Tim Ferris - Michael Mauboussin

Michael Mauboussin, author andhead of consilient research at Counterpoint Global, discusses his approach tolearning and teaching, emphasizing the importance of questioning old rules ofthumb, grasping underlying ideas before focusing on equations and computations.Mauboussin also discusses his experience in corporate diversity, the importanceof cognitive diversity, and the "wisdom of crowds" concept. Herecommends two books, Against the Gods by Peter Bernstein and Complexity byMitchell Waldrop, for their insights into risk and the history of humanunderstanding of risk. Finally, Mauboussin discusses the decline of publiccompanies in the US and the rise of private equity, and the power of base ratesin making accurate predictions.

1)      Michael Mauboussin, author and head of consilientresearch at Counterpoint Global, talks about two unofficial mottos of his courseand how they reflect his approach to learning and teaching. The first motto,"nullius in verba," which means "take nobody's word forit," encourages people to question everything and find out for themselves.The second one, attributed to Carl Gauss, is "Notions not notations,"which emphasizes the importance of grasping underlying ideas before focusing onequations and computation. Mauboussin also discusses how his lack of formalbusiness education was actually an asset on Wall Street when he first startedout.

2)      Michael Mauboussin discusses his approach tounderstanding things from first principles and how it helped him in his careerin finance. He talks about the importance of questioning old rules of thumb andrelying on a beginner's mind to truly understand how things work. Mauboussinshares the insight he gained from reading Val Rappaport's book "CreatingShareholder Value," which emphasized the importance of understanding cashflows, value creation, and the relationship between valuation and strategy.Additionally, Mauboussin shares his experience working with an exceptionalanalyst at Drexel Burnham Lambert who had a unique focus on cash flows, assetvalues, and direct communication with management teams.

3)      Michael Mauboussin explains how he became a foodanalyst and defines "consilience," a term in his job title that heoften had to explain. He learned about the food industry from an individual hefollowed and became an analyst in that field because of his interest in thatindividual’s analytical prowess. "Consilience" is about theunification of knowledge and became the verb associated with it. Mauboussinlaunched a newsletter called "The Consilient Observer," where hewrote short essays shining a different light on various topics, which ended upbeing compiled and published into a book that shared the greatest hits of TheConsilient Observer. Mauboussin discusses how EO Wilson inspired him to becomeinterested in bringing ideas together from different disciplines to tacklebigger problems that exist at the intersections of disciplines.

4)      Michael Mauboussin explains how understandingmarkets as complex adaptive systems has been a valuable insight for investors.He discusses how the classic efficient markets theory is flawed, and howcomplex adaptive systems can offer a better explanation. Mauboussin also notesthat the key to understanding complex systems is the study of emergentphenomena, and highlights the importance of cognitive diversity, rather thansocial category diversity or values diversity, in solving problems.

5)      Michael Mauboussin discusses the importance ofcognitive diversity and how it can lead to better problem-solving and corporatesuccess. He cites Scott E. Page's work on this topic, which demonstratesmathematically why diversity adds value. Mauboussin also shares his experienceco-chairing the diversity advisory board for Credit Suisse and how the CEObelieved in the cognitive diversity argument. Mauboussin then talks about the"wisdom of crowds" concept, which refers to the idea that thecollective intelligence of a group is better than that of any individual,citing examples of the jelly bean guessing exercise and the Solomon Ash experiment.

6)      Michael Mauboussin discusses social conformity andthe experiment conducted by Solomon Asch in which participants were asked toidentify the correct answer to a question on a vision test. While the subjectinitially provided the correct answer, when the Confederates around themprovided the wrong answer, many participants lost confidence and went with thecrowd. Mauboussin replicates this experiment every year with his businessstudents and finds that while individuals may be off by 50%, the collectiveguess is more accurate than any individual within the group. Cognitivediversity is key to this. Mauboussin cites Scott Page's diversity predictiontheorem which states that the collective error of the group is a function ofthe accuracy of each individual and cognitive diversity. However, Mauboussinclarifies that having the right expertise for a particular task is crucial andin many cases, a single specialist may be better than a group.

