book from Bernard Suits called The Grasshopper, which is an attempt to define games, which actually takes itself as a response of Wittgenstein and also secretly about the meaning of life and the relationship between games and the meaning of life.

The short version is, “To play a game is to voluntarily take on unnecessary obstacles for the sake of making possible the experience of struggling against them.”

  • Part of the idea of the game is that the goal of the game is partially constituted by obedience to certain restrictions:

    If you’re trying to get to the top of a mountain to get some rare drug that’s only there, you’re not playing a game. You’re just trying to get to the top of the mountain. If you’re trying to climb the mountain as a mountain climber, then certain restrictions are part of what you’re doing. So the medical seeker is not a game player, and the mountain climber is. And one way you can tell is if someone goes by in a helicopter and says, “Hey, you want a ride?” The medical climber will say, “Of course, get me the cancer drug.” And the other person is like, “Of course not. What do you think I’m doing?”

  • Autotelic: It’s worth engaging in the activity for the sake of the engagement and the doing rather than the product.

The charm or allure of games

  • Struggle

    The aesthetic experience of struggle can be accessed in a safe way by making the difficulty manageable.

Some struggles are beautiful, some struggles are satisfying. And what games do is, they let you tweak the activity to maximize that satisfaction…Most of life’s challenges are too big or too boring and little for us. In games, we get to modify the world of the game and the abilities we’re allowed in the game until they fit just right.

Example:

I feel like things like chess are kind of tuned to maximize that moment, you get more and more of those moments. In my normal life moving around the world, I get to feel graceful once a week, but rock climbing tunes you into the part of the activity that has that feeling. It’s built to constantly call out of you that incredible experience of delicate, graceful, perfect motion.

Manageable because of clarification

Games are these circumscribed spaces where the actions in space have been often been leaned down and clarified, so your actions can fit. They’re clarified, not just because the actions you can perform have been clarified, it’s because your values have been clarified.

Bounded and limited beings make things that make them feel temporarily okay, like spaces where we don’t feel too little for this vast world. The real world is this existential hell-scape of too many values, and games are like this temporary balm, where the world makes sense for a little bit.

  • Games as art

    Games are sculpted experiences of practicality. I think what’s interesting in games is, if games are sculpted practicality, then the beauty emerges in the practical action. So in other words, when you play a game, it’s not the game that’s beautiful, it’s you that’s beautiful.

    I think a lot of the literature about games has been going around looking for qualities that are in the game, like, Oh, the graphics are beautiful, the sound is beautiful, the story is beautiful. And they’re not looking at how radically different games are. And I think there are other things like this that are also mostly neglected, but the thing that makes games unique is that they’re sculpted action.

The danger in having your values clarified

  • Gamification

    Game values are hyper crisped-up, and that’s fine if you put away those values at the end. But when you gamify something like education or communication, then you’re forcing a singular clarified value system on a real-world activity. Think of how Fitbits or Twitter engagement can orient your goals towards local maxima. Twitter’s gamification squashes an individuals’ pluralistic values and gets everyone, insofar as they’re motivated, to be motivated in the same direction.

    • Education examples:
      • Sean Carroll: I used to be at the University of Chicago, which obviously has always been academically super-duper strong, but back in the day, it wasn’t the place you applied if you were interested in Harvard or Stanford or Princeton, it was less well known. So suddenly, there was a strategy that they undertook at the University of Chicago because they were being hurt in the US News rankings, and they were being hurt because the only people who applied to the University of Chicago were the ones who really wanted to go there. And you are rewarded in the US News rankings by having a high selectivity, by rejecting most of the people who apply, so they intentionally encouraged people to apply knowing they would reject them, ’cause it increased their selectivity, and they leapt up in the rankings. That’s an example of maybe the goal perverting the original aspiration.
      • Law School culture
        A study about law school culture when the US News and World Report started ranking them charts a bunch of stuff like what you’re talking about, about people gaming the rankings. One of the things they point out is that different law schools used to follow different missions before the rankings, but if their mission is skewed to the ranking at all, then you drop in the rankings, so it’s forced everyone to pursue the same values.

