Notes From Lessons of History

The Lessons of History
by Will and Ariel Durant


Geography

  • As technology evolves, the influence of geography is diminished
  • The prosperity of civilizations is closely tied to geography notably rivers and coasts
  • Ultimately, humans create culture, not the earth

Biological lessons of history

  • Life is competition
  • We rely on the protection of our tribes and may cooperate within its confines but this is adaptive behavior in service of a wider competitive landscape. Until a group is as large as a state it will “continue to act like individuals and families in the hunting stage”
  • Life is selection
  • Nature knows nothing of our egalitarian ideals or Bill of Rights. “Freedom and equality are sworn enemies”. If people are free, relative advantages will grow nearly geometrically. Inequality is inborn, we can only aspire to ideals such as equal access to education and justice.
  • Natural selection benefits from the diversity and range of natural ability as it is the basis of evolution.
  • Life must breed; birth rates shape history
  • Nature cares only about the species, not the individual. Diversity and large “litters” are the fertile grounds that natural selection needs as fuel. Nature’s check on overpopulation is famine, pestilence, war.
  • Higher birth rates can give rise to stronger tribal powers while progression into a higher standard of livings and industry appears to slow the birth rates as the tribe advances.
  • To track the future of ideas, it may be instructive to watch birth rates; weakened ties to ethnicity or tribalism can leave the incumbent group vulnerable (Caesar and Augustus were aware of this and sought to penalize birth control; Italy’s ethnicity diluted over time making the empire vulnerable to its neighbors)
  • On race: “A knowledge of history may teach us that civilization is a cooperative product, that nearly all peoples have contributed to it; it is it common heritage and debt; and the civilized soul will reveal itself in treating every man or woman, however lonely, as a representative of one of these creative and contributory groups.”

Government

  • Monarchy has been the historical norm while democracies have been ‘hectic interludes’
    • Roman democracy crumbled under class wars giving way to Pax Romana, a 200 year succession of benevolent dictators until the murder of Caesar. This period was followed by disgraceful monarchs including Caligula before giving way to the greatest succession of monarchs ever, the last being Marcus Aurelius. Some of these monarchs had no heirs and promoted by merit until Aurelius died. Afterward his son Commodus ruled when no heir was named.
    • Monarchy has a mixed record, typically at its worst is when it is determined by blood and accompanying incompetence
  • Most modern, complex governments  are oligarchies — ruled by a minority
    • Aristocracy by birth
    • Theocracy by religion
    • Democracy by wealth
  • Plato reduced the cycle to monarchy->aristocracy->democracy->dictatorship. Repeat. This was based on Greece and repeated with the Romans. Democracies are overthrown or conquered as envy amongst the majority tires of the ‘sham’ of having a vote and uses the state to seize wealth. Other oligarchies fall when they wield their great power to narrowly or incompetently.
  • The US democracy started from a wider base and in unity against British rule. Rural land-owning enhanced the sense and dedication to freedom, while geographic isolation created a national sense of freedom. These conditions have given way as land as sparse and cities have grown “Every advance in the complexity of the economy puts an added premium upon superior ability and intensifies the concentration of wealth and [power]”
  • Democracy is a difficult form of gov’t since effective mob rule requires widespread intelligence to avoid manipulation by ‘the forces that mold public opinion’.
  • Democracy, however, has done the most good and it can maintain its promise only if it affords equal opportunity for education [my own thought is this will always be uneven, and the unevenness grows with population size. For a small population, it is reasonable that the average access to education can be even]
  • “If a race or class war divides us into hostile camps, changing political argument into blind hate, one side…may overturn the hustings with the rule of the sword. If our economy of freedom fails to distribute wealth as ably as it has created it, the road to dictatorship will be open to any man who can persuasively promise security to all”

History and War

  • Competition via war is often for the same reasons as competition amongst individuals however while individuals are restrained by law and morals a state ‘acknowledges no substantial restraint either because it is strong enough to defy any interference…or because there is no superstate to offer its basic protection, and no international law or moral code wielding effective force’
  • Religious wars in the 16th century and the wars of the French Revolution were battles between aristocracies leaving the masses to maintain mutual respect for their foreign counterparts while wars of the 20th century in accordance with technology and ‘means of indoctrination’ made war all-consuming ‘struggles between people’ and completely destroying centuries of labor and property.
  • He presents the general case for the inevitability of war — competitive human nature, envy, beliefs so fundamentally different that cannot be settled by negotiation. Perhaps and only if we were united against aliens could we imagine our species not warring with each other. The opposing view is that the imperative to avoid large scale war because of the destructive power of current technology will prevail over any disagreements over ways to organize our lives and economies.

Progress

  • Are we the ‘same trousered apes’ merely armed with increased tech, locomotion, and knowledge but weighed down by the persistent features which moor us to our primitive ancestors? Progress is defined not by happiness or similar measure but to the degree in which we may control our environment. By this standard, as evidenced by our increased adaptability and lifespans we have made tremendous progress. While subject to lapses and regressions, the avergae human has been the beneficary of an accumulated history and knowledge which has been succeeds in being recorded and transmitted to subsequent generations so that they may continue to build on this heritage from its most advanced point.

