Tuesday, May 26, 2015

A Beautiful Model

When Economist build models of how the world works, they make simplifying assumptions. A character created for many of these models is Homo Economicus. These humans are completely rational and self-interested and so make it very easy to predict behaviour. Behavioural Economics studies the more psychological and emotional factors affecting economic decisions to try understand how we break away in reality. Often they do this by playing games to illustrate our biases. One of my favourite is the Ultimatum Game.

In this game there are two players. Call them Mmusi and Julius. Mmusi is given $100 and told that he must give some to Julius. If Julius accepts the amount, they both get to keep the money. If Julius rejects the amount, no one gets anything. They have to pay back the money. If Julius were Homo Economicus, he would accept even $1. Since $1 is more than nothing and he would have more. 

In reality, very few people accept $1. Concepts of fairness and justice kick in. Emotions kick in. Julius is likely to get very angry with Mmusi even if there is 'rationally' absolutely nothing wrong with what he has done. Unlike many of the fascinating list of biases, this doesn't appear to be a mistake in our thinking. Mmusi, in making his decision, will know that it was luck that gave him the choice. He won't know whether the game is once off or will be repeated. Part of his decision making will have to be affected by stripping his identity from the game. How would he want the participants to behave if he didn't know which character he was?

John Nash sadly passed away recently in a car accident. He is the real person behind the movie 'A Beautiful Mind'. One of my favourite scenes is in a bar, when Nash realises that the strategy of Homo Economicus is wrong. Or at least incomplete. We do indeed do better when we do what is in our best interests, but what is in our best interests may be something that takes both those interest and those of the group into account. The Nash Equilibrium.

John Nash died 23 May 2015, aged 86

A broader point is that models are just that. Models. You can't capture reality in a model. Models are best thought of as questions. In fighting to put them together, they help structure thought but they will never capture all the fuzziness. The reason you always get incredibly smart people arguing with each other, is because no one has the answer, we are just searching for more beautiful questions. Just like you should get worried if a coach stops giving you grief, you should get worried if you agree with everything someone says.


Monday, May 25, 2015

Passion and Compromise

Normally there is no clear answer. There are tradeoffs. That is very annoying because being able to do something with confidence is a challenge when you have nagging doubts. Pesky what ifs.

One of my favourite books is 'Catch 22'. The lead character is caught in a dilemma. Yossarian is a World War II bombardier who is desperately trying to get out of the war. Normally if you think thousands of people you haven't met are trying to kill you, you are crazy. Unless it is World War II and you are a bombardier. In order to convince the powers that be that he should be released from duty, he needs to convince them that he is crazy. Too crazy to fly. But if someone wants to leave, they are obviously not crazy and so they have to stay.


A form of this 'Catch 22' can appear in the work place. You are working with other people and so the nature of the beast is that there are going to be many views. To get things done, there have to be compromises. As soon as there are compromises you can feel slightly less attached to the outcome. The more compromises, the more apathy. To give your best to something, you need to be passionate. You need to care. There needs to be something that draws out your creative spirit and gets you excited. But normally those creative spirits are less willing to compromise and apathy clips their wings a little each time they do. 

The answer seems to be in detachment. It is somewhere in between compromise and passion. It isn't apathy. When it comes to a workplace situation, I think the best way to detach is to think of it like a game. I can remember one particular situation where I was walking along particularly rattled by some project that was being worked on. Thoughts going round and round but not going forward. I also happened to have watched Game of Thrones the night before. I decided to play a mental game and think of the situation as GoT, with 'Physical Me' as an Avatar. 'Real Me' was watching the game. The outcome was important, but it didn't affect Real Me. The rest of the walk was more pleasant. Perhaps because of the mental exercise, perhaps because the episode of GoT that had come to mind was particularly good. I think there were dragons.

This was a brief experience and I am no Jedi Knight of detachment. I know I am at my worst when I either desperately want something or am too attached to a result over which I don't actually have control. I know being comfortable separating myself from that result is the way forward but I am not particularly good at it. I blame an artistic temperament. I am unwilling to let go of the fire that gets rattled. I have a friend who is the Luke Skywalker of this detachment in the workplace. He really cares, but is able to detach enough to be ridiculously good at getting things done. This allows him to navigate personalities and situations without getting too rattled.

Whenever I hear friends 'download' about work frustrations, whatever the work, whether medicine, business, teaching, or charity work - they often relate to some variation of this compromise/passion trade off. They are rattled. The Catch 22 is to get things done, it feels like you have to not care. If you don't care, the flame to get things done dies. My friend Mr Skywalker shows one way. Detachment seems to be the source of the force. The force is strong with him.

