artifical intelligence · Big data · Business Culture · decision making · Investment · Learning · Maths · Statistics

The unrules by Igor Tulchinsky, founder and CEO of WorldQuant

Igor’s rules

  1. The UnRule: all theories and all methods have flaws. Nothing can be proved with absolute certainty is, but anything may be disproved, and nothing that can be articulated can be perfect.
  2. You only live once. Your time on earth is the only truly irreplaceable resource. If today was my last day, what would I be doing with it?
  3. Life is unpredictable. There are limits to planning; the key is to act. Foster opportunities, then take advantage of outcomes. If you have to decide and you can’t, flip a coin. If it’s the wrong action, you will feel it and reverse course. Actions have a compounding effect; it’s bad to deliberate for too long.
  4. Establish concrete quantifiable goals and always go from A to B. Concrete things are attainable. Abstract and nebulous wishes are not.
  5. Develop willpower and persist. The most important limit is how much ability and persistence you have. Age means little.
  6. Play to your strengths, don’t compromise. Weaknesses can only be improved marginally, but strength can be improved more.
  7. Obstacles are information. If you can’t get something to work there is a reason. Learn adjust and attack it again.
  8. Aim for the anxious edge, the point of mild anxiety
  9. Arrogance distorts reality. Arrogance makes you perceive the environment in the way that maximises your ego. Environment does not exist for you, so your perceptions turn into fiction. You make bad decisions by chasing illusions. This gets harder after success when hubris slips in.
  10. Make everyone benefit
  11. Opportunity is unlimited, ideas are infinite
  12. Blame no one else. Minimise regrets.
  13. There is a virtue in economy of expression. Efficiency implies clarity and economy of thought. Pretend you have a fixed number of words in your life. The sooner they are all said, the sooner you’ll die.
  14. Value diverse and competing methods. Because all theories are flawed, the best approach is to collect as many of them as possible and use them all, in as optimal a fashion as you can devise, simultaneously.
  15. Value multiple points of view.
  16. Make everyone benefit. Align your endeavours with everyone around you and you will create your own tail wind.

Quotes and other insights

  1. To be successful in this investment business you have to think about it all the time. Thomas Peterffy
  2. Keep losses small. Profits will take care of themselves. Izzy Englander
  1. Don’t get emotional about your trades. React instantly to bad news. If it’s scary run. Take aggressive risks but manage losses. Aggressive behaviour forces your environment to react to you, rather than the other way around. You’re in control; you have the wider array of options in a higher probability of success. You need an exit route if it doesn’t work out.
  2. In systems with a high degree of interactive complexity, multiple and unexpected interactions of failure are inevitable.
  3. A good business runs itself. And create this by choosing the right people. A lot of time should be invested in that activity. Optimal compensation schemes are vital.
  4. Minimise bureaucracy. Time is money; time is scarce. Bureaucracy wastes time and money. If you have the right people, right systems and the right compensation scheme you can scale without adding bureaucracy.
  5. What makes a good trader? Intelligence, focus, action orientation, and the ability to learn from errors; economy of words and thoughts, honesty, and a strong sense of self; the ability to take risks, compartmentalise, and handle setbacks without ego getting crushed.
  6. What makes a good researcher? Creativity, tenacity, attention to detail, intelligence, relentlessness, follow-through, and top-level programming skills.
  7. What makes a good manager? Empathy, intelligence, creativity, relentlessness, and follow through.
  8. In their view, quantity of alphas is far superior to quality. Quality cannot easily be defined. They seek to maximise exponentially the number of Alphas they pursue.
  9. If data increases exponentially, predictability should improve linearly.
  10. They key to testing ideas is to have good simulation software.
  11. As complexity increases so will the number and frequency of non linear events will also increase (ie many std dev events – rogue waves, schrodinger equation)
  12. Power laws very common in nature. In some systems the largest entity often brakes scale invariance, ie. it is even bigger than predicted eg. In network systems, dominant player much bigger.

WorldQuant online university in financial literacy worth checking out.

artifical intelligence · Business · General · Learning · Philosophy · Psychology · Science

Books of 2018

As I don’t have time to do full write-ups on everything I get through, here is just a brief few comments on the books I chose to read in 2018 and the key things I want to remember of them. Roughly in the order I would recommend them for general consumption…

  • 1. Man’s search for meaning by Victor Frankl
  • (See the separate blogpost on this) This is the book I would most recommend you read, it addresses very deep and meaningful challenges we all face, particularly suffering. It’s a short and easy read, but very powerful.
  • 2. Poor Charlie’s Almanac, Charlie Munger

    An amazing read, in echoes of Benjamin Franklin’s Poor Richards’s Almanac, full of down to earth wisdom and common sense, not to mention that this should be compulsory reading for anyone in the investment field.

    The single biggest concept is the idea of being well acquainted with the core mental models used in a wide variety of disciplines, and then be able to apply those in other situations in a methodical way. This is perhaps the best articulation of the multidisciplinary approach to which I aspire.

    The incredible moments for me are his insights into psychology. Many of these are now better understood with progress in modern behavioural economics, but Charlie Munger was years ahead in figuring out a lot of this for himself. He also makes some astute observations about the current state of psychology which, relative to many other sciences, seems in its infancy.