        Before the rankings, prospective law students used to talk about what different law schools valued and talk about their own values and decide what their values were, to pick which school to go to. Now, they, say 99% of the students just assume their goal is to get into the best school, where the best school is set by the ranking. So they don’t go through the process of value self-deliberation. You end up outsourcing your values, you end up letting somebody else perform value deliberations for you, and what goes into those values are often very much based in what’s in the interest of large-scale institutions and the kind of information management systems at large-scale information.

People worry a lot about games creating violence, and there’s actually a lot of data that mostly they don’t. And I think part of that is that the violence in games is fictional, and we have a lot of information that people are mostly capable of screening off fictions. The thing that I’m really worried about is people becoming used to the idea that the goal is some simple, quantified thing that people share, and what we’re supposed to do is do everything in our power to up that simple measure, and one thing on to note, that’s not fictional.

We shouldn’t worry about games creating serial killers, we should worry about them creating Wall Street bankers.

[obligatory reference to James C Scott’s Seeing Like A State: “Look, what you should think is that large-scale institutions generally see the parts of the world that are processable by large-scale bureaucratic machines, which are quantified data, they can’t register the part.” So, think about this, a large-scale school district or an educational bureaucracy can’t register individual student evaluation data, they can only register aggregatable data like GPA. So, says Scott, large-scale institutions have reason to remake the world along lines that are more regular, so that they can be legible to the institution and actable on by the institution.]

  • The satisfying aspect of games common to conspiracy theories

The satisfaction we crave in the clarity and simplification of games is why we are drawn to conspiracy theories. Conspiracy theories are tuned to give you the exact same pleasure [as games]. Someone has changed the nature of the world, apparently, to make it tractable.

How the argument works:

    1. There’s a source of anxiety: The world is complex

      Scientists are hyper-specialized, no-one understands everything, at some point you realize that you have to just trust tons of stuff that you have no ability to grapple with.

    2. Conspiracy theories circumvent our need to trust

      They say “Don’t be sheep. Don’t trust other people. Here is a vision of the world, where you can contain the world in you. You can explain all of it with this one powerful explanation.” It is a game-like pleasure, but exported to a place where it’s dangerous.

      • Refers to a book by Elijah Millgram, called The Great Endarkenment. It talks about how knowledge must not be individual quest given the fact that the world is so hyper-specialized that no one can know more than a tiny amount of it. [This stands in contrast to the] ideal of intellectual autonomy that drove the Great Enlightenment. But it doomed itself, because it created all the science that made it impossible to be intellectually autonomous. If you still hold to the old ideal of intellectual autonomy, where everyone can understand everything, what you get is being driven to anti-vaxxing and various conspiracy theories in which you reject trust in the sciences.]
    3. Conspiracy theories hack our desire for clarity

      It’s not that clarity is always bad. When you have intellectual success, you do have this feeling of clarity. My worry is the feel of clarity actually comes apart from real understanding, and that outside actors can game it.

      For example, in the course of evolution, it made perfect sense for us to pursue sugar and fat because calories are scarce, it’s hard to get enough fat and so on. Then the world changes and industrial forces figure out that they can maximize the feeling of sugar and fat separate from any nutritive qualities. And then if you’re still stuck on that old heuristic and chasing sugar and fat, then you’re screwed. Clarity can be like cognitive sugar. Someone can aim to max out the feeling of clarity, and the way that looks like is a conspiracy theory.

Trust’s role in conspiracy theories

1. Trust is tricky because there’s a lot you cannot trust, yet being able to trust is not optional

If you devote your entire life to it, you can understand one one-millionth of the human landscape of knowledge. [Even worse] not only can you not understand everything else, you don’t even have the capacity in yourself to pick the right experts to trust.

I have a PhD in philosophy, I have a lot of education. If you gave me a good, a real statistician, and a fake one, I don’t have the mathematical skills to tell the difference between a good statistical paper and one that gives a bad result. I don’t have that in myself. So what you get is actually this incredibly iterated and very fractal chain of trust.

[An example of why we have no choice but to trust in many cases:

There was one proof of a really famous theorem that literally only one guy understood, and he’s getting old, so a whole bunch of people had to have a project to re-write the proof in a way that other people could understand it. And that whole process of dealing with the fact that you need to trust some things, while you shouldn’t trust everything, is a tricky thing that is probably under-theorized.]