Moontower Thanksgiving 2019

This letter started with a discussion of cosmic luck. There are 7 billion people in the world. You have about a 1 in 6 chance of being born into the “developed” world. My gratitude starts there.

I didn’t quite catch the heads required to end up in the crib of a median American family but I got something more valuable. Parents who love me and cared about my future.

They met here in the US but they are both from Cairo and they were not in the US long before meeting one another and having me in 1978. As all immigrants must, they navigated a strange land and a strange language. One of my favorite bits of family lore is how weird they thought the spaghetti sauce was in the US. They thought Americans’ taste buds were broken. Turned out my grandpa was buying ketchup.

In my spoiled existence today it’s hard to imagine what they went through and with so little. And yet despite the odds, I was given great opportunities and have had amazing luck:

  •  I’m 6’1
  • My parents are hard-working and my mom was especially demanding. She worked in treasury ops at banks when I was growing up. I was sorting fixed income traders’ mail when I was 16 thanks to her. I commuted from Hazlet, NJ to Manhattan at 5am in my summers to work. I got paid $16/hr in the 90s.
  • I have thus far dodged serious illness. I survived 2 serious car crashes before age 21 (at age 13 I had the experience of seeing and touching my right shinbone before I had even realized what happened). My apartment building burned down my junior year of college. Everyone has crazy experiences. That you are still around to have them has nothing to do with merit. Blind luck.

Speaking of college one of the most influential moments in my life was my choice to go to Cornell. My mother had always pushed me and spoke of this place Cornell before I was even in HS. When I visited the campus, I immediately loved it and applied early decision to maximize my chance of getting in. When I did get in, she and I were over the moon. But in a moment of major doubt and looking at the cost, I hesitated. You see Rutgers would have been a full academic scholarship. Cornell was gonna cost close to 30k per year. I didn’t want to saddle my mother with any more burden. She had already shouldered the bills of a private Catholic all-boys HS (CBA in Lincroft). And when she couldn’t afford it, she begged the school to let me attend without paying. She never gave up and it worked. They graciously made an exception for part of my tuition.

She had a one-tracked mind. Give her son a chance.

In the end, she convinced me with a plan I could bear. Cornell offered 1/3 of the cost in a need-based grant that she wrote many letters for every year. She and I would split the remaining cost equally. I’d pay my share with loans and my summer job earnings. She believed Cornell was going to mean more opportunities.

She had a one-tracked mind. Give her son a chance.


If you simulate my life 100x over I probably don’t end up with the professional luck I’ve actually enjoyed in 90-95 of those sims. I punched above my intrinsic gifts. But I have respectable outcomes in most of those sims because of who my mom is. Sure I had to meet her part of the way with effort but ultimately she gave me the best chance.

I’m thankful for being born in America and that my family fought their way to get here. I’m fortunate to grow up in a home that taught me how to fish even though it didn’t have much fish to give me. I’m not very interested in politics but if I had to say, I’m a lot more liberal than my parents. But something I would agree with them on…when I watch politicians fan the flames against the rich on what I feel are extremely exaggerated claims about what income inequality really is I recoil.

The prosperity of the United States and the possibility to push yourself or your kids into a better life has been calling to foreigners for over a hundred years. Anecdotes are not data. But having seen enough people from humble roots succeed beyond their expectations, makes me thankful I live where those anecdotes are not outliers. Billionaires are outliers. Kids from Hazlet or Newman, CA (Yinh’s hometown) who end up in our shoes are very much part of the real distribution.


if there is a devil he wants you to compare yourself to your neighbor. It’s that simple. It’s his most effective trick. And it’s subtle. Don’t pay attention to his whispers.

This Thanksgiving I’m grateful for all the luck it took for me to be able to sit in a warm house, with wifi and the time to write this. To have my children fed and asleep in bed (they’re in my bed tonite the rascals) and for my wife to be peacefully passed out while watching TV. There’s a lot of heads that had to come up to be here but it all started with a chance to play.

Enjoy your loved ones this Thanksgiving and much love from me. As always, thanks for reading.

Longitudinal Studies > Snapshot Studies

Longitudinal studies described by Roberts are very difficult while snapshot comparisons are relatively much easier to implement. But even the longitudinal studies are done on wide demographic cohorts. You may be interested in a much narrower subset of people. For example the children of decamilionaires, the class Kylie was born into.

The way to do a study like that would probably be a Bayesian experimental design. For example you’d take the base rates from the broader longitudinal studies and adjust them for the specific reference class you are studying. A statement that sounds like “how did children born in the 1980s do given they had access to a PC or given they grew up in Beverly Hills?” The conditions after the word “given” comprise the reference class.

