Rational Enlightenment Essay: Building Social Wealth

Building Social Wealth

How to Win Friends and Cultivate Relationships

You must be the change you wish to see in the world.
Mahatma Gandhi

I don’t have many original ideas, and this essay isn’t one of them. I’ve always tried to synthesize the best ideas from other people, and over the past few years, I have shamelessly cloned the shameless cloning espoused by Mohnish Pabrai. In that vein, this essay is almost entirely a combination of ideas from Peter Kaufman (editor of Poor Charlie’s Almanack) and Guy Spier (author of The Education of a Value Investor) regarding how to build social wealth.

Negativity Bias and the Elevator

The term 'negativity bias' refers to the notion that negative experiences have a greater effect on a person’s psychological state than those that are neutral or positive. It isn’t clear exactly how much more a negative experience affects a person than a positive one, but there seems to be some consensus that a 3:1 ratio (positive:negative) allows for flourishing. John Gottman famously studied marriages and found that successful marriages had a ratio of 5 positive interactions to 1 negative interaction. Daniel Kahneman (author of Thinking Fast and Slow) found that people had a loss aversion ratio of between 1.5 and 2.5, meaning that a loss that is identical to a gain is valued between 1.5 and 2.5 times more than the gain.

This bias has a pervasive effect on how we interact with each other. Peter Kaufman uses a story about an elevator as an example, which goes like this:
You’re standing in front of an elevator. The doors open. And inside the elevator is one solitary stranger, you’ve never met this person before in your whole life. You have three choices for how you’re going to behave as you walk into this elevator: choice number one you can smile say ‘good morning’; choice number two, you can scowl at this stranger; and choice number three, you can do nothing.
The most likely outcome for each of these choices is a mirrored or neutral response: if you smile and say ‘good morning’, then it is likely the stranger will do the same; if you scowl, then the stranger will likely make a weird face or ignore you, and if you do nothing, the stranger will also likely do nothing. However, in the instances where you smile and say ‘good morning’, and the stranger ignores you or scowls at you, the negativity bias comes into play. While this uneven response may not happen that often, psychologically, it has a much more negative effect than the times when the stranger mirrors back positivity. As a result, to avoid this negativity, we default to being neutral, rather than positive.

Peter’s Solution

Peter likes to say: “When you do as everyone else does, don’t be surprised when you get what everyone else gets.” Thus, to get a better outcome, you have to do something different and better. If 90% of the time, positivity would yield a positive result, but 10% of the time it doesn’t, our psychological biases are making us miss out on the 90%! This is not rational behavior. Peter talks about this beautifully, so I’ll let him speak for himself (from a transcript provided by Richard Lewis at Latticework Investing, with minor editing for brevity):
Now let me tie this to your lives. I’m going to do a psychic reading of anybody in this room. What’s your name? (Answer: “Emily”) Emily, your entire life you’ve been on a quest, an odyssey, a search for that individual that you can 100 percent absolutely and completely trust. But who’s not just trustworthy, but principled, and courageous, and competent, and kind, and loyal, and understanding, and forgiving, and unselfish.
I’m right aren’t I? (Answer: “Dead on”) You know what else? If you ever think you may have encountered this person, you are going to probe and probe and test and test to make sure that they are real, that you’re not being fooled. And the paradox is that it looks like you’re probing for weakness, but you’re not. You’re probing for strength. And the worst day of your life is if instead of strength you get back weakness. And now you feel betrayed. You know why? You’ve got to start your search all over again. It’s the worst thing in the whole world isn’t it? Does everybody here agree with me on this? Look how simple this is.
Here’s your 22 second course in leadership. That’s all it takes. All you have to do is take that list that’s in Emily’s head, and every single other person in this room, every single other person in the whole world, has this list in their head – trustworthy, principled, courageous, competent, loyal, kind, understanding, forgiving, unselfish, and in every single one of your interactions with others, be the list! 
Have you all heard of opportunity cost? Here’s the classic illustration of opportunity cost. You have a finite number of something, it’s important. If you’re doing ‘A’ with it, it means what? It means you’re not doing B or C or D or E. What do you have to do? You have to evaluate all the different alternatives and pick the one that’s most optimal. Is that fair? So you’ve got one lifetime. How do you want to spend your one lifetime? Do you want to spend your one lifetime like most people do, fighting with everybody around them? No. I just told you how to avoid that. And in exchange have what? A celebratory life. Instead of an antagonistic fighting life. All you have to do is go positive, go first, be patient enough. You know we have to be patient for a week with a puppy. Do you know how long it usually takes for a human being to do all the probing and testing that Emily was going to do and to find out that you’re for real? It takes six months. This is why nobody does it. ‘Oh it takes too long.’ Compared to what? Look at the plan B that everybody uses. It’s terrible! It doesn’t work. They spend their whole lives fighting with everybody.