Politically, conspiracy theories tend to be associated with the right, but the left’s appeal to science fall flat because they are not appreciating the role of trust:

      • The false argument they spout:

        “Oh, these fucking anti-vaxxers, anti-maskers. Think for yourself, look at the science, evaluate the science.”

        When the truth is “I can’t evaluate that science.”

      • The obstacle is not whether people trust Science with a capital “S”, it’s the trust of its messengers

        Look at the people that are legitimated in a certain institutional structure, which involves a background trust in those institutions. And I think there’s this vision where for a lot of us, like when you look at anti-vaxxing, anti-masking, the climate change denialist space, what we want to say something like, “Oh, those people are totally irrational.” But I think what you have to think instead is, they have an entirely different basic framework of trust, for a different set of institutions. The degree of rationality there depends on the degree to which we can justify our trust in our institutions. And that’s a really, really complicated matter, and it’s not like the authoritative institutions are always right. There are plenty of historical cases where they are corrupted, right?

        It’s hard to be against conspiracy theories as a blanket statement ’cause sometimes there are conspiracies. We have plenty of historical examples where all the institutions in a particular country have become corrupted, have taken over the news media, are issuing fall statements. That’s a real thing that happens.

2. Echo chambers are not about ignorance, they’re about trust

An echo chamber is a system in which people have been taught to systematically distrust people on the other side. The book Echo Chamber doesn’t quite say the world around Rush Limbaugh is a cult, but they basically almost say it. This book is an empirical analysis of the world around Rush Limbaugh — Rush Limbaugh’s top people just systematically distrust and dismiss people on the other side.

This is is different from not hearing them at all (which is the filter bubble argument). The problem goes back to trust, not irrationality or disbelief of science.

A large segment of the population has had their trust subverted and undermined and directed toward what we think of as like the wrong institutions.

The way back is not to wave the evidence in people’s faces. I think people want to be like, “Oh, climate change denialists, just look at the evidence, here is the evidence,” but of course they’re not showing you the evidence, they’re showing scientists that they trust who process the evidence, ’cause not even a climate change scientist, a particular climate change scientist, has looked at all of the evidence for climate… It’s all processed.

Someone whose trust has been systematically undermined in that set of institutions will not trust evidence from sources they distrust**. And that is rational.

This is a complicated problem without easy solutions. But the first step is recognizing the story is that the other side doesn’t hear us. It’s that their trust has been undermined.**

A lot of public policy figures are fixated on the filter effect thinking we just need to create these public spaces where people can meet each other and talk to each other. That’s a standard view in a lot of political philosophy and public policy. And I think that’s not going to work if trust has already been systematically undermined. It doesn’t matter if you meet and hear the other side, if you already have a prevailing story that says they’re malicious, manipulative, evil people.

The grand takeaway

The need for clarity as evidenced by our love of both games and conspiracy theories can cause us to overoptimize and seek safety in echo chambers.

What do we do about it?

While there are no answers some hints that can point in helpful directions:

  1. Transition between perspectives

    Playfulness is the quality to transition between different world perspectives, easily, lightly, to hold your perspective lightly and slip between different ones. This can be done via literally traveling and playing games where you are forced to slip in between different value perspectives.

    It’s hard to do, it’s hard to put on different worldviews as like different outfits. This is a resonant argument for reading and earning widely:

    This is going to become the world’s oldest chestnut, but sometimes I think like, this is what the fucking humanities are for. Read some art, read some novels, motherfucker, and if you want the background paranoid view, it’s something like the world has very good reasons to get us to onboard to super simple, clear targets. And when I look at universities cutting humanities programs in favor of business schools and STEM, because those are higher-earning jobs or lead to more clearly measurable productivity, I’m like, of course, reading weird subtle art, experiencing weird subtle art, including games, but also including novels and music and all this other stuff, is this stuff that might have clued you in to different value perspectives other than make a lot of money and get a good job. And of course, they’re going to get cut out in a world dominated by hyper-simplified institutionalized values.

    One of the suspicions I have is that certain domains, especially the domains that science has a lot of success with, are the kinds of domains that admit of extraordinary clarity. And other domains, like the domain of life value and the domains of personal health and fitness and aesthetic joy, are not domains that admit of the same systemic clarity. And when we demand them, we start hitting simplified targets.