In Kylie’s case, what was the right reference class? What’s the relevant condition? Being a decamillionaire to start? What about her IG followers? Not all decamillionaires enjoyed her fame. What about the fact that she became a billionaire so quickly?

The critical observation: experimental design has an enormous impact on the results of studies that show up in our feeds that then spread like truth at happy hour. A poorly constructed design or reference class has downstream effects that can swamp the conclusions.

A recurring Moontower theme is the world is messy, be critical of tidy takes. Alas, don’t despair, here are some guides and concepts to keep in mind.

Making Better Comparisons

One of my favorite researchers Michael Mauboussin wrote a guide to making better comparisons. Since all non-split second decisions require conscious comparison we can all do better by getting meta about the process. Mauboussin decomposes the steps and highlights pitfalls that await along the way. The link to the pdf and my summary notes can be found here.

Simpson’s Paradox

We learned how easy it can be to overreach for conclusions from snapshot data. Russ Roberts pointed out the danger of averaging averages — Simpson’s Paradox. It states that the change in the average is not the same as the average of the changes. When I interviewed at Susquehanna coming out of college, one of the questions was a perfect example of the paradox, even if I didn’t know the term for it back then.

The question: If batter A has a better batting average than batter B for the first half of the season AND batter A has a better batting average for the second half of the season, is it possible for batter B to have a better batting average for the whole season?

The answer.

Life expectancy example

In 1900, life expectancy was about 47 for a US male. Does that mean you were middle-aged by the time you left college? Of course not. If you made it to 22 years old there was a good chance you’d live well into your 60s or older. Life expectancy is extremely sensitive to infant mortality rates. In 1900, infant mortality was around 20%. Today it’s closer to .5%.

Society 1:

Infant mortality = 30%
Survivors who make it past infancy live to 80
Life expectancy = .20 x 0 + .80 x 80 = 64 years old

Society 2:

Infant Mortality = .5%
Survivors who makes it past infancy live to 80
Life expectancy = .005 x 0 + .995 x 80 = 79.6 years old

Without tracking the lives of people, the snapshot of life expectancy can make people jump to all types of silly conclusions about the 2 periods. When we study longitudinally we would have seen that someone who makes it to 32 is still far from middle-aged.

The Income Inequality Myth?

Blind luck matches your unborn spirit to a physical baby body on Earth. The spirit didn’t audition for the part. Where you arrive? To whom? In what century? Blind, dumb luck.  But the second the baby opens her eyes her conditions and her genes interact. A unique trajectory unfolds.

Repeat this process billions of times across geography and history. Interject randomness, a magical insight or a stray bullet. Watch as outcomes diverge just as a narrow river flows down a hill, widens at the mouth, then spreads into a vast ocean.

The combinations are infinite and we can’t help but wonder what variables along the way cause which outcomes. Consider the life of an attractive woman. I’m ready to non-ironically play the violin for exceptionally pretty girls. Why? Because I can’t imagine how they must navigate all the distorting signals they receive, an excessive quota of creepers they’re going to attract (in addition to desirable mates), the baggage they might have incurred in the process, and the feedback loops that sweep them up. It’s easy to see how arrows of causality rarely point in one direction. Every blessing rides with its own curse.

How does this relate to income inequality? 

In order to study how people arrive at different outcomes you must follow the same people around and only then do you have a chance to disentangle the interaction of their qualities from their conditions. You must track the water as it travels from peak to basin. If you just sample the water in the starting and ending locations you have no chance of uncovering whys and hows.

The discourse on income inequality makes exactly this mistake. Everyone is familiar with a graph that looks something like this:

If you Google image search “income inequality” you will be bombarded with charts like this showing that the rich’s share of income has increased relative to the poor and median. While it’s true that the bucket of people considered “rich” now earn even more than the bucket called “poor” over time, these studies are all based on snapshots. And they make great kindling for outrage, attention, and political thrust. They sell like steroids at the Jersey Shore.

But it also masks the good news. Regrettably, good news doesn’t have a natural buyer.

Like the Kylie Jenner problem, that chart tells us absolutely nothing about one’s chance of climbing or falling through the ranks. That is the question we really care about. Russ Roberts writes:

What the snapshots show is that the rich today are richer than the rich of yesterday. If rich people are the same people as yesterday, then one’s class determines one’s fate. But if they are not the same people, the snapshots tell you that the dispersion of income has increased. That may or may not bother you, but it doesn’t necessarily mean that there is a distinct group called “the rich” who are capturing all the gains while the rest of us tread water.

A Much Rosier View

In his outstanding essay (link), which I’d go far as to call a PSA, Roberts shows the most dramatic claims by the pessimists that no one is making progress other than the rich are wrong.

1) Distortions in the snapshot methods conspire to make inequality look much worse than it really is.

You can’t use two snapshots to conclude that only the rich have made progress. It’s possible that everyone from the earlier snapshot has actually gotten richer and then been replaced by different people whose incomes will also rise. The people in the snapshots are not the same people. 

