Mauboussin 2019 interview with Farnam Street

7 minute read

Shane Parrish at Farnam Street did another interview with Michael Mauboussin recently. There’s some repeat ideas that Mauboussin has talked about before, but as always there’s much to learn from the conversation. My highlights below:

Q: If you could hop on the elevator with your younger self going into your first day on the job, what would you say?

A: […] I would encourage my younger self to read widely, to constantly learn, and to develop points of view independent of what others say and based on facts. Specifically, I would recommend developing the habit of reading. Constantly ask good questions and seek to answer them.

Charlie Munger has been quoted before on having a similar view of reading widely. What’s interesting here is Mauboussin’s incremental advice to have a question that you’re curious about, and then seek to answer it. That’s a good way to frame your learning - What do I not know, what am I interested in finding out, how can I go about researching that? I’ve stated before how I aim to be intellectually curious, and I still believe it’s a good principle to follow. There’s so much interesting stuff out there to learn about and experience!

Q: Your most recent book, The Success Equation, points out something that few people seem to consider: that most things in life are a mixture of luck and skill. What’s the mental model we can take away from this?

A: The main point is to think critically about the activity you’re participating in and consider how much luck contributes to the outcome. […] Once you understand luck’s role, you can understand how to approach the activity more thoughtfully, including how you develop skill and interpret results. […] any mental model has to overcome our natural tendency to think causally—that is, that good outcomes are the result of good skill and bad outcomes reflect bad skill. […] skill is what’s within your control and luck is what is outside your control. If there’s something you can do to improve your lot, I would call that skill. […] I wouldn’t want to bet on anyone who has truly succeeded by dint of luck because luck by definition is unlikely to persist.

Mauboussin and Annie Duke both like to discuss luck vs skill a lot. It’s also a common topic among professional money managers, who tend to discredit successful big bets by others to luck, and credit their own successful big bets to skill. It’s hard to tell even as a limited partner investor what the cause of success (or failure) of your fund manager is. Sometimes the fund managers might not even know themselves. Mauboussin has talked before about the paradox of skill, in which “As people become more skillful, luck becomes more important”. This has absolutely happened in the world of investing. Compare the data available to investors now to back when getting hardcopy earnings releases was an edge.

Annie has a great way of evaluating an activity on the skill vs luck continuum: Ask whether you can lose on purpose. It’s not perfect, but gives an effective framework to compare chess (high skill) vs a lottery (high luck).

Q: How can we get better […] when it comes to promoting people internally?

A: Typically, the lower you are in an organization, the easier it is to measure your skill. That’s because basic functions are generally “algorithmic,” people are executing their jobs based on certain known principles. But as you move up in an organization, luck often plays a bigger role. […] Said differently, even strategies that are really well thought through will fail some percentage of the time as the result of bad luck. So as people move up in organizations, it makes sense to pay more attention to the process of decision making than the outcomes alone.

This is a new idea to me, and makes sense! There’s more specificity to your role when you’re junior, and you’re usually in charge of specific areas which require specific niche skills for you to do well. As you get promoted, your job scope expands and becomes more general. Not only do you need more skills, but you also are dealing with more variables. Since there’s more things that can go wrong (or right), luck plays a larger role. This makes evaluating a decision based solely on outcomes the wrong way to judge success.

For example, in investment banking, the skills desired of an analyst is different compared to a managing director. As a junior analyst I can be rewarded for working hard, being responsible, and being efficient. As a MD I could be rewarded for a client deciding to do a bond deal with us even though I personally had less to do with the decision, compared to the banking capabilities of the bank I’m working with. I could also work very hard in client outreach but just have a bad year in which they didn’t want to do deals in a downturn.

Q: […] you note that fluid intelligence peaks at age 20. What does this say about leadership?

A: cognitive performance combines fluid intelligence, which peaks when you are young, and crystallized intelligence, which tends to grow throughout your life. For older people the problem is not that they don’t have the knowledge or wisdom to make good decisions, it’s that they tend to become cognitively lazy and fall back on rules of thumb that served them well in the past.

This is interesting too! I’m sure everyone has faced a situation in which they felt ignored as a younger member of an organisation, when they’ve tried to pitch an idea that their older colleagues just didn’t get. Social media successes such as Facebook, Instagram, Snapchat, Tik Tok all seem to follow the same formula of catching a younger demographic and then attempting to age up in their userbase. When they were just getting started, their users realised they had an app that older people ‘just didn’t get’, which probably helped the popularity of the apps.

If you’ve been successful all this time with your decades of investing experience using a certain framework, it’s incredibly hard to change your mindset and think that this time, it might actually be different. And who really knows beforehand if it actually is? There’s plenty of people who will proclaim they’ve predicted every crisis after the fact, but few that are legitimate. Geoff Yamane writes about how the most successful investors are not those that succeed in a single regime, but those that are successful across multiple regimes.

I don’t know if I personally will be able to shake my biases as I grow older. Kahneman himself thinks his intuition hasn’t improved, and he’s studied biases nearly his entire life. One way I try to combat this is actually by writing and publishing my ideas. This way, I’m hoping to outsource error checking to my readers, and hopefully learn that I’m wrong about someething earlier rather than later. I’m not alone in thinking that way

Q: One of your pieces of advice is to create a decision journal, can you tell me what that looks like to you?

A: A decision journal is actually very simple to do in principle, but requires some discipline to maintain. The idea is whenever you are making a consequential decision, write down what you decided, why you decided as you did, what you expect to happen, and if you’re so inclined, how you feel mentally and physically. This need not take much time.

I emphatise with the discipline issue here. I had a decision journal that lay unused even as I was making some huge, high impact life decisions. It would have taken <30 min to write down simple notes to frame my process, but the thought of having to put everything down was just a little too much for me to get over. And I’ve always prided myself on erring towards being more rational!

I have since used the decision journal, and hope to continue the habit. I do believe the ability to keep a record is tremendously helpful (I keep records of as many things as I can, example Google maps reviews), and hopefully will be able to track my record of decision making over time in order to improve it. Feel free to reach out if you want to know what metrics I keep in my decision journal!

As always, Mauboussin and Farnam Street give up great insight. I like that the full transcript was released as well! Mauboussin has written more here, though I don’t know where he publishes his more recent stuff. There’s an excellent one on what a P/E ratio means that all finance people should read.

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