Sunday, May 24, 2015

Too Hard Pile

The more something can be reduced to a single number to explain, the easier it is to price. If you are selling cans of coke, you know all the inputs and outputs. You know how many people normally want what you sell, and you know how much is produced. Things are predictable. Things are clear. The more and more fuzzy things get, the more likely it is you are starting to wade into 'Too Hard' territory.

The Holy Book of value investing is 'Security Analysis' by Benjamin Graham. 'The Intelligent Investor' is a more accessible abbreviation. The businesses Graham liked investing in were ones with 'tangible value'. Stuff that made stuff. So if it couldn't make that stuff any more it could be sold at a predictable price. This 'fire-sale value' gave a baseline for working out what something was worth. At the time, people buying shares tended to speculate and guess what was going to happen in order to figure out what the value of the business was. Graham was more boring. He would just search for businesses where he could get a good understanding of a base value. If he could find ones that were selling below this, he would have a 'margin of safety' in case he was wrong. He tried to find enough 'cigarette butts' that had been discarded to get the last puff so that he could effectively extract value out of boring businesses that had been missed.

As soon as things were too hard to value, he moved on. His aim wasn't to value everything. He didn't have to. Warren Buffett, his most famous student, calls moving on putting something on the 'too hard pile'. As Industry has progressed, there are lots more businesses that are harder to value because the various forces affecting the business are less predictable. You can still find businesses that you can build confidence in.  Seth Klarman has said 'The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis.'



A big part of the success of value investing is that it doesn't cover all businesses. Some things are harder to value than others. Lots of businesses are too hard. That is fine. Investing doesn't require you to put a price on everything. Value is also a messy word. Warren Buffett says, 'Price is what you pay, value is what you get'. Sometimes you can get a good sense that people are paying far more than something is worth. But only when something is quantifiable. When the things that affect it are understandable. 

Michael Porter wrote another classic, 'Competitive Advantage' and has built a career around examining the various forces affecting business. The things that affect valuations include
  • other products that can do the same things (substitutes),
  • other businesses that can make the same thing (competitors), 
  • the bargaining power of buyers (supply and demand), 
  • the bargaining power of suppliers (supply and demand),
  • the threat of new competitors coming in if you make too much money
All these factors mean a good idea is only half the equation. Something having 'worth' isn't the same thing as the forces involved being manageable enough to price it. To reduce it to a number. Some things are priceless. Water is the most obvious example. Clearly it is one of the most valuable resources we have. That doesn't mean we pay the most for it.

Many of the things that are most valuable can not be reduced to a number. You can't say: without it I have this much, with it I have this much. It is worth the difference. We try price things with the hack of how many people are prepared to pay for it, and how many people have it. This is the price. This is all the price is. There is zero moral value judgement. As soon as something is remotely interesting. As soon as it is hard to box. As soon as something is hard to put into words. It is hard to price.

When things are on the Too Hard pile, price is just a hack.

Saturday, May 23, 2015

Staying Alive

Mental health is a quagmire when it comes to knowing how to respond. If someone has a physical illness, I think we are normally quite good at showing sympathy. When it comes to 'stuff of the mind', I have always struggled.  This is a big problem since lots of people we care about suffer from problems of the non-'my pants are on fire' variety. We don't have buckets of water to throw on them. We don't know what to do.

A starting point seems to be empathy, but even that is hard. Depression is a big one. I have written about the challenge of 'silencing your perspective' in order to try understand others. The first place we go to is our own experience. But, I don't think I have ever been depressed. I am lucky enough to have a natural bias towards being glass half full. I think the closest I have come was as an 11-12 year old boy. But I was sad, not depressed. I wasn't very good at banter and so was very easy to get a response out of when teased. I also had a justice complex, so if anyone was being teased I would often end up sticking my nose in. I taught at a prep school between school and university, and saw that age from the other side. Kids can be mean. But they are learning. And interestingly, while you feel like you are alone at the time, it seems most people go through a tough stage at school. I don't think that stage was depression for me. I never thought it wasn't going to end. It was just a stage that sucked. That I needed to get through.

Matt Haig is a writer who has suffered from, and is trying to raise the level of understanding of depression. I came across him when Stephen Fry, who also openly suffers from depression, recommended his book 'The Humans'. It is a very funny novel which looks at what it is like to be alive from an alien perspective. This Alien was sent to earth to destroy any evidence of a dramatic scientific breakthrough. The superior life form didn't believe Humans were sufficiently emotionally intelligent to cope with the power this breakthrough would unleash. His up and down process of getting to know us is wonderful.

Following on from 'The Humans', Haig has written about his own personal experience with depression in 'Reasons to Stay Alive'. I don't think that we have to actually experience something to be able to empathise. I don't think we are unique snowflakes destined to go through life only understanding our own experiences. I think we can recognise glimpses of our experience in others. We can learn from others. We can have the emotional experience through our response to music, art, drama, dance or words. Haig has the ability to make the experience of depression tangible, but also the words to demystify it.