Immigration, divorce, and marriage rates all distort measure of progress. Roberts creates this easy-to-follow video showing how snapshot math can make it appear that the poor are doing worse even when everyone’s income doubles!

In this diagram captured from the video he creates a hypothetical to demonstrate how divorce rates impact snapshots.

Imagine 5 quintiles with 2 families in each bucket. Every person earns the same amount. 30 years later we take another snapshot and every individual’s income doubles but half the families divorce resulting in 5 more households. Now when you look at the quintiles it appears the top 2 quintiles benefitted at the expense of everyone else, yet in this example every person in society is benefitting equally from the stronger economy.

Immigration and marriage rates will reveal similar effects.

2) Longitudinal studies > snapshot studies

Roberts emphasizes the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time.

The data crunchers at DQYDJ, a leading site for income studies, make similar warning when viewing data that is not longitudinal:

You can not draw any conclusions about the performance of individual households from this data. Households in certain income brackets move up or down the income spectrum, but the data as presented doesn’t give any history or hint of movement. The only fair way to draw conclusions about the performance of last year’s households is with repeat surveys given to the same subjects.
3) The American dream is alive and well

Roberts reveals encouraging conclusions when you look at the results of longitudinal studies. Many are summarized in this video.

The pessimistic story based on comparing snapshots of the economy at two different points in time misses the underlying dynamism of the American economy… When you follow the same people over time, the largest gains over time often go to the poorest workers; the richest workers often make no progress.

4) What it actually looks like when “the ladder has been pulled up”

Nassim Taleb observes social mobility in the US vs Europe:

Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life

Consider that about ten percent of Americans will spend at least a year in the top one percent and more than half of all Americans will spend a year in the top ten percent. This is visibly not the same for the more static –but nominally more equal –Europe. For instance, only ten percent of the wealthiest five hundred American people or dynasties were so thirty years ago; more than sixty percent of those on the French list were heirs and a third of the richest Europeans were the richest centuries ago. In Florence, it was just revealed that things are really even worse: the same handful of families have kept the wealth for five centuries.

You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate –or by forcing people to incur the possibility of creating an opening.

The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the one percent

Or, more mathematically

Dynamic equality assumes Markov chains with no absorbing states

Our condition here is stronger than mere income mobility. Mobility means that someone can become rich. The no absorbing barrier condition means that someone who is rich should never be certain to stay rich.
Pulling from a NYTimes op-ed, this tweet maintains that economic rotation remains alive and well in the US.

Final Takeaway

As you get bombarded this election season with discussion of income inequality, remember, the snapshot view you are being fed is:

a) politically useful

and

b) doesn’t answer the question you care about: what are the prospects for me and my loved ones?

That the rich today are richer than the rich of yesterday is a very different finding than that the rich are getting all the gains. Too many economists have treated these as identical. The snapshot approach does not capture the impact of economic growth on people’s material well-being or provide evidence that the rich or the poor are static categories no one ever escapes. [While none] of these studies is decisive, [what they] show is that the economic growth of the last 30–40 years has been shared much more widely than is generally found in the cross-section studies that compare snapshots at two different times, following quintiles rather than people.

Extra credit question I have for the finance-minded

Are low real interest rates actually progressive by flattening the compounding effect of wealth. Asked differently: do low rates of return in markets make being rich less of an absorbing barrier?

How Many Coin Flips to Be Kylie Jenner?

Imagine. You’re a zygote hanging out in the fancy airport lounge of the cosmic ether. Chatting with other unborns while sipping a mimosa and charging your phone.  Meanwhile on Earth, a couple bails early from a holiday party and Lyfts it home. The couple will soon be asleep but not before the ancient power of wine and nature take its course.

The loudspeaker in the cosmic airport lounge summons you. Next thing you know, you’re en route to sit in a uterine waiting room until Labor day.

Who Will I Be Born To?

Let’s say you start flipping a coin on the flight. How many heads in a row you flip determines whose house you go to. No heads at all? Ouch. Your soon-to-be-mother is struggling to keep a job while her baby daddy stands before a judge for domestic violence.

Flip a single head and you arrive at the median net worth household. You got two parents and statistically speaking .5 siblings.

Flip 3 in a row and you’ll get some overachieving parents who are going to spend the next 5 years wondering if they should ‘redshirt’ in kindergarten since your birthday is right on the cut-off and if your the oldest kid in the class you’ll be better at sports and blah, blah, blah, blah…You’ll probably be in the safest car seat and your parents the life of the party I’m sure.

Now, what about 11 heads in a row? Jackpot. You are being dropped into a Calabasas mansion to an ambitious family that knows how to wring clicks from the genetic advantages securely stored in your carry-on. In an era where anyone can get Warhol’s “15 minutes” but not a minute more, this family knows how to get their 15 years (and counting).

This table approximates the household a zygote headed for America can fall into. (I cobbled it together from 2016 DQYDJ data).