    There’s a difference between qualitative and quantitative data. Qualitative data is really rich and nuanced and subtle, but it’s really context-sensitive. It doesn’t aggregate, it doesn’t travel well.

    [insert quote: Not everything valuable can be measured, and not everything we measure is valuable]

  2. Be aware that there are forces that are trying to manipulate us

Like the sugar analogy, is this moral view or worldview too yummy? Is it just too satisfying? Did someone make this just for me and people in my cohort to swallow down?

This is definitely not a blanket. The thing is, you also get clarity and pleasure from really getting at truths. You can’t throw all that stuff away, you just have to realize that the signal has been amenable to perversion and misuse.

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)

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



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.

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

Kathleen Mercury on Board Gaming With Education Podcast

Link: https://www.boardgamingwitheducation.com/games-in-schools-and-libraries/

About Kathleen: Educator with a special focus on teaching gifted students game design (Link)

Transcription: Otter.AI

I incorporated Kathleen’s presentation to these notes for the sake of consolidation.


Overview

Kathleen believes:

“Happiness comes from being able to choose the life you want to live.”

To empower students there are 2 anchor ideas:


Be Producers Not Consumers

…what I want more than anything for my students is for them to be creators, not consumers…The only thing I care about is what ideas they have, and giving them the tools where they feel empowered to take on big complex challenges where they have no idea of what the final product will be, but that they can build in and learn the skills and confidence that they can hopefully get themselves there. That’s what I care about because if I can get them to accept that and do that, then they can pretty much take on whatever challenges come their way for the rest of their lives.

Bias Towards Action

For those familiar with the Silicon Valley ethos of “Move fast and break things” this will be familiar. Despite, her midwest roots and home Kathleen’s thinking has been heavily influenced by the Stanford D-School.

…probably the biggest thing that’s helped me is the Stanford design school’s method of prototype development. I went to a design-thinking boot camp, and the design mindsets that were presented as far as when you’re wanting to design something for someone else, and how you should think about it. Here’s how you should approach it. And it was so different from what I was doing, but it was just one of those things where it’s like, oh my god this is 100%, what I should be doing and it completely pivoted everything that I was doing. For example “bias towards action”. Instead of just thinking about something just start doing it. Rapid iteration making prototypes fast and cheap so you can get them on the table so that you can fail quickly see what works, see what doesn’t work quickly and so you can make more versions of something even faster.

It’s designed to keep them moving quickly so that nothing becomes precious and nothing becomes so sacred that they won’t get rid of it. And I think for me as a teacher, that’s really helped me and also helped me as a game designer in terms of trying something getting it out there, seeing what happens getting feedback on it and making improvements to it as well.

Lessons From Teaching


On using games in learning

  • I think for a lot of gaming experiences in the classroom, having everybody involved at the same time, really, really matters for success.” (Party games are a good tool for this)
  • A good teacher can make a lot of things fun. Sparks a love of learning.
  • Bridging the abstract to concrete
  • Critical Thinking
  • Information more sticky/accessible. Increases connections.
  • Boosts engagement & connections (made me think of how a local teacher used Pokemon cards to bring the boys and girls in 1st grade together)

On kids having different abilities

  • Everyone deserves to learn at their level every single day that’s just one of those tenets that I just hold. If you’re doing something where their disabilities or inabilities become apparent to others. I think you have to be really careful about how you handle that. As far as you know what you’re willing to do to, you know, protect them to take care of them because if they’re stressed out and embarrassed.

  • Approach to gifted kids:

    1. If you don’t give gifted kids problems to solve, they will create their own.
    2. They need to learn how to struggle and work through it.
  • Heterogeneous groupings can protect kids by partnering up.

  • But homogenous groupings have advantages too.

For my gifted kids, a lot of times when that happens, they’re always like the ones that are like spread out amongst the other groups, and then they put all the spread out all the middle kids and then they spread out all this sort of low kids and pardon me for speaking in broad brushstrokes but I am. And so a lot of times they never get chances to work with each other. And one thing that research shows is that when you let kids have similar abilities work with each other. Everyone gains, because the kids on the middle step it up, and the kids on the lower end also step it up, even if it’s like one notch higher, you know, that’s okay for them, you know they’re using their abilities and what they know and trying to push themselves up to be more competitive as well

  • Why the emphasis on points in winning is redundant.