    3. The biography of Benjamin Franklin: an American Life by Walter Isaacson

    I had no idea just how prolific a thinker, scientist and statesman/politician Benjamin Franklin was. This book gives a real sense of that. Standout thoughts for me:

    • He was in many senses the ultimate pragmatist, choosing what was useful over ideology over and over again
    • His basic industriousness and strong drive towards practical daily work
    • His own awareness of his fallibility, while striving towards this industrious ideal
    • His role as a scientist and his curiosity about the natural world, including much around an understanding of electricity, inventing descriptions such as battery, positive, negative, charge etc.
    • His role as a printer, the power of the media in influencing society’s direction and thoughts
    • His passionate forming of societies to further all sorts of ends, and his ability to network
    • The interplay between aiming to find a diplomatic solution versus knowing when to take a stand. The role he played in the founding of America and its independence from Britain was quite incredible – from diplomacy to the leading of militias. And while this happened over much of his life, he achieved the majority in his last 10 years from the age of 65 to around 75.
    • He was instrumental in writing of, and was the only common signatory to the Declaration of Independence, the peace treaty with Britain (and with France) and the US Constitution. He was instrumental in forming a governance system that would bring the various independent states, into one United States, and in creating the two chamber structure of the Senate and the House.
    • The contrast between his pragmatic beliefs in “salvation by works” and a frankly not very deep religious conviction, versus Jonathan Edwards’ thinking, a leading Christian spiritual thinker of the timewho emphasised salvation by grace and grace alone, which I find spiritually curious.
  • Takeaways for myself: to be more industrious, pragmatic, and turn to action when needed, to be more outgoing in fostering connection (which is possible in a very different way in today’s internet-centric world) to continue to be curious, broad ranging and diplomatic.
  • It’s a fairly easy read, quite long and a bit repetitive at times but definitely worth pushing through. The second half of the book, which concentrates on the last 10 years of his life and many of the political developments between the US and Europe, is very interesting.
  • 4. Consilience by Edward O. Wilson

    His key concept is the unification and “consilience” of all fields of knowledge, the natural sciences, social sciences, art, spirituality and religion, with a scientific underpinning. The book was helpful to me in several ways:

    • In furthering this idea that what are traditionally thought of as separate fields of enquiry, are in fact highly related; and understanding one, may lead to deeper understanding of another.
    • Along side this, is the observation that most people become specialists in one area and few are the generalists making connections across what are considered separate areas of expertise. There is great opportunity for those willing to span the fields.
    • The idea of deeply rooted genetic origins to some of our cultural- and spiritual practices, and that our minds grow in a cultural context as part of a communal mind.
    • He was quite prescient in his insight that it would be the development of our understanding of the mind, that would become a connecting force across many of these areas.
    • The idea of social- or collective-Darwinism, the importance of culture in creating cohesion, that group cultures can evolve and individuals may subserve their needs to the group in order to ensure its survival.
    • This then leads to discussions of the social sciences from evolutionary biology to economics to psychology and hence onto art, ethics and religion.
    • While many may disagree, I found he had a positive light on spirituality and religion in the sense that, it is necessary for the effective organisation of our cultures
    • He is again prescient in looking forward at issues like gene therapy and environmentalism

    This is an intellectually exhausting read, with many concepts tightly packed and demanding language, so I would recommend it if you are interested in the idea of reconciliation as the basis for all forms of human knowledge; but be prepared to put the effort in.

    5. Deep Work by Cal Newport

    An easy read and some good practical advice too which I will be applying in the coming year to try and improve my productivity and general focus. (I have put out a separate post summarising my takeaways on this book.)

    6. The Four Tendencies by Gretchen Rubin

    This book has been hugely helpful in understanding our family’s internal motivations and drivers. The world can be split into two types of people: those who believe in personality types and those who don’t! Jokes aside, personality types can be useful mental models. Rubin develops a mental model of what motivates people: are we driven by what others expect of us, or are we driven internally by our own expectations, do we balance other people’s and our own expectations or do we reject all expectations – those arising from within and those of other people? Which of these types is dominant, has a great deal to say about how we approach life, and what approach in work or relationships will be effective in motivating in specific situations.

    In our experience her mental model was highly descriptive of the different members of our family. Each of the four different ‘types’ she describes is a good fit to one of the four of us. It’s been very helpful in understanding what approach to take in working with one another. Recommended for anyone in a relationship or parenting, struggling to make things work better.

  • 7. Life and Work Principles by Ray Dalio
  • I am a huge admirer of what Dalio has achieved at Bridgewater having followed their investment thinking for many years. He is possibly one of the most systematic of thinkers and this book of his Principles does exactly that, starting from elementary components and building up. The book also gives a good insight into him as a person and family man which round out a view, if you know him only as an investor.
  • There is too much to distil into one summary but a few of the key highlights and takeaways for me include:

    Life principles

    • What I have seen is that the happiest people discover their own nature and match their life to it.
    • Two worthy life goals: meaningful work and meaningful relationships
    • Embrace reality, see it as it truly is, and deal with it
    • Love your mistakes and learn from them. pain plus reflection = progress
    • Weigh second- and third-order consequences when making decisions
    • Have good mental maps (to help you understand the world), humility and open mindedness (to know you don’t have all the answers and be open to other’s solutions)
    • Understand your own ego barrier, preventing you from understanding or accepting your weaknesses and blind spots, versus your executive function, a higher level ‘you’ that wants to make the right decision – these are in conflict.
    • A concept of believability: weighted decision making I think is very powerful – weight the opinions of those with proven track records and who are most expert. This is a better model than either consensus decision making or dictatorial decision making. One of the most important decisions you can make is who you ask the questions of.
    • Other people genuinely see the world very differently from the way you do. Sincerely believe that you might not know the best possible path. You must suspend judgement and empathise to properly evaluate another person’s perspective.
    • Decision making is a two step process. Take in all the relevant information, then decide.
    • Thoughtful disagreement is an art: how to be both open minded and assertive.
    • Everything looks bigger closer up, and ‘new’ is overvalued relative to ‘great’.
    • Navigate levels effectively, high, intermediate, detailed. Synthesis requires back to the big picture, not getting lost in the detail. Simplify. It takes a genius to make it simple.