Enter Kylie Jenner

After selling a stake in her cosmetics brand she is now worth $1.2 billion. Here’s context:

First off, let’s just get one indisputable fact out of the way: Team Kylie Jenner has built a remarkable business. It posted revenues of $200m last year, and is on track for Ebitda margins of 25 per cent this, all while growing 40 per cent. For reference that’s more Ebitda than Uber, Lyft and Peloton made in the last quarter. Combined. (Link)

Then this guy:

The internet has been arguing over whether she is “self-made”. Just check out the comments.

People can’t wait to discount the success of people who “start on third base”. People like to drink Haterade. That’s old news. But it does bring up an interesting question. How likely or unlikely was such an outcome based on where she came from? After all, her half-brother Rob shared many of the same advantages.

What would be the equivalent level of success for somebody who started in a regular household? Well, let’s see. We can use the table to see how many heads in a row it would take Kylie to become a billionaire from her roots. Her silver spoon roots place her somewhere between decamillionaire and centimillionaire. From there, it’s about 7 heads in a row to billionaire. Translating that to a person born into the median net worth home, that’s the equivalent of Mary Smith rising to become the richest person at their HS if not their whole school. A 99.9 percenter.

Using that logic, you can still see just how unlikely it was to pull off what she did. You can lessen it since it wasn’t impossible from the get-go but there’s lots of things that impress us even if they aren’t impossible. Throw in the fact that regression to the mean shows most rich kids remain outshined by their illustrious parents. Meanwhile, Kylie blew them out of the water (financially speaking).

Dissonance

You’re skeptical. “Wait a minute, Kris, you can’t use the raw odds of being born into a certain household to estimate the probability of moving higher through the ranks? When Kylie gets her last name she also gets a weighted coin.”

Congratulations. You have just discovered a major flaw in the income equality conversation dominating the nation. In this week’s Money Angle we’ll see why.

Mauboussin on Making Better Comparisons

Michael Mauboussin Guide to Making Better Comparisons (Link)


Comparing via analogies (steps and common mistakes)

  1. Select the source for analogy
    • Common pitfall at this stage: Undersampling due to availability bias
  2. Map the source to target to make inferences usually looking for similarities
    • A common pitfall at this stage: mistaking correlation for causality
      • Consider the first attempts at flight were people putting feathers on their arms, not studying lift
      • Confusing a star performer with talent in a volatile field
  3. Adjust for differences between source and target
    • Tversky showed we place more emphasis on similarity than differences
    • The framing problem: We are influenced by which differences and similarities we are prodded to focus on (ie framing)
  4. Learn by the success or failure of the analogy
    • Pitfalls in heuristics and intuition
      • Intuition works great in chess since it is a form of pattern recognition, but works poorly in investing where outcomes are non-linear
      • Recency bias influences sample
      • Choice-supportive or confirmation bias taps into our need to be consistent; we create stories after the fact to validate our decisions
      • Hyperbolic discount rates prevail when we study inter-temporal decision making
        • Stress is good response for crisis because it focuses on immediate needs; chronic stress causes decisions to be short-sighted
    • Using poor reference points in comparison
      • 2 companies in different industries can be more similar than their peers within their own industry; this shows how we can conflate attributes with what is actually driving value
      • Not recognizing that widely varied values can be justifiable. For example, 2 companies with the same earnings growth can trade at justifiably different valuations if underlying returns on invested capital are very different
      • Anchoring bias
      • When I went to Capital Camp, Mauboussin discussed T Theory. The top row of a category have more in common with each other than the average in the category. This articulates how I think about investors! Warren Buffet, Annie Duke, and Sam Hinkie have more in common with each other than other people in the same category.

So how to get better?

Instead of relying on analogies drawn from memory we can use “similarity-based” forecasting.

  • Inputs
    1. A wide sample for the reference class rather than 1 or 2 examples from memory
      • Additional refinement by weighting the results of the most similar samples more heavily
        • Ways to quantify the similarity
          • “nearest neighbor” algorithm (requires identifying relevant axes for the dimensions)
          • “connectionist” technique for weighting features by similarities and differences
    2. A statistical “base rate” drawn from the outcomes of varied reference classes

Optimize Your Reading

In 1974 a researcher named Paul Slovic studied professional horse bettors. He let them each choose 5 pieces of information to make their predictions. Whatever they wanted from an extensive database. Horse’s age, jockey weight, etc. The bettors could each have a custom list of 5 variables.

The bettors turned out to be nearly 2x as good as chance in predicting winners 17% vs 10% since there were 10 horses running. Furthermore, the betters assigned a 19% confidence to their bets suggesting they were also well-calibrated.

As betting rounds continued, the bettors were allowed more pieces of information culminating in a final round where a bettor was allowed 40 variables.

What happened? Access to more variables had no effect on their accuracy but doubled their confidence. (Source: Adam Robinson interview)

1. Humans struggle to process too many sources of information effectively.

Psychologists and common sense suggest we simply can’t hold too much in our working memory. Since storage is upstream to processing it feels safe to conclude we can’t integrate too many variables in our reasoning.

