Extraxt

Below is an excerpt from a speech by Charlie Munger entitled “A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management and Business,” given to a class of Professor Guilford Babcock’s students at the USC Marshall School of Business on April 14, 1994.

So let’s briefly review what kind of models and techniques constitute this basic knowledge that everybody has to have before they proceed to being really good at a narrow art like stock picking.

First there’s mathematics. Obviously, you’ve got to be able to handle numbers and quantities—basic arithmetic.

And the great useful model, after compound interest, is the elementary math of permutations and combinations. And that was taught in my day in the sophomore year in high school. I suppose by now in great private schools, it’s probably down to the eighth grade or so.

It’s very simple algebra. It was all worked out in the course of about one year between Pascal and Fermat. They worked it out casually in a series of letters.

It’s not that hard to learn. What is hard is to get so you use it routinely almost everyday of your life. The Fermat/Pascal system is dramatically consonant with the way that the world works. And it’s fundamental truth. So you simply have to have the technique.

Many educational institutions—although not nearly enough—have realized this. At Harvard Business School, the great quantitative thing that bonds the first-year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They’re amazed to find that high school algebra works in life.

By and large, as it works out, people can’t naturally and automatically do this. If you understand elementary psychology, the reason they can’t is really quite simple: The basic neural network of the brain is there through broad genetic and cultural evolution. And it’s not Fermat/Pascal. It uses a very crude, shortcut-type of approximation. It’s got elements of Fermat/Pascal in it. However, it’s not good.

So you have to learn in a very usable way this very elementary math and use it routinely in life—just the way if you want to become a golfer, you can’t use the natural swing that broad evolution gave you. You have to learn—to have a certain grip and swing in a different way to realize your full potential as a golfer.

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You’re giving a huge advantage to everybody else.

One of the advantages of a fellow like Buffett, whom I’ve worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations. [1]

It’s interesting that Munger points to Buffett as someone who naturally thinks in terms of permutations and combinations, concepts which form the foundation of probability. This is because probability is equally important in the field of insurance. Perhaps that’s why NICO, the first insurance company Buffett bought, never had an actuary – because the math is rather quite simple if you can keep it that way. Insurance, like stock picking, is about probabilities of various outcomes, such that one can arrive at an expected value today – expected future cash flows in the former and expected future claims losses in the latter. We’ll go into the role of probability in the field of insurance in the next post.

[1] Edited by Peter D. Kaufman, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition
(PCA Publications: 2014), 168-169.

Ray Dalio, founder of the investment firm Bridgewater Associates, offers a prime example of what a learning organization looks like in the best book I’ve ever read on learning, Learn or Die: Using Science to Build a Leading-Edge Learning Organization. He comes to us again with this bit of unconventional wisdom.

First, the context …

To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus there’s a significant probability you’re going to be wrong, so you have to be humble.

Early in my career I learned this lesson the hard way — through some very painful bad bets. The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever noninflationary growth period

What’s important isn’t that he was wrong, it’s what the experience taught him and how he implemented those lessons at Bridgewater.

This episode taught me the importance of always fearing being wrong, no matter how confident I am that I’m right. As a result, I began seeking out the smartest people I could find who disagreed with me so that I could understand their reasoning. Only after I fully grasped their points of view could I decide to reject or accept them. By doing this again and again over the years, not only have I increased my chances of being right, but I have also learned a huge amount.

There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call “open-minded and assertive at the same time.” This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.

Still curious? Check out my lengthy interview with Ed Hess.

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Sponsored By: Greenhaven Road Capital: You think differently - now invest differently.

Warning: This blog is written for a rational audience that likes to have fun wrestling with unique or controversial points of view. It is written in a style that can easily be confused as advocacy for one sort of unpleasantness or another. It is not intended to change anyone's beliefs or actions. If you quote from this post or link to it, which you are welcome to do, please take responsibility for whatever happens if you mismatch the audience and the content.

 
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In my prior post I suggested that if a person lives in a hostile place, that person should leave. I think we can keep gender out of the discussion for a minute. Let's just examine the proposition that if you live someplace terrible, perhaps you should leave.

First, let me give some context. You know I love context.

Years ago, when smoking was still allowed indoors, I went after my employer to force a rule change. Given the health risks, my second choice was to leave for another job, but as some of you pointed out in the comments earlier, moving isn't easy. So in that case, staying and fighting the system (and winning) made perfect sense, at least as a first plan.