Points are used to ultimately communicate your position in the game to other people. And if we’re playing a game that is just to be, you know, a review or something like that I don’t care about the points at all. And so, what I will often do is even if they get points, or if one team starts to get a blow out. I will, you know, do something like say “this is a 20 point question”, and then somehow I manage to make it so that kids on the other team get those points, or I start awarding ridiculous points my cool you just got a puppy. So drop puppy up there on the scoreboard.  

Why teach game design?

  • Develop analytical, practical, and creative thinking skills

  • Autonomy and collaboration
  • Teaching game design is teaching to orient towards an internal scorecard not an external one

That quantitative checkmark feeds into a lot of the programming that we’ve already done with kids as far as you know letter grades and standardized tests and success is 100% and success is, you know, an A plus is, you know, and I think for a lot of my students especially having to sort of break that mentality. A lot of what I do in teaching game design is here is this problem that cannot be solved, or notions like that. Here is this problem that you will have to you have to define the problem. You have to figure out how you’re going to solve this problem, you’re going to design your tests with these resources in terms of you know how close are you to solving this problem and you’re gonna do this again and again and again, you’re going to make a prototype you’re going to put it in front of other people, they’re going to play it, you’re going to get their feedback, and then you’re going to take those ideas, and that, you know, good, bad, the ugly. Incorporate that into your next design so that when that hits the table hopefully it’s better. Thinking of it as an unfinished unending hopefully upwardly ascending sort of cascade. See that process as a real process reflective of what life will be, I think is really important, because for a lot of my kids, you know they’ve learned what successes is and it’s an A+. I’m trying to show them that if you want to do anything cool, there will never be A+. You will never be finished. You will always just have to try to do your best to put out your best possible effort, listen to other people, and hopefully make that idea better and so that’s why I teach game design.

The reason why I teach game design is a teaches them this process of thinking design, thinking hands-on, trying to create solutions and learning how to see successes incremental progress, not as I finished I’m done.

We do talk about how it can be finished and not perfect and that’s really important for a lot of them. That you can have something that is unfinished. And you can see it as successful because you did try to make it better, even if you don’t think it’s better. And that’s really really hard for them to accept because it goes against everything they’ve always done

  • An antidote to results-based thinking

I honestly try to minimize any type of objective points in any kind of game situation as much as possible, because no one should ever be blamed for losing for their team, and I honestly don’t want anybody to be, you know, the fourth batter to just hit the Grand Slam home run and they get all the credit, not the people who also got on first, second and third.

  • Be thoughtful about when points matter

It does make sense to have kids have scoring that matters, but I think you have to really ask yourself, is this that time.

  • Not having grades at all doesn’t really work

And if I had my choice I wouldn’t do grades at all, but this is the world we live in and I have to actually try tried one year to not give out grades and our gifted class. There’s some unintended consequences there but there you go. We tried it once. As much as we wanted it to work it didn’t really work.

Projects Kathleen and Dustin Are Pushing Forward

  • Game Database To Aid Teachers looking to use games to augment material

    I think that something you touched on and I’ve been kind of thrown around in my head is creating some sort of database where teachers are teaching a unit on something and they can go on there and see what kind of games they can use in their class to either tackle review or tackle preview and concepts of the whatever material they’re learning. It would be really good for teachers to find like a resource where they can just go to, and save time and kind of have this lesson plan that they can use.

  •  Formalizing standards

Look at the curriculum that I have and formalize it a little bit in terms of standards that it’s meeting. That’s something that people ask me about that I haven’t really ever have had to do. And I think it’s something that I’m interested in one because it will make it even easier for people to use these resources in their classroom but it also. I’m really like thinking about the idea of what are the things that people could do to get their kids to think like game designers to use design thinking, using games, what would be appropriate, you know the early elementary level, the later elementary level, the middle school level, the high school level. So that if somebody wants to do something with game design in the classroom, they’ve got a better chance of success. That they’re not over-shooting or under-shooting what their kids are able to do but also in terms of tying this, you know, more specifically to actual curriculum. Then it can be easier for their administrators to use.