If one of the biggest challenges is our feeling that Mental Health issues aren't normal, these books help start a conversation that can change that. Tough times are normal. And they do pass.

Friday, May 22, 2015

Dialogue De Swords

I get worried when I agree with everything that someone says. Steven Pinker has given me the greatest concern in that regard. In a world where lots of people are having a good whine (Everything is awesome and no one is happy), I think his book 'The Better Angels of our Nature' is a powerful case to say everyone needs to chill. There are lots of problems, but we seem to be working our way through them. 


I have come across two attacks on Pinker's march of progress.

One comes from Christopher Ryan and Cacilda Jetha. Pinker says people tend to talk about the 'Good Old Days' without looking back at whether the old days were actually better. Ryan & Jetha argue that we used to have better relationships in these 'good old days'. They believe that they onset of an agricultural society and the break from hunter-gathering changed our behaviour and made us more aggressive. In the way providing food in one place for Chimps or Pigeons forces competitive groups making them far more aggressive (and lazy) than they would be if they were out foraging. Pinker argues that hunter gatherer societies were more dangerous than life is now.

The second attack comes from Nassim Taleb. He questions Pinker's statistical competence and says his whole book is flawed. Taleb is famously aggressive in his criticism. Ezra Klein points to Taleb's criticism, Pinker's response, and Taleb's response to Pinker's response. The heart of Taleb's attack is that the decline of violence Pinker describes ignores the 'fat tails'. When an event is potentially catastrophic, but very low probability, things can 'in reality' be getting more dangerous even though everyday life is getting safer. These one in one hundred year events are almost impossible to model and understand. Statistics work when we can apply the 'law of large numbers'. Individual stories are interesting, but they are noisy. You need to step back to separate stuff that matters. Taleb calls catastrophic events 'Black Swans'. It is almost impossible to step back from Black Swans by looking at data. The fact that the only swans you have seen are white doesn't make the case stronger that all swans are white. One Black Swan proves they aren't all white. Even the 70 year 'long peace' since the end of the last World War becomes a mere individual story if a bunch of nuclear bombs go off, or the world becomes uninhabitable  due to irreversible environmental damage.



Pinker, and me, are a little confused by Taleb's attack since 'Better Angels' does actually talk about these concerns. In the 'response to the response to the response', Taleb taught me a new word. Well, he didn't, I had to look it up. A 'dialogue de sourds' means a deaf people's dialogue and is used to describe a situation where two people continually talk back to each other without actually trying to understand what the other person is saying. I think Pinker is making that attempt.

In the same way as I get concerned that I struggle to find a concrete point of disagreement with Pinker, I think not finding points of agreement is even more of a concern. If we allow people a 'Bull Quota', we can find the points of agreement before we even criticise. It doesn't mean we are accepting everything someone is saying but it might help people put down their swords in the 'dialogue de sourds'.

I find myself agreeing with Ryan & Jetha (we can learn from simpler times), Pinker (things are getting better), and Taleb (Think deeply about hidden risks). I suspect they agree on far more than they disagree on.

Thursday, May 21, 2015

Talkers and Pausers

I read a fair bit. Until about eight years ago, that wasn't true. I was lucky if I could get through one book a year. I wrote about the things that helped me read more in 'Love it, Do it'. One of the things that I do is to read a few books at the same time. That means that when I start getting overloaded with one book, I can switch to another. A friend of mine who is the most prolific reader I know has switched almost completely to Audio books. Other than making answering the question as to whether you have 'read' a book fun, it does make getting through tough books easier. Like watching a movie or having a group conversation, your thoughts can wander and the book carries on. Imagine we watched movies like we read books? If the movie paused every time someone spoke? If the movie could read our mind and paused every time we thought about something else? Painful.

I am sure there are several relationships that have ended because one person is a talker, and the other a pauser.

Anyway, here is what is on my reading list at the moment:

 

They are all in various states of unfinished, but are all likely to be things I comment on here at some stage. The books at the top of my recommended reading list at the moment are:


'The Art of Learning' became an instant favourite and I have read it five times in the last year. I kept coming back to it after Joshua Foer pointed out the value in re-reading your favourites. We now have an infinite library of ideas and thoughts. The temptation can be to fly through them. The idea that an audio book caters to our wandering mind may seem like a cop out. We do it when reading traditionally too. Sometimes we only remember the gist of a book. Sometimes we know we have read it, know we enjoyed it, often recommend it, and yet no longer have any idea what it is about. 'The Art of Learning' is awesome every time.