A few years later, still working for that large bank, my boss informed me that there wasn't enough gender and ethnic diversity in management and so there was no hope for a white male like me to get promoted in the foreseeable future.  So I looked for another job and left. I didn't stay and fight for my rights for the simple reason that the fight was, in my opinion, unwinnable. I had a chance of winning the indoor smoking fight. I didn't feel there was any realistic chance to win the promotion fight as long as diversity was the headline of the era.

Then I went to work at the local phone company, Pacific Bell, and as most of you know, I hit the diversity ceiling again. My boss told me in direct language that a white male could not be promoted into their all-white-guy management ranks because now the public was watching. But I didn't stay and fight the system because I didn't think it was winnable. That's when I started pursuing some entrepreneurial ideas. One of them was Dilbert.

And as I mentioned in the prior post comments, as soon as I graduated college I bolted from my small hometown that had no opportunity to the bosom of California and all it offered. That was among the best decisions of my life.

Here's my point:

The loser worldview is that whoever is causing the problem needs to fix it for you.

The problem with the loser worldview is that in many cases the only person who CAN fix the problem is you, even if you had nothing to do with causing it. A winner in that situation fixes his own problem. A loser sits indefinitely waiting for others to solve it for him, even knowing that won't happen.

When indoor smoking was my problem, the fault was clearly with the smokers and with management that allowed it. So I went after them and made them fix their problem for my benefit. That plan worked because the problem was fixable.

When I hit the diversity ceiling on two occasions, I chose to run instead of fight because in those cases victory seemed impossible. I also ran from my hometown because staying and convincing everyone to build some industry so I can get a good job seemed impractical.

Now let's circle back to the street video I discussed yesterday, in which a woman is harassed far too often on the streets of New York City. Should that woman vote with her feet and leave, which might be a huge sacrifice, or should she stay and fight the system by making videos and whatnot?

I think that depends on whether the problem can be fixed by others. If others are at fault, and they have the ability and motivation to fix the problem for you, by all means take a run at it. But if the only person who can fix your problem is you, and you choose not to do it because the fault is with others, you have taken the loser path. You literally chose the path you know will fail because of some misguided sense of rightness.

The men in the street video were obnoxious but acting within the rights granted by the Constitution. They had opinions and expressed them. And I remind you that their opinions were almost universally positive and complimentary, albeit scary and creepy at the same time.

Can that situation be changed?

I'm going to say yes, but only if the problem is approached in the proper order. So I would say that living in a bad place does make sense if you are working toward fixing it and you have a reasonable expectation of prevailing.

Expecting the men in the video to feel bad and change their ways won't work. They are operating under the laws of the land and quite clearly enjoying it.

I wouldn't expect any law changes to make public compliments illegal even when the giver is too creepy or scary. That standard could not be enforced.

And I guarantee that if any of the men shown in the video watched it, they would not conclude they were acting badly or hurting anyone. So shame is not a tool that can work in this case.

But there is one path that might work to solve this. And that path recognizes that humans modify their behavior for rewards, just like other animals.

The men in the street video are presumably repeat offenders. And that means they are getting a reward, at least occasionally, from their shouted public compliments. And I assume the reward comes from the occasional women who appreciate the compliments and smile back. Does that group represent ten percent of women? Fifty percent? I have no idea, but it wouldn't take much to reinforce the habit in men. Remember that men like to fish, date, and play baseball, so we know how to wait for unpredictable rewards. And we know from science that unpredictable rewards are the most addicting. So the men in the video are acting exactly as science would predict, given the type of rewards they are getting.

So the way to vastly reduce the street harassment problem is by removing the rewards. And only women can do that, by never responding positively to compliments about appearance. And that means all women, all the time, whether on the street or in the workplace, or even at home. Perhaps the next video on this topic should be addressed to the women who have enjoyed street compliments and rewarded the behavior. I don't think they know how much they are torturing the women who hate the attention.

Yes, this line of thinking does remind you of the horrible old-timey idea that women who dress nicely in public are "asking for it." None of us want to live in a world in which a rapist can get away with the "she was asking for it" excuse. But I think all of you are smart enough to know that that is a political and practical standard, not a rational one. A rational standard might be, for example, that it is unwise to poke a bear with a stick because that usually doesn't end well. The political standard is that the bear is at fault for overreacting. And to be clear, I fully endorse the political standard over the rational standard if it keeps women safe. In this special case, it makes sense to abandon strict rationalism because the political standard gets the job done better. So I'm okay pretending the universe only allows cause-and-effect to be a real thing when it wants to because that is the best way to keep women safe.

But every situation is different, and you wouldn't necessarily apply the same thinking that works for sex crimes to the thinking that works for unwanted public compliments.