2. Excessive information can lead to false confidence.

Humans are slaves to narratives, most of which are not rigorously tested. In Moneyball, old school scouts thought having a six-pack was predictive of a player’s success. This might be true if you are choosing from random people and have no other info. But when you are looking at a narrowed pool of baseball players, the sight of impressive abs loses its weight relative to the information file that was used winnow the candidates in the first place. The excess info can not only distract us from our proven model but, and this is diabolical, increase our confidence.

Implications for Reading

When reading to learn, as opposed to entertainment, search for the books that matter. The lessons that generalize. The handful of variables that do most of the explaining.

Probabilistically speaking, the non-fiction you picked up at Hudson News in Terminal 3 is best used to lined a birdcage.  The canon that has stood the test of time gives you perspective. You need perspective to judge. Perspective shifts in increments, while the latest study simply gets written over. A draft better off never seen.

Instead of filling your brain with the facts most likely to expire, let’s optimize our reading time.

What to read

Bill Gates has called Charlie Munger, Warren Buffet’s partner at Berkshire Hathaway, the “broadest thinker he’s ever met.” Heavily influenced by Ben Franklin and his almanac, “Poor Charlie’s Almanack is a collection of Charlie Munger’s best advice given over 30 years, in the form of 11 speeches given as commencement addresses and roundtable talks.” Allen Cheng’s notes are outstanding and sectioned by topic. (Link)

While I prefer to be cautious when drawing lessons from outliers such as Munger, his emphasis on multidisciplinary learning bears repeating.

By collecting a broad range of mental models you can more effectively pattern-match phenomena in one discipline with more general phenomena that you may have discovered in a different field. Farnum Street describes 109 handy mental models to add to your repertoire. (Link)

How will they help?

1. Improve your analysis and more importantly predictions

Many phenomena are just instances of a more general one. To analyze the phenomena at hand, we can study how the general one usually plays out. The general one will have a long history and wider sample set to draw from. Consider a hardware store and a candy shop. They seem very different but both are straightforward examples of brick and mortar retail. The underlying business principles are going to be more similar than the difference between Skittles and a chainsaw. In essence, we are collapsing many data points into the ones that mattered. Rather than study every type of brick and mortar we can reference our mental model for how brick and mortar businesses work. Remember the horse bettors. Isolate the information that matters.

2. Avoid misdiagnosing a problem 

When you are too narrow, you are the proverbial hammer to which everything looks like a nail.

Example in action

According to The Power of Mathematical Thinking, there was a year in which North Dakota had the lowest cancer rate and South Dakota had the highest. Explain how that can happen.

Reveal the answer

 

Where To Start

To get a start or reboot of a personal multidisciplinary education Naval Ravikant offers suggestions:

  • Stick to science and the basics
  • Generally, read the things that people agree on: “The longer something has been in print, the longer it will remain in print and the higher value it is.” What Nassim Taleb calls the “Lindy Effect”.
  • Read lots of microeconomics (NOT macroeconomics)

I’ve offered my own advice in the past. Avoid the news and information with a short half-life. (Link)

How to Read

There are different types of reading which depend on your intent. If you are not reading for entertainment or scanning for a specific piece of info, then you are reading for understanding, retention, and reuse. Mortimer Adler describes analytical and synoptical reading. (Link)

You must read actively which takes effort if you expect to absorb the information for later use. Some techniques for doing this include:

  • State what a chapter or book is about with the utmost brevity.
  • The Feynman technique — “the best way to learn anything”. (Link)

Reading Experiments 

  1. Cedric Shin’s Land and Expand strategy for fully conquering a topic. It assumes you are too tired to read difficult topics after a long day at the office. (Link with my highlights)
  2. The “Barbell”. Nassim Taleb and Marc Andreesen focus on very short term and very long term expiring information. Think social media and classic books.
  3. Dave Perell plunges into “atemporality
    • For days or weeks at a time, I will escape the present moment and only consume content published in a different decade. For example, if I want to learn about the 1970s, all my media consumption will consist of books, videos, and interviews published in the 1970s. By doing so, I’ll embody the mindset of people in a bygone era and gain new perspectives on the here and now. (Link)

Reading Recs From the Pros

This week I asked about 25 people from my network of portfolio managers, CIOs, and independent investors for the books which have most impacted how they think about risk-taking, investing, and trading. Here’s the Investing Pro’s Library (Link).

Besides books, the web is teeming with analysis and discussion in finance. It wasn’t always this way. 20 years ago when I started at Susquehanna in the options and ETF world there the best places to learn online were not blogs. They were forums. You could come across brilliant gamblers and traders on sites like 2+2 and Wilmott. Fast forward to 2019 and you can gain a substantial education in finance if you follow the right authors. The problem is no longer discovery but curation.