    Work principles (a few of the many he suggests)

    • Organisations consist of people and culture
    • An idea meritocracy = radical truth + radical transparency + believability weighted decision making
    • You have to be able to put your honest thoughts on the table, have thoughtful disagreement and abide by agreed-upon ways of getting past disagreement
    • Be loyal to the common mission, not to anyone who is not operating consistently with it
    • Create a culture where it is okay to make mistakes but unacceptable not to learn from them
    • Get in sync
    • Don’t leave important conflicts unresolved
    • Once a decision is made everyone should get behind it, even if individuals still disagree
    • Who is more important than what, hire right: for values, then abilities (ways of thinking and behaving), then skills (learnt tools), pay attention to track record
    • Don’t tolerate problems
    • Diagnose problems and get to their root cause
    • Evolve the machine
    • Have good governance

    My suggestion for using this book in a business context (after you have understood the big principles and concepts) is, if you have a specific set of challenges you’re facing there will probably be a section of his book that applies to that. See if applying them in your situation would be helpful. There is way too much to hold it all in mind, at once.

  • 8. 21 lessons for the 21st century by Yuval Noah Harari
  • I have wanted to read this author for some time (his book, Sapiens in particular). This one touches on most of the major themes that I think will be hugely important trends over coming years. In some ways it is a short cut covering many of the topics in both Edward Luce’s Demise of Western Populism and Kasparov’s Deep Thinking, including
    • Politics and the rise of populism
      The rise and impact of Artificial Intelligence
      Issues around education, truth and fake news, power
      The development of secular spiritualism
      The workings of the mind and our understanding of it
  • One key perspective that he brought through for me was the power and centrality of the narratives we tell ourselves about ourselves and our tribes, that this is both a defining feature of humanities success and our own greatest chains and shackles.
  • (With all it covered and some great quotes, there is a separate blogpost on it.)
  • 9. Deep Thinking by Gary Kasparov
  • I put out a separate post on this book too picking up on the themes of Artificial Intelligence and its increasing impact on work and the world, and on decision making psychology. A relatively accessible read with a bonus for anyone interested in the chess itself.

    10. The retreat of Western Liberalism by Edward Luce

    (Again, one I have done a separate blogpost on.) Articulate, and well-written, this is an excellent read for anyone wanting to understand the changing political landscape and rise of populism.

    11. The Psychology Book (published by DK)

    Psychology and the way our brains work has been an increasing area of interest for me both professionally and personally. I believe that psychology and the mind is going to be greatest and most important frontier on which we will make progress over the coming decades. I see its relevance everywhere: in interpersonal relationships between adults, both personal and professional; with children, as parents; in the aged; in the rise of interest in meditation and self help, in the rise of mental health issues amongst friends, colleagues and our community, and in my own self. I think mental health will become bigger than physical ailments as the frontier to address of human suffering. And compared to many of the other sciences it is its infancy, only just emerging from the dark ages. The subject it is studying is the most complex machine ever devised, the human brain. And studying cognition as opposed to the physical brain, is one of the most difficult things to do scientifically because most of it is happening in our heads, which to date are not terribly transparent to scientific inquiry.

    However as one approaches this subject it’s inevitably starts off as very confusing, with lots of different terminology and theories, and everyone appears to think that their theory is the perfect one to address your current situation. In the words of Charlie Munger, “to the man with a hammer, every problem looks like a nail”. In an attempt to try to make some sense of the cacophony of theories and approaches I am trying to get a more global picture of the field of psychology, this book by DK has been immensely helpful. It summarises the key ideas that each major psychologist contributed to the field and its helping me create a mental map of the different approaches and lineages we know of to date.

    12. Cryptonomicon by Neal Stephenson

    This was my fiction read of the year, a wonderful yarn combining the modern history of cryptography from World War Two through to today (slightly before the advent of crypto currency). It’s a bit long and some descriptions of less relevant facts can go on for a while but it’s a good nerd’s adventure, and he certainly knows his facts when it comes to cryptography.

    Business Culture · Investment · Learning · Psychology

    The emotional side of investment decision making with Jason Zweig

    Jason Zweig writes The Intelligent Investor column for the Wall Street Journal and is interviewed here by Shane Parish.

    Lots of useful stuff, starting for me from about min 26 of the podcast onwards, here are my highlights as well as some of my own complimentary thoughts:

    Financial advice

    1. One of the biggest distorting forces in financial markets comes through misalignment of incentives (eg. Brokers paid commission encourages turnover). I think this is one of the greatest truths of financial markets. Charlie Munger also points it out as one of his key mental models, never ever underestimate the power of incentives:

    I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.

    The way you pay your financial advisor, or your investment manager, your staff, your business managers very very strongly dictates whether or not their interests are aligned with yours. He also talks a lot about how to create greater trust between advisors and their clients through better alignment of incentives

    An insight from early in my career when I worked on the financial incentive structure for a team of financial service salesmen: these incentive structures are massively powerful but also cannot remain static. Most incentive structures are not perfect. Usually when you implement a new structure to begin with it has the desired effect but after a year or two the participants understand it and start gravitating towards exploiting its weaknesses at which point in time it’s usually a good time to modify it further.