Cultivating the Right Relationships

Peter’s solution is excellent for being the person that deserves good relationships, but it doesn’t address the selection process. Charlie Munger (Vice Chairman of Berkshire Hathaway) has said:
The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.

I believe this sentiment also applies to relationships, but identifying whether a relationship will be good or bad at the outset is difficult. In his book, The Education of a Value Investor, Guy Spier talks about an interesting, and I believe effective, strategy to quickly identify high-quality relationships.

First, Guy casts a wide net: he is typically open to conversation from strangers, and he sends thank you notes to an incredible number of people that he interacts with. Additionally, when he meets someone, he tries to do something nice or helpful for them, which could be as simple as a sincere compliment or an introduction that might be beneficial. It is important that whatever is given is done freely and without an expectation of recompense; in other words, follow Peter’s advice: be generous and go first! Once he has given something, Guy watches to see how the person responds. Some people are takers, who take whatever help is given and do not reciprocate; clearly, these relationships are asymmetric and not worth pursuing. Some matchers, who will try to match whatever they have received; these relationships are perfectly good for acquaintances. And finally, there are the givers, who will more than match whatever they receive; these are the relationships to pursue, as they cultivate a virtuous cycle of giving. These relationships will improve the lives of everyone involved and will yield one serendipity after another. As Guy puts it: “What I’m trying to do is simply create an ecosystem for myself in which everybody is the type of person who wants to find ways of helping others.”

This method has a lot of positive side effects, which Guy describes in his book:
The crazy thing is that, when you start to live this way, everything becomes so much more joyful. There is a sense of flow and alignment with the universe that I never felt when everything was about what I could take for myself. Again, I don’t want to make this sound like I’m some kind of saint. But this experience of finding ways to serve others has been so overwhelmingly positive that I now find myself looking for more and more opportunities to help.

How to Build Social Wealth

Putting these ideas together:

  1.  Be the person you are looking for and go first.
  2.  Be generous with people you meet, and observe their response.
  3.  Prune the takers, keep the matchers, and cultivate the givers.

September 27, 2018

Financial Essay: A Few Thoughts on Banks

A Few Thoughts on Banks - Joel Stevens, June 7, 2018
This essay discusses the current state and potential returns for the large four U.S. banks.

Rational Enlightenment Essay: Seeking Wisdom

Seeking Wisdom
Better Behavior and Interpretations
Any year that passes in which you don't destroy one of your best loved ideas is a wasted year.
Charlie Munger
Every so often, I think about my former self, and there’s always at least one behavior or assumption that just makes me think: “How could I have been so stupid?”.  Of course, at the same time, I usually think that now I’ve got it mostly figured out, and I won’t have a nasty surprise later—except that somehow, the same cycle repeats the next time.  Sadly, it took me quite a few iterations to realize that I’m pretty much always doing something stupid; I just haven’t figured out what it is yet.  Clearly, the trick is to be self-aware enough to identify the current idiocy now rather than waiting to figure it out later! Given that the new year is upon us, I thought it might be helpful to review some of my own past mistakes, as it might be helpful to others.
For most of growing up and even into my early adult life, I assumed my behavior and language would be interpreted by others in a fairly specific manner. First, I assumed that those who did not know me would interpret me in a neutral or slightly negative manner.  For example, if I were to say or do something rude, then these people would judge me to be a rude person.  Perhaps more subtly, if I were to say something that could be interpreted negatively even when that wasn’t my intention, then it would likely be interpreted in the more negative manner.  This assumption still seems to make sense to me, as in my experience people do not tend to give the benefit of the doubt except to those that have shown they deserve it.  So this first