7)      Michael Mauboussin discusses how groups of peoplecan come up with better answers than individual experts due to the "wisdomof crowds." He suggests that using an audience of around 10-20 millionpeople to conduct experiments could be valuable and fun, and proposes two gamesas examples. The first involves predicting the winners of the Academy Awards bypopular vote (rather than who they think should win), while the second gameinvolves guessing a number between zero to one hundred, with the winner beingthe person who guesses closest to two-thirds of the average of everyone else'sguesses. He also notes that the latter game has an equilibrium solution (zero)and reminds the audience that sometimes, groups aren't always right even ifthey are smarter than any individual.

8)      Michael Mauboussin discusses an interesting exercisecalled the two-thirds game that he experienced during a meeting with worldleaders in Switzerland. The game, which involved negotiation and risk,demonstrated the importance of understanding the position of others and thebasics of empathy. Mauboussin then suggests running prediction experiments withhis audience, inspired by Phil Tetlock's forecasting tournaments, to see ifthey could be super forecasters. He also recommends two books, Against the Godsby Peter Bernstein and Complexity by Mitchell Waldrop, for their insights intorisk and the history of human understanding of risk.

9)      Michael Mauboussin discusses two books that haveinfluenced him: Against the Gods by Peter Bernstein and Complexity by MitchellWaldrop. Against the Gods is a history of risk and how we understand it, fromthe Bernoullis in the 1700s to the present day. Complexity is about thefounding of the Santa Fe Institute, which is focused on understanding complex,adaptive systems. Mauboussin also emphasizes the importance of understandingthe history of ideas and where they originated from, in order to gain a betterunderstanding of a subject.

10)   Mauboussin discusses why value investors tend to bedrawn towards the Santa Fe Institute, highlighting the type of people that tendto be self-selected to be interested in the ideas that come out of it. He describeshow investors tend to be a fun group to hang out with because they are curiouslearners who read widely and think a lot about different disciplines.Mauboussin also emphasizes the importance of observing and studying investors,as they have a report card in many cases, so you can look at the returns forsome of them, which he finds very refreshing.

11)   Michael Mauboussin discusses the decline of publiccompanies in the US and the rise of private equity. He attributes the declinein public companies to fewer IPOs and more mergers and acquisitions. In turn,an increase in private equity has emerged as a way to accommodate the lowerexpected returns in public markets. The conversation then shifts to the powerof base rates, which involves analyzing a problem as an instance of a largerreference class. Using a combination of the inside and outside view can lead tobetter and more accurate predictions.

12)   In this section, Michael Mauboussin discusses the2008 Belmont horse race and the likelihood of Big Brown winning the TripleCrown with a 77% probability of winning the Belmont. Based on base rates, itwas observed that only 40% of horses in similar positions succeeded in winningthe Triple Crown, with only three of the 20 attempts after 1958 succeeding,suggesting that 77% was an overestimation of Big Brown's chances. Furthermore,while Big Brown was considered a favorite due to his impressive track record,he had the slowest speed figures compared to other Triple Crown contenders inthe past seven years, all of which had failed. The diversity breakdown alsooccurs, with many people excitedly betting on the Triple Crown contender due tothe rarity of such an event, leading to market inefficiencies. Mauboussinsuggests that when making decisions, assessing an appropriate reference classand base rates can provide valuable information.

13)   Mauboussin discusses the limitations of geneticdiversity in horses and how this affects their speed. He then goes on todiscuss what separates good from great investors and states that it has littleto do with analytical tools and more to do with how they make decisions.Mauboussin highlights overconfidence and confirmation bias as difficult biasesto circumvent and updating views objectively and anti-social decision-making asvital components to investing success. He also recommends Robert Sapolsky'sbook, "Behave," as the best book he has read on human nature.

14)   Michael Mauboussin discusses the effects of stresson investors and how it can lead to a shortened time horizon. He explains thatstress triggers the same physiological response in humans as physical threatsdo in animals, leading to the body turning the stress response on and neverturning it off. This can cause several symptoms, such as being sick all thetime and having problems with the gut and reproductive systems. Mauboussinemphasizes the importance of investors maintaining equanimity and keeping theireyes on the horizon, even during times of stress, to avoid shortening theirtime horizons. Additionally, Mauboussin highlights the importance ofintellectual curiosity and continually seeking to improve one's craft forsuccessful investors. Lastly, he discusses the importance of consideringalternate possibilities in decision-making to avoid common mental missteps.