    2. It’s very hard in financial markets to tell the difference between good and bad advice. Outcomes are disperse with many driving factors, narratives are only clear in retrospect and easily misappropriated (see earlier post on Narrative Fallacy). Sometimes outcomes can take years to play out and we judge them over shorter time frames. How could you go about judging this: focus more on their process, ask for evidence that that woks in the long term rather than the short term outcomes and watch those incentives very carefully.

    3. We tell ourselves lies every day just to live life effectively, to get ourselves out of bed and moving forward. We think we are better than average at almost anything we do otherwise why get out of bed and do anything? We believe in a “Just world” (a psychological paradigm/theory propagated by Melvin Lerner): The underlying belief we have is that most of us are “good” and good things happen to good people, bad things happen to bad people and that we will get what we deserve. If you are a good investor (you do the right things diversifying your portfolio, controlling costs etc) you will get a good outcome. We are devastated when that illusion is stripped away, when bad things happen to good people and we conclude that they must have been a bad person in some way:eg. a bad outcome for a good investor, or a crime committed against a person; we can often be influenced by this set of beliefs to rationalise that the victim/good person must have done something to deserve the outcome. The financial crisis of 2008 stripped away this illusion vey completely where investors followed “good” advisors and lost a lot of money and Jason believes this has broken down a great deal of trust between financial advisors and their clients. (see minute 42 onwards)

    Investment decision making

    4. Your decision making needs to be evidence based, not intuition based wherever possible. However you also need creativity to see the connections that others do not. These two are in a bit of tension.

    5. He gives an absolutely brilliant definition of risk:

    Risk is the difference between what investors think they know and what they end up learning about their investments, about financial markets, and about themselves.

    But he glosses over discussing this. The reason I think it is so brilliant is it encapsulates three different types of risk we face when we make investment decisions

    A. The investment itself turns out to be different from what we expected eg. Earnings disappoint, cashflow disappoints and it goes bankrupt

    B. It may be that the investment performs exactly as they expect fundamentally, but financial markets end up pricing it way different from what they expected. Eg. Nominal economic growth is 4 % but bond yields are only 2.5 %, to highlight the thing investors have been most surprised by in the last decade: how low bond yields can go and stay

    C. And most importantly, about ourselves. About our emotional reactions to losses, our ability to remain rational during periods of pain. Most of us suffer from tremendous loss aversion, as behavioural economists would call it.

    6. The power of not trading. “Both buying and selling are a form of hubris” believing that you know more than other people, or that you have some unique insight into a situation. I am pretty sure this does not apply to every investor as I have seen some very effective investors operate with a very active style but there is definitely a difference between knowing when to act and when you are just reacting to the noise.

    7. Minimising risk by simply not being overconfident in your views, a very powerful way of ensuring you don’t blow up, don’t put everything on one bet,

    8. To flourish in a bear market you need two things: cash and courage. So going into a bear market you need to make sure you have the cash otherwise there is no chance to have courage. This is not easy, very few institutional investors ever raise cash, they tend to remain fully invested. And there are many situations in bear markets where institutional investors are not given the option to invest because either their clients are panicking or because they have not managed their liquidity and risk appropriately. And in the midst of a bear market it’s very difficult to have courage. Great quote from Benjamin Graham on the subject from the depths of the 1932 crash:

    Those with the enterprise lack the money, and those with the money lack the enterprise to by buy stocks cheap

    9. Needing to know your own temperament and understand your own emotions is absolutely essential as an investor.

    To be a good investor you need independence, scepticism, good judgment and courage. Easier said than done.

    In his opinion the best investors are “inversely emotional”. They need to be a little on the autistic spectrum: able to see that others are experiencing severe emotions but able to detach themselves from that emotional gravitational pull and go in the opposite direction. Again interesting examples of Benjamin Graham being described as “Humane but not Human”, Charlie Munger as being simply “rational”.

    10. So if you are a regular human being, not on the autistic spectrum, can you teach yourself to be “inversely emotional” like this?

    It’s not easy. You have to put policies and procedures in place to help manage the emotions. If you are an alcoholic you don’t walk past the bar on the way home. So avoid stimuli and shut off noise that could distract. Focus on and listen to analysis that’s rational and unemotional. How do you put the right governors in place to manage the emotions during a decision making process? To avoid the temptation to react to short term performance and pain of loss but not to be complacent either? To avoid the enthusiasm of a new idea and seeks the world might be different going forwards from the past even when past patterns are different.

    Danny Kahneman says its very difficult to do as an individual but it may be possible to do as an organisation with the right structures in place.

    If it is possible to do as an organisation, I suspect it is still very very difficult to do, and most will fail. That is because it takes much more than structure, though structure is a prerequisite. It takes an incredible culture. That’s because the the pressures to conform with a crowd are already operating at a small number of people, it’s hard to be independent and diverse even among a group of colleagues. To not be swayed by the myriad of cognitive biases we each have interacting with each other is a big challenge. Not to allow group think to quickly dominate an idea.

    We will have to work very hard at establishing the culture as one that is both creative, but also evidence based and rational rather than driven by emotions which are the natural drivers of many of our actions at a level we ourselves may not even be aware. We need to have good mental hygiene! How to do this practically is, I think this is the topic of a whole separate blogpost!