By any objective measure, the root problem of street harassment is that the men involved are ignorant assholes. All thoughtful people are unanimous on who is to blame in this case: the men. The problem is that the guilty men have no incentive to change. And I see no practical way to influence them directly. The loser worldview would involve wishing very hard for that situation to change while knowing it won't.

The winner worldview is that you have responsibility for your own life and it is irrelevant who is at fault if the people at fault can't or won't fix the problem. I've noticed over the course of my life that winners ignore questions of blame and fault and look for solutions they can personally influence. Losers blame others for their problems and expect that to produce results.

If you want to see a good example of winners, look at the Asian and Indian population in the United States. The country handed them the usual boatload of intense discrimination with one hand and the promise of unlimited education with the other. Who's your valedictorian now? That's what winners do. No blame, just personal responsibility.

In summary, men are 100% to blame for their bad behavior on the streets. But there is no reasonable hope to change that situation as long as men are periodically rewarded for it. So a winner worldview offers two options: Either move or try to convince other women to stop rewarding the behavior. Both of those options offend our sense of rightness, but a winner sees society's artificial definitions of rightness as nothing but a speed bump.

A hundred years ago it wasn't practical to leave a shitty or sexist place because everywhere else was the same. But today you have plenty of nice places to live. So if you insist on living in New York City, please stop making videos that suggest it is somehow my problem to fix.

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Scott Adams
Co-founder of CalendarTree.com   
Author of this book 
Twitter Dilbert: @Dilbert_Daily

I have a new personal Twitter account: @ScottAdamsSays

Twitter was useless in helping me fix the old and broken account. I had to create yet another email account just to start anew. See there how I fixed my own problem instead of wishing they would do it for me?

P.S. Yes, I am in a bad mood this week. Why do you ask?

The common view of human behavior is that thinking causes doing.

In recent years science has discovered this situation to be more of a bi-directional thing. For example, studies show that forcing a smile can lead to greater happiness. Most of you already knew that factoid. And obviously you understand that events in your environment and various sensations in your body can influence your mood and your thinking.

But I'll bet most of you hold the view that for the most part your thoughts lead to actions and that's 95% of the story of you. Lately I've come to the opposing view. I think our actions are the things that matter and our so-called minds are nothing but some executive control and a chemistry experiment.

I've been experimenting in the past year with the idea that I can control my thoughts by what I do with my body. Obviously my mind has to get the ball rolling to make me act in the first place. But instead of acting based on how I feel, I act based on how I WANT to feel. In other words, I use my body to control my future thoughts.

Yeah, yeah, you all do the same thing. I know. But it's a matter of degree. And it's a matter of how you THINK about your choices. A subtle shift in thinking can be a big deal.

For example, when feeling down, many people will curl up with some junk food and watch bad television shows until the feeling passes or some other duty calls. That's an example of letting your mind control your actions.

What I do in that situation is ask myself what is likely to cause a chemical improvement in my brain. Then I do that thing.

An hour ago I was in a funk. These days I recognize that situation as being no more than my brain chemistry being temporarily out of whack. In my younger years I would have cursed the world for serving up so much crappy luck, even if my luck was perfectly normal. Today I went and hit some tennis balls for an hour. Now I feel just fine. My body fixed my brain.

There's a tendency to think of the brain as the decision-making master of your person while the rest of your body is a slave. I see my body as an experience collector and my brain as the central depository of the experiences. When my brain chemistry is out of whack I use my body to collect the types of experiences that will correct the situation.

My observation of other people is that what I am describing (the moist robot view) is far from a universal approach. I think most people feel that their emotions and thoughts are somehow spontaneously generated, almost like magic, thanks to our souls and our free will and other things that aren't real.

The problem with that view of your own mind is that when things go bad you don't have a tool to fix things. Bad moods cause you to do self-destructive things which make your life worse which in turn keeps you in a bad mood. And repeat.

Now when I feel the world has conspired against me with a torrent of bad luck I keep in mind two thoughts that always help.

1. If this is truly a random cluster of bad luck, my luck will surely return to the mean in due time. In other words, the universe owes me big time. No one can be unlucky all the time. It's not an option the universe typically offers. 

2. I'm probably imagining the bad luck, or investing too much emotion in whatever is going wrong. I can reprogram my mind to happier thoughts by manipulating my body. 

So the next time you're not feeling the way you would like, ask yourself what you could do with your body to change your brain chemistry for the better. Then do it. You might be surprised how well it works.

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Scott Adams

Co-founder of CalendarTree.com

Author of the best graduation gift ever.