Here’s my short list of who you can’t miss today:

For breaking down high finance topics:

Matt Levine
Byrne Hobart

Quantitative Investing

Philosophical Economics
Econompic
Newfound
O’Shaughnessy Asset Management 
Alpha Architect
Convexity Maven

Susquehanna’s Raise Your Game

Valuation

Musings on Markets by Aswath Damodaran

General Investing

Of Dollars and Data
Movement Capital
Morgan Housel
Michael Mauboussin

History

Investor Amnesia
American Business History

A more extensive list of blogs to follow can be found on my site. Note that this is only a subset of all the feeds I think are worth subscribing to. If anybody is interested in that giant list, just reach out.

The Investing Pro’s Library

In my 20 years of option market-making, trading, and portfolio management I’ve been fortunate to meet many talented risk-takers. I took the opportunity to ask some of them what the most influential books or papers they have read in their careers.

I asked a cohort of 25 investors. They are CIO’s, PMs, and independent investors whose livelihood depend on the bets they take. Half of the respondents have had an options focus and more than 80% would be classified as quantitative. That word is a bit nebulous so my own clarification would be “non-bottoms-up”.

Let’s jump in.

The Most Influential

Topics: Risk/Reward

Nassim Taleb

  • Fooled By Randomness (Link)
  • Antifragile (Link)
  • The Black Swan (Link)

Peter Thiel: Zero to One (Link)

Aaron Brown: Red Blooded Risk (Link)

Peter L Bernstein: Against the Gods (Link)

Howard Marks

  • The Most Important Thing (Link)
  • Quarterly Memos (Link)

David Sklansky

  • Getting the Best of It (Link)
  • Theory of Poker (Link)

Topic: Process to Extract Edge

AQR research

  • Expected Returns by Antti Ilmanen (Link)

“The Bible”. “Don’t tell others”

  • Papers by Tobias Moskowitz (Link)

Turtle Trading

  • Way of the Turtle by Curtis M. Faith (Link)

“Drilled into me the importance of process, even if simple, before my career really ever began”

  • The Original Trading Rules pdf (Link)

Jack D Schwager

  • Market Wizards (Link)
  • The New Market Wizards (Link)

“Biggest takeaway: a lot of shit works, figure out what aligns with your personality”

Popular Themes

Topic: Numeracy and stats

Nate Silver: The Signal and the Noise (Link)

Darrell Huff: How To Lie With Statistics (Link)

Alex Reinhart: Statistics Done Wrong (Link)

John Allen Paulos: Innumeracy (Link)

Microeconomic Reasoning

Levitt and Dubner: Freakonomics (Link)

Tim Harford: The Undercover Economist (Link)

Value Investing

Munger/Buffet

  • Poor Charlie’s Almanac (Link)
  • Munger Speech at USC, 1994 (Link)
  • Buffet’s original partnership letters (Link)

Seth Klarman: Margin of Safety (Link)

Joel Greenblatt: The Little Book That Beats The Market (Link)

Competitive Markets

Michael Mauboussin

  • Research papers (Link)
  • The Success Equation (Link)

Jesse Livermore (pseudonym)

  • Diversification, Adaptation, and Stock Market Valuation (Link)

“This changed my thinking about how market participants behave and how their learning process can influence future prices”

  • The Single Greatest Predictor of Future Stock Market Returns (Link)

Risk

Benoit Mandelbrot: The Misbehavior of Markets (Link)

William Poundstone: Fortune’s Formula (Link)

Chris Cole: Research Papers (Link)

Parallels to Edge in Sports

Michael Lewis: Moneyball (Link)

Bill James: Win Shares (Link)

Dean Oliver: Basketball on Paper (Link)

History

Daniel Yergin: The Prize (Link)

“It’s a good exercise in rethinking everything-you-know based on a new model.”

Ron Chernow: The House of Morgan (Link)

Emile Zola: Money (Link)

Michael Lewis

  • The Big Short (Link)
  • Liar’s Poker (Link)

William Thorndike: The Outsiders (Link)

Jim Rogers: Investment Biker (Link)

Satyajit Das: Traders, Guns, and Money (Link)

Roger Lowenstein: When Genius Failed (Link)

Scott Patterson: The Quants (Link)

Steve Knopper: Appetite for Self-Destruction (Link)

Behavioral/Psychology

Thomas Gilovich: How We Know What Isn’t So (Link)

Lynne Twist: Soul of Money (Link)

Kahneman and Tversky: Thinking Fast and Slow (Link)

Steven Johnson: Mind Wide Open (Link)

Brett Steenbarger: The Psychology of Trading (Link)

Edward Russo: Decision Traps (Link)

General Investing

William J. Bernstein: The Four Pillars of Investing (Link)

“I’m confident a regular person could read this book, and nothing else, and outperform most professional advisors. It’s an all-in-one book that covers the history of markets, practical portfolio construction, and the emotional side of investing. Despite the wide scope, it doesn’t feel like a compromise in any category. By far my most suggested book.”