    11. Once again value of history, really understanding the lessons of history. Be a student of financial history!

    Here is the link to the podcast:

    Listen to Elevate Your Financial IQ from The Knowledge Project with Shane Parrish in Podcasts. https://itunes.apple.com/gb/podcast/the-knowledge-project-with-shane-parrish/id990149481?mt=2&i=1000354857225

    Business Culture · Learning · Psychology · Relationships

    Givers, Takers and Matchers

    Adam Grant is an organisational psychologist who has published a book on this concept of the way individuals operate and how they then function in organisations. Organisational citizenship behaviour is the field of organisational psychology focused on behaviours that are not relevant to the task at hand but critical to the success of the effectiveness of the business: speaking up with ideas, effective team work, going the extra mile, sportsmanship, showing loyalty, helping out day to day.

    Adam hypothesises a mental model of three basic types of people driven by different values

    Givers ask “what can I do for you?”. Givers have a “trust first, ask questions later” bias or heuristic (at least to begin with in an organisation). They have a core value and belief that starts with an assumption that others will be generous. They are afraid of becoming a doormat, being taken advantage of. They are driven by values of generosity and helpfulness.

    Takers ask “what can you do for me”. They believe other people are selfish, are mistrustful and prefer to take first to ensure that they get what they want. Takers tend to believe that “other people are always out to take advantage of a situation” and even if people are well behaved suspect “opportunism laced with guile”

    Matchers tend to think “I don’t want to be too selfish, if you do something for me, I will do something for you”. They are driven by values of fairness and justice. Matchers start off more conciously thinking “I will be fair to you, and I will make sure I dont get more than I deserve but I dont get less than I deserve.”

    Most people have a default mode of operating. Lots of people do adopt a matching strategy to play it safe in an organisation, but most have a tendency towards being either more like givers or more like takers. Some matchers do take the strategy to an extreme and optimise to constantly be in a balance of fair trades which feels very transactional, does not build trust and does not optimise for the long term

    Adam wanted to understand how organisations develop their cultures and the types of people who are attracted to them and who succeeds and who fails in those organisations.

    He did studies classifying people into the three groups and then measuring outcomes. In aggregate more people are matchers than either givers or takers. So his basic questions were:

    What sort of structures are optimal for team and individual performance? Who succeeds and why?

    Organisational norms and culture can influence the types of team work that develops. Some organisations are highly competitive and will attract takers, others highly collaborative and attract more givers.

    What happens when an organisation tries to change its culture. Highly competitive teams with lots of Takers that try to be more collaborative often end up with a “cut throat collaboration”: This operates as “I will pretend to help you but I am really just waiting for an opportunity to stab you in the back when I can get ahead”.

    If you start off collaborative and then move more competitive you often get friendly competition, “I am going to try to be more competitive with you but I am really hoping you push me to raise my game and afterwards we go out for drinks and the loser buys the winner drinks”

    Culture comes from what you incentivise and reward. A strong individual compensation focus tends to drives takers, versus collective compensation that tends to drive givers. An organisation full of takers is not going to attract givers.

    You don’t want to influence takers to become better fakers by just telling them what you measure: they will then just focus on achieving that. So be careful of being too explicit in your objective setting. If the culture is not strong and carefully managed, you can end up in a culture where the most visibile takers/fakers are the only ones who are successful. Ie you reward those able to manipulate the system.

    Instead focusing on the incentives, focus on taking away the disincentives to be Givers in an organisation. Demonstrate that you value their behaviour. For example “to make partner here you have to be more selfish” is not sending the right signal.

    In many team work and service orientated jobs no one wants a taker on the team and organisations often find ways of weeding them out so the organisations tend to be heavier in Givers and Matchers.

    Darwin proposed a theory of Group Selection: “If you had a tribe where they were always ready to aid one another and sacrifice themselves for the common good, they would be victorious over most other tribes” and that would lead to the possibility of group selection in evolution. The theory was and is controversial but later evidence does seem to prove that under certain conditions there does seem to be evidence for this. A group of all takers is likely to often end up with suboptimal outcomes as individuals aim to maximise their own outcomes and not the groups.

    In an analysis of performance evaluation and promotion decisions across 51,000 appraisals across multiple organisations, they found that the amount of time you spend helping others is as critical to assessments of performance, as to how well you do your own actual tasks.

    Curiously Givers end up more often at the tails of the distribution either succeeding big or failing big in the business. Even after controlling for other factors this continues to be the case in his data. So for Givers what determines their success or failure?

    Their strategy determines this: if you are a Giver, then who you help, when you help and how you help determines your success.

    Over time people get feedback and reinforcement on the job. Some Givers get positive reinforcement and go on to succeed. others get negative feedback and reinforcement, feel they are taken advantage of and decide they need to change. The question is whether they change their style (i.e. become a Matcher) or change their strategy (who, how, and why they help).

    The danger for Givers is deciding to just to be reactive and help with whatever requests come their way instead of deciding carefully what sort of giving behaviour does the organisation actually need? Is their behaviour aligning with the organisation’s mission and teams objectives.

    Time management skills are critical for performance and productivity. Givers who are not thoughtful about how they spend their time can have terrible productivity. Being thoughtful on time management can also be clearly more helpful to others.

    An ideal team in Adams view, has a mixture of Givers and Matchers. Matchers tend to be generous because they are matching givers. But you need the Matchers to weed out Takers because givers can be to trusting and too generous to takers whereas matchers will be much harder on them. Matchers believe more in fairness and justice compared to compassion and generosity.

    TED talk with Adam Grant

    And this Knowledge Cast episode with Shane Parish

    Farnam Street interview with Adam Grant

    Business · Investment · Psychology

    Human behavioural motivations and insights with Rory Sutherland

    Here is a facinating conversation between Shane Parish of Farnam Street and Rory Sutherland, the Vice Chairman of Ogilvy & Mather Group, one of the largest advertising companies in the world.