Notes from Capital Allocators: Basil Qunibi

Link: https://capitalallocatorspodcast.com/2018/03/04/novus/

About Basil: Founder of Novus which does analytics on managers and portfolios trying to disaggregate sources of edge/skill and quantify obliques risks such as crowding and liquidity.


Early Days

Initial Research

  • Early 2000s, Basil began studying underutilized data sets :
    1. Public filings (ie 13F, 13D etc) domestic and abroad
    2. Monthly exposure reports from managers
    3. Position level reports when available which provided full transparency

Meeting Resistance

  • “People hear with their amygdala”
    • Amygdala is the emotional center of the brain. His analysis was perceived as a threat as opposed to being received with commensurate rationality. Often his analysis contradicted narratives or perceptions

Novus’ Start

  • Initial Novus Products
    • Individual Manager Report
      • batting and slugging avg, long/short attribution, geographic/industry exposures
    • Overlap Report
      • Calculate overlap between candidate managers as well as the client allocator.
    • Aggregate/Look Thru Report
      • Analytics on an allocator’s entire portfolio of managers combined
  • Novus Framework Product: aimed at distilling manager skill, positioning (based on private data on 1500 funds)
  • Product aims to be “Moneyball for Allocators”

 

Moneyball for Allocators: Decomposing Manager Skill

Systematic Factors

Factors that depend on the broader market.

  • Exposure Management: How does gross exposure variation influence return? On average detracts 200 bps/yr
    • Manager’s variation in this aspect is not persistent; deviation from mean is mostly luck
  • Capital Allocation: How does exposure to capital structures or sectors contribute to performance?
    • This factor is also typically negative for most managers

Intrinsic Factors

More persistent and where the potential for alpha lies

  • Security selection: items picked out of the sectors or geographies
  • Sizing: This is compared to a control of equal-weighted portfolio
  • Trading: Tactical trading seen in flipping positions

 

Using the Framework to Make Better Allocation Decisions

  • If the allocation thesis for any fund is simply returns it will invariably hit a bad run. Mapping a fund’s skill to the environment is a better basis to decide whether to cut or increase exposure to the fund than simply returns.
    • For example, if the majority of a fund’s monthly alpha comes from trading but the data shows that the volume in the fund’s positions has been steadily dropping, it may indicate a lack of opportunity to capitalize on the fund’s strength.
  • The framework allows an allocator to evaluate a fund based on its stated intentions. If they claim they have an edge in security selection they can be rated on that dimension.
    • This shifts the evaluation from “thinking in T to thinking in N”.
    • It doesn’t make sense to compare a fundamental value strategy vs a high-frequency strategy at the same time horizons.
    • Large sample size of trades without any single trades dominating the results is easier to evaluate than strategies that make a few concentrated bets.
  • Benefit of increasing transparency also accrues to good managers since the story is about more than returns and the data can reveal that a bad run is just bad luck (ie losses coming from extrinsic non-persistent factors)

4 Measures of Crowding

  1. Conviction: largest position sizes amongst managers; names reported as > 5% positions within a fund
    • Best performing factor over time
    • From Faber’s interview with fellow Novus co-founder Altshuller, they constructed a ‘Conviction Index’ with Barclays based on impressive and still persistent performance of stocks which rank high on a sort of high conviction positions by hedge funds (stock > 7.5% of portfolio concentration)
  2. Concentration: How tightly held are the shares?
    • This is also a positive factor
  3. Consensus: how popular is the name?
    • This factor underperforms over time
  4. Crowdedness: How consensus is the name AND how much daily volume do they represent? “How crowded is the theater; how big is the exit?”
    • This is actually a factor which performs well over time but has massive skew

Scaling up as AUM Grows

How you can expect AUM growth to impact manager performance?

  • Increasing number of positions
    • If the manager has skill in sizing positions this will ‘flatten’ the alpha
  • Moving into higher market cap names
    • If the manager has skill in small cap, this is style drift
  • Increasing current position sizes
    • This deteriorates liquidity; while adding it can be a positive feedback loop but this is a double-edged sword. This is the most dangerous form of scaling if liquidity is overestimated