15)   Michael discusses techniques to expand one'spossibilities and avoid making the same mistakes twice. He mentions utilizingbase rates, conducting pre-mortems, and red teaming to broaden one'sperspective. Additionally, he emphasizes the importance of counterfactuals,building off of learning from failures, and being open-minded. When asked abouthis favorite failure, Mauboussin cites his experience as a stockbroker, whichled him to develop the concept of skill matching.

16)   Mauboussin discusses the difference between experienceand expertise and explains that true experts are those with a predictive modelthat works. As algorithms become more prevalent, many experts are beingsqueezed out of certain domains, although in others, the wisdom of crowds canoutperform experts. Mauboussin warns against over-reliance on experts,particularly in complex domains where experts can offer wildly differingopinions, citing climate change as a prime example. Instead, he suggestsconsidering the inputs and models generated by various experts and comparingthem to reach a decision.

17)   He also discusses the idea of intuition and how itrelates to decision-making. He explains that intuition is an automatic answerthat comes to the mind due to training in a specific domain. However, intuitiontends to be way over-weighted and overestimated. It can only work effectivelyif the system is stable and linear. Intuition also has a sampling problem, aspeople only talk about the successful ideas that come to them and not thefailures. Mauboussin believes that eradicating biases is part and parcel of thesystem, and that failures become more apparent in stable and linear systems.

18)   Michael Mauboussin and Tim Ferriss discuss theconcept of intuition and its role in decision making, specifically in sportsand investing. Mauboussin presents the idea that experts often work in a waythat is different from the average person when it comes to pattern recognitionand chunking, but the key question is understanding where these methods areeffective and where they are not. Mauboussin also touches on the importance oftime management and how he balances his various responsibilities as aninvestor, author, and parent.

19)   Michael talks about the importance of having asupportive life partner and being organized in life. He believes that having agood relationship with a partner who is supportive and understanding helpsamplify everything, making everything better. Mauboussin enjoys learning,reading, and understanding things at first principles, which motivates him tokeep growing. To perform at a high level cognitively, he focuses on gettingeight hours of sleep, exercising, and being careful with his diet. Mauboussinrecounts how sleep deprivation affected his productivity in the past,emphasizing that focusing on sleep makes a significant difference in hisperformance.

20)   He also discusses the things he tries to avoid,which include addictive behaviors and heavy drinking, as well as being mindfulof how he spends his time. He also shares insights on parenting, referencingthe work of Judith Rich Harris and her book "The Nurture Assumption,"which suggests that nature plays a significant role in how children turn out,rather than solely parenting. Additionally, Mauboussin mentions the importanceof taking a circumspect approach to managing complex adaptive systems, such asecosystems, economies, and climate issues, as they are difficult to model,think through, and manage.

21)   Michael Mauboussin discusses the benefits ofunderstanding complex adaptive systems, especially in terms of thinking aboutmarkets and making interventions. While acknowledging the difficulty of beatingmarkets, he explains how recognizing them as complex adaptive systems can beliberating in terms of letting go of the misfounded belief that we can controlthem precisely. He suggests resources like Melanie Mitchell's book"Complexity: A Guided Tour" and the Santa Fe Institute's website forthose interested in exploring this field. Finally, Mauboussin shares two quotesthat he finds powerful, including "beliefs are hypotheses to be tested,not treasures to be protected" and "analysts who know the most abouta situation have the most to unlearn when the world changes," emphasizingthe importance of keeping an open, beginner's mind.

22)   Michael Mauboussin shares his view on theimportance of having people around us who are willing to ask naive questions,have fresh eyes, and not carry baggage. He also provides recommendations forwhere to start with his books, "Think Twice" and "The SuccessEquation," for those interested in becoming better thinkers andunderstanding luck and skill. He suggests "Expectations Investing" forserious investors and emphasizes the value of collaborating with those oneadmires and the role of luck in shaping one's path.

23)   Michael Mauboussin talks about how he admires TimFerriss's work in helping people think and work better, especially in thedomain of investing. He emphasizes the importance of sleep, exercise, and dietto improve cognitive performance and be really good performers in any cognitivedomain. He also advises people to mind their P's and Q's when it comes to sleepand the fundamentals, as they are cognitive athletes, and their brains are notseparate from the rest of their bodies. Finally, he talks about the value ofbuilding valuable relationships with experts who can help enhance one'sunderstanding and ability to explain things.

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