    Rory started the behavioral insights team at OM and spends his days applying behavioral economics and evolutionary psychology to solve problems for their clients.

    The conversation is broad ranging and long (Rory certainly likes the sound of his own voice) but it is littered with hundreds of nuggets of mental models and insights that are applicable to both running a business, investing and understanding trends in the world today including political trends and technological trends like Artificial Intelligence. So well worth a listen.

    A few of my takeaways (my own thoughts in italics)

    “The problem with (traditional) economics isn’t only that it’s wrong, it’s that it is very creatively limiting, it posits a very one dimensional view of human nature, entirely driven by monetary utility.”

    Different consumers respond differently to different distribution channels

    Did you know that advertisers have exploited double-blind testing of what works in adverts since the 1800’s, often running different printing presses with different variants of adverts to test which were more successful! The medical world only caught onto this is the mid 1900’s.

    In an example he gives an advert in the pre internet era is run in three different forms: an option of responding by mail only, an option responding by telephone only, or an option where both channels were available. In their example the first mail option had a 2.5% response rate, the telephone advert had a 3.5% response rate. The interesting thing is that the combined option had a response rate of around 5.8%, ie. the two different channels for the same thing accessed almost completely different non overlapping groups of consumers. So how you sell something is as important as what you sell.

    The value of unpredictability, emotion and irrationality

    “It’s impossible for anything completely rational to successfully evolve, because a byproduct of being optimally rational is being completely predictable and if you were completely predictable you would be dead.” In evolutionary terms other aninals would take advantage of you due to your predictability. So there is a danger in looking at everything as an optimisation problem. Our psychology has evolved to be a bit random and unpredictable.

    Examples:

    People will take advantage of driverless cars because they are programmed to be safe, pedestrians will walk in front of them or mess around with them to have some fun. Driverless cars will not only have to cope with the normal unpredictability of human drivers but with also how humans will evolve their driving because of how they know driverless cars will behave!

    Anger is a useful emotion for humans because the potential to provoke it prevents someone from taking advantage you. They know at some point they will get a reaction and that basically keeps most of us well behaved.

    A connected though from me is: Will general artificial intelligence have to develop the same evolutionary mechanisms to operate in our world or survive in a world with other GAIs? Like genetic algorithms will it have to have random mutations or like humans have to evolve emotion to create unpredictability to be able to survive and evolve? What are the implications of that?

    Some societies have a cultural tilt towards being tolerant of ambiguity, and have more of an attitude to “give the benefit of the doubt” to someone else compared to those who are more rules driven “this is my right so I will assume I can do this and not make for any allowance for others” – the former (Sweden, Ireland, Netherlands) have lower road accident rates than the latter (Germany, the US). People who are less reliant on rules operate more carefully to avoid costly mistakes.

    Contextual biases and value signalling

    He explores how the value we place on either a good or service is incredibly contextual. For example we will have a bias towards paying more for the same service or good from one provider or another depending on our sense of the brand of the provider. eg we will pay more for a beer from a boutique hotel than for the same beer sold by a pop-up stand even if we take away all of the “other benefits” like the location and atmosphere. In a financial context think of this as a “boutique hedge fund” versus a lowley long only manager with the same alpha! How does this effect how you market your business?

    Other insights into human behaviour from Robert Trivers: his work on Reciprocal altruism (another behavioral trait, that we feel obliged to reciprocate towards someone who is altruistic to us) and work on self deception: Self deception is evolutionarily advantageous, as the best way to deceive others is to believe your own deceits.

    Our desire for artificial certainty justified by rational models

    Beauracrats, business men (and many investors) love a formula because of the artificial sense of certainty that it creates for then when making a decision. That prevents them from having to exercise judgement for which they might be blamed. Avoidance of blame is a key driver in many businesses.

    And that creates herding behaviours because of the asymmetry of reward to getting something right (often a small bonus) versus consequence of getting something wrong (getting fired). The “rational boring norm” is the safe place for most businesses and most peopke working for a big business. Most businesses and people are focused on avoiding bad outcomes rather than maximising the opportunity.

    This creates bogus rationality where we try to use simple, understandable algorithns to prove that the decision was logical rather than take a risk of complex judgement demanded in understanding a more complex system: like the financial markets. Does this have potential consequences for the current trend towards “smart beta” algorithms in investing?

    This leads on to the role of imagination vs reasoning in decision making. It usually takes takes imagination to formulate an insight or hypothesis and then logic to prove whether it is true. The role of imagination is often downplayed because afterwards we present the thinking as if the linear sequence of the logic led us to the conclusion. Science and insights are very seldom arrived the linear way.

    He highlights three different forms of reasoning

    Forward reasoning: what will happen next because I know of what has happened so far, based on our heuristics of how the world works. We then can test out model or heuristic by seeing if the outcome matched our expectation. If not we need imagination to hypothesise how to change our models or heuristics.

    Reverse reasoning: like a detective, I observe an outcome and then I hypothesise what preconditions could lead to it and like a detective I sift through possibilities. This requires a lot of imagination to hypothesise what could lead to the outcome.

    Post-rational reasoning: what we usually do when we come to a conclusion: our emotional limbic system reacts very quickly resulting in a conclusion or action using its heuristic systems in a situation, afterwards we justify the outcome by coming up with a narrative or logic that justifies the decision (fitting the facts to what we want the answer to be). We are post-rational creatures rather than rational creatures. Most of our reasoning happens after we feel an emotion, to justify why we feel the emotion.