Harry Browne: Fail Safe Investing (Link)

Alexander Elder: Trading For A Living (Link)

Novel

Ayn Rand: The Fountainhead (Link)

Herman Melville: Moby Dick (Link)

“A good way meditation on how much you sacrifice if you’re goal-oriented, effective, have a high risk-tolerance, and need to work with a diverse set of stakeholders.”

Reference

Sheldon Natenburg: Option Volatility and Pricing (Link)

Mullis and Orloff: The Accounting Game (Link)

Nassim Taleb: Dynamic Hedging (Link)

Carol Alexander: Market Models (Link)

Peter Kennedy: A Guide to Econometrics (Link)

Lists from others whose work I follow:

Meb Faber (Link)

Dan Egan (Link)

Epsilon Theory Core Curriculum (Link)

Jason Collins’ Economics + Evolutionary Bio list (Link)

Taylor Pearson (Link)

Jason Zweig (Link) and his Top 5 (Link)

Famous Investors’ Reading Lists (Link)

The Antisocial Advantage

Friends,

  • 5 years ago the Patriots’ Malcolm Butler intercepted a Russell Wilson pass on the goal line to cement another Super Bowl trophy. The NFL Network called it the 5th greatest play of all time, and Seahawk’s coach Pete Carroll’s decision to pass and not hand the ball off to Marshawn Lynch aka The Beast is one of the most widely criticized calls of all time. Was it a bad call?
  • If you were coaching a Stanley Cup playoff game and were down by 2 goals, when would you pull your goalie? With 2 minutes left? 90 seconds? When do you see coaches typically decide the benefit of having an extra skater outweighs an unminded net?

Straight from the writing-a-hook-101 playbook, surprise! You guessed right — the answers are counterintuitive. In the first case, coach Carroll actually made the right call despite what many observers think. How about the hockey coaches? According to famous Wall Street quants, Cliff Asness and Aaron Brown, coaches should yank the goalies with more than half the time remaining in the 3rd period. Their argument and model has been one of the most popular papers on SSRN since it was published last year.

Going for it on 4th and long near midfield. Letting your opponent score a TD when they are in close range for a go-ahead FG late in the 4th. These are some examples of the unconventional but correct calls that have been normalized in the NFL. Upon first glance, these stories seem to be about sports becoming more woke about math. I disagree. The math was not the bottleneck. Bill James and sabermetrics have been around for forty years.

The deeper lesson is about acting independently. Pete Carroll made the right call. It happened to not work out. When you have a 55% edge on a coin flip you still lose almost half the time. What makes this call memorable is how courageous it was. He knew that observers would ridicule him if he called a pass and lost. A lesser coach may have chosen wrongly to run the ball knowing that nobody would second-guess the call if it didn’t work. Even if a magical flying Seahawk materialized on most coach’s shoulders with divine knowledge that running was only 45% to work, you can easily imagine the coaches rationalizing that it was still worth trying. Such is the power of motivated reasoning when the fear of a mob shakes your conviction.

(The story of the defensive play that was called on the field for that interception is fascinating. If you want to understand the depth of Belichik’s strategy it’s worth a listen. Mike Lombardi, Pats assistant that year, breaks it down starting at 38:40)

Somewhat anti-social

For Carroll to pass the ball in that goal line situation took faith that the team owner wouldn’t fire him based on the outcome. He had to trust that that the process which brought him to this moment and dictated the decisions on smaller stages deserved more weight than the emotions which might emerge in the spotlight. To explore why some people seem to be more capable at this and how we can all be aware of the forces which inhibit us from good decisions check out Malcolm Gladwell’s interview with Cliff Asness and Aaron Brown.

For those of you who have taken the Big Five Personality test (also known as the Five-Factor or OCEAN model), you will see the role of ‘disagreeability’ and in which ways it is an adaptive quality. The trait of being less interested in others’ approval has significant pros and cons. It’s advisable to match your temperament in this category to the work you do. More than many other traits, I feel like a mismatch here leads to very avoidable frustration. After the interview (and a moment to ponder how Brown’s voice sounds just like Jeff Bridges), you will find yourself in the following thought exercise:

You discover an armed intruder in your house when you are home alone with your child. What’s your strategy?

Gladwell, riffing on the plot of No Good Deedwalks you through the right strategy versus the one you are going to choose. He then explains why you should be forgiven for choosing poorly.

The Courage to Be Disliked

This is a book by Fumiake Koga and Ichiro Kishimi which follows a conversation between student and philosopher to demonstrate the principles of Adlerian psychology. It was the latest book covered in the Rad Read’s Slack book club. Borrowing from Blas Moros’ notes:

No matter what moments you are living, or if there are people who dislike you, as long as you do not lose sight of the guiding star of “I contribute to others,” you will not lose your way, and you can do whatever you like. Whether you’re disliked or not, you pay it no mind and live free.

Armed with observations from Alfred Adler, you can orient towards your needs more effectively than the often misguided promise of other’s approval. I highlighted Moros’ notes here if it helps you decide whether you want to pick it up the book.