    The psychology of choices and value.

    On a menu we can use the price of different items to signal worth or quality. The menu context pushes people towards selecting certain options, for example seldom choosing the most expensive or cheapest option on the menu, or the more expensive options being indicative of higher quality.

    Game theory and the difference between one-off games vs repeat games.

    In a repeat game you don’t just optimise your outcome for the next move but for many moves into the future. For example in selling to someone, you don’t just want this sale but future sales to the same customer, so you had better make sure that this experience is a good one for the customer even if that does not maximise your short term profit. In long term games you have to be tustworthy and reputation is incredibly important. Consumers make many choices based on their intuitive understanding of service providers trustworthiness and alignment. The bigger the upfront cost of committing to a decision that takes a long time to see results the more the long term alignment will matter.

    There are many practical applications in every day business. For example the focus by many large businesses incentivised by stock market behaviour towards short term earnings results is a bias toward “one time games” to make themselves rich. Think of the contrast between hedge funds with annual performance fees, private equity with 5 or 7 year incentivisation and Amazon with a very long horizon strategy for growing the business through reinvestment.

    The value of experimentation.

    In business you don’t have to be right all the time, you can be experimental and see what works and what doesnt (provided the cost to testing is low). It is important to test some counterintuitive or imaginative ideas because as its much more valuable when they pay off as your competitors won’t or are unlikely to have tested them.

    In the case of the financial markets the payoff of a contrarian bet may be large as it is counter to expectations with little downside if the crowd is already pricing in the consensus scenario.

    So have a listen here

    https://www.farnamstreetblog.com/2017/06/rory-sutherland-podcast/

    Investment · Learning · Psychology · Statistics

    Super Forecasting

    [Farnam Street Podcast] Philip Tetlock on The Art and Science of Super Forecasting

    http://podplayer.net/#/?id=24093071 via @PodcastAddict

    Phil Tetlock forms teams of “super forecasters” who are amazing accurate at predicting the probabilites of real world events, in their case often used to predict the likelihoods of complex real world events for the intelligence community.

    It has many insights useful to invesmtent management and I am sure other fields that depend on probabilities.

    1. Start with the outsiders view. Establish baseline probabilities of how likely something is before you start refining with inside knowledge. Eg in predicting how likely someone specific is to get divorced start with the probabilities of anyone getting divorced.

    2. Break the problem down into steps in a decision tree each with their own probability. You can then work on refining each node in the tree. That way you know what the key questions are that you are asking.

    3. Focus on accurate statement of the prediction, many of us are managing career risk for fear of being wrong, creating fuzzy statements that could be right under a wide range of outcomes.

    4. Being open minded is essential to being a good forecaster. We all like to think we are open minded – we really are usually not. We can be more open minded on things we are not ideological about but where we have ideologies its much more difficult to be open minded

    5. A group of people with the same objective and a good debating style but where possible with very independent thought processes can operate far more effectively to get to the right probababilities.

    6. There are lots of impediments to making accurate forecasts in organisations where the objective of accuracy may be to further your career, not rock the political boat or not be seen to make a mistake rather than getting to the right answer. Manging that culturally is a challenge that leadership have to undertake: ensuring that the goal is the accuracy, that open mindedness is real and that mistakes are welcomed to learn from.

    7. One of the biggest risks is conflating mistakes with probabilistic outcomes. You thought the probabilty of an outcome was 75%, the alternative outcome actually happened. That does not mean your probability was wrong, it could just have been the 1 in 4 chance of the other outcome happening.

    Business Culture · Learning · Psychology · Relationships

    Leadership, coaching and managing

    The Knowledge Project Podcast Shane Parish with Michael Lombardi, former general manger of the Cleveland Browns and coach of the New England Patriots. It’s a really dense podcast and you find yourself having to pause just to absorb some of the sentences because they are so packed with wisdom.

    Four key aspects of leadership

    1. Have a plan – have beliefs, a philosophy, create the system clearly, pay attention to the detail.

    2. Communicate the Plan clearly and concisely to the people you are leading

    3. Trust – people need to know that they can trust you to be consistent and fair

    4. Management of self – being able to be self critical, and honest when you make a mistake

    Coaching is both leading and teaching, to be successful you have to do both.

    Some insights and quotes:

    When you win figure out what you did well and do more of that, when you lose figure out what went wrong and what you could do differently.

    How can what you have learnt from coaching be applied to raising your children being a parent?

    Coaching isn’t criticism but it can easily feel like that. Conveying that you are aiming to help them by giving feedback and your goals are aligned with them and not to be critical of them as a person is a fine line to walk a difficult balance to achieve.

    Difference between being a manager and being a leader:

    Managers do things right, Leaders do the right thing

    The podcast is interesting in itself in how analytical their coaching process, how much they analyse their team, the other team and come up with a strategic game plan that then gets implemented practically with the team. Also about developing a team with enough flexibility to meet very different conditions as they play against different teams.

    Here is the podcast

    https://itunes.apple.com/gb/podcast/knowledge-project-podcast-by-shane-parrish-curator/id990149481?mt=2&i=1000343404189

    Business · Business Culture · Learning · Psychology · Relationships

    Nancy Lublin, CEO of Crisis Text hotline

    A truly inspiring podcast that I would recommend anyone interested in any of the following topics to have a listen to.

    Key insights and takeaways for me:

    Business leadership: Being decisive and moving fast, yet still caring very personally for the people you work with

    Purpose: Being driven by a real need and passion not money and perhaps not even really aiming to make money, aiming to make a difference.

    Hiring: aim to hire someone who you could live with in a bunker with, someone energetic and someone who is not going to bore you

    Developing people: it’s okay to have someone onboard for a short period of time where they develop this part of their life/journey and for it then to be time for them to move to something else. Not everyone has to be a lifer ie. with the company forever. But in the time they are with you they have to be energetic and dedicated.

    Developing people: Her enjoyment of seeing people through crucial development phases of their lives when they are in their 20s and 30s.

    Creativity: giving people enough space to come up with creative ideas and then pursuing the ones that really get you excited

    Process: Applying Systems thinking and feedback loops on data to training people, improving systems.

    Creativity: Empowering people you work with and getting out of the way of their creativity, sometimes that requires you stepping out of the frame.

    Empathy and support:When helping someone in crisis know the magic words: what not to say: don’t ask “why?” questions e.g. Why someone did something: it usually comes across as accusatory and denigrating. (note this is the opposite of what to do when you are being analytic, as highlighted in a previous blog, when asking Why repeatedly is a very powerful technique).

    What to say: use the words “proud, brave, smart”. Those words move people from hot to cooler quickly. Use that with your kids too.

    Other people’s perspectives: The value of the perspective of younger generations and understanding the millennial generation. Eg. Her insights that at least for a period of time, texting is a more powerful medium than Facebook and other social media as it is more trusted.

    The podcast:

    Uncut Interview — Crisis Text Line’s Nancy Lublin from Masters of Scale with Reid Hoffman. https://itunes.apple.com/gb/podcast/bonus-uncut-interview-crisis-text-lines-nancy-lublin/id1227971746?i=1000392185172&mt=2

    Investment · Learning · Psychology

    Ask “why?” five times…. Proximate causes vs root causes, Narrative fallacy and Mental Models

    Great post for people in the investment field:

    Farnham Street is an amazing blog dedicated to discussing mental models and they do a great job of explaining the challenges of proximate vs root causes and how to deal with the deductive problems that can occur when we jump to conclusions too quickly.

    https://www.farnamstreetblog.com/2017/05/proximate-vs-root-causes/

    In investments we are always coming up with narrative to explain what happened. The financial press exist purely on this, reporting the day after on why the markets have moved the way they have as if it’s an obvious truth. Making an investment is much harder, you need to look forward to what is likely to happen.

    When assessing our investment outcomes we are also immensely susceptible to a whole range of behavioural biases. The issue of proximate cause and narrative fallacy often comes up.

    Proximate cause: The manager lost a lot of money because the position was very big and the stock blew up because company management were hiding what they were really doing and no one could have know. Root causes: they failed to size the position correctly because they failed to assess the risk in the investment correctly, they failed to assess the risk because they were trying to cover too many different investments without enough resource, or they failed to assess the risk properly because they did not have enough independent challenge to the key decision maker, or they failed to assess the risk properly because the analyst was not diligent enough/experienced enough to identify the risks…

    Each of those different causes has very different corrective actions and very different reactions that we should have as asset allocators.

    The opposite can also be true: the manager lost money, what an idiot, obviously they should have seen the risks, because now with hindsight we have the narrative stating how obvious it was. But at the time they understood the risks. They sized appropriately for the risks. And things just didn’t go their way this time, which will happen 45% of the time for most money managers.

    The key to differentiating between these different potential cases is asking the right questions, and asking more and more questions. Digging deeper and challenging your assumptions.

    In the Farnham Street article the particular route I like is asking “Why?” 5 times?

    Why did you lose money? We sized it to big and got it wrong.

    Why did you size it to big? We misestimated the risk.

    Why did you misestaimate the risk? The analyst was an idiot.

    Why was the analyst an idiot? Oh they are not really an idiot. It’s because we left him to do the work on their own and did not provide independent challenge

    Why did you not provide independent challenge? Because I was too distracted on something else.

    It reminds me of Ricardo Semler, who applies this approach to much of his business decisions, for him it seems to work when you just ask Why three times?

    He is interviewed by Tim Ferriss episode 229 which can be found here. It’s a really inspirational podcast that covers his approach to building a phenomenally successful business with a very unconventional management style, well worth a listen for all sorts of good reasons.

    https://itunes.apple.com/gb/podcast/the-tim-ferriss-show/id863897795?mt=2

    The Farnham Street post also has a great explanation of other mental models which are all relevant to Investment decision making if you read down to the end.

    Business Culture · Investment · Learning · Psychology

    Improving decision making in committees

    A review of decision making literature from UCL on what makes for good decisions in committees is particularly relevant for investment committees:

    1. Diversity of participants (functional diversity) with different independent expertise or knowledge makes optimal decision making more likely (finding global rather than local maxima more likely with different starting points for the mathematical optimisation geeks)

    2. Slower decision making is more accurate. (And conversely sometimes you need to trade speed for accuracy).

    3. Don’t vote, prefer discussion. Getting to a consensus answer or leave it to an expert final choice, if you do vote it needs to expertise weighted (ie some votes count more than others) based on objective expertise measurement, not one man one vote.

    4. Over confidence bias: The worse you are at something the more delusional you are that you know the right answer! More expertise often results in less certainty from expert individuals: the problem is they know how much they don’t know and they can take other less expert people’s opinion into account too much. Go with the experts opinion after having the discussion and as the expert balance your opinion carefully with the input from others.

    Podcast: The Naked Scientist

    Episode 22/08/15

    Dan Bang University College London 5:40 mins up to 10:40 mins

    https://itunes.apple.com/gb/podcast/the-naked-scientists-podcast/id74171648?mt=2&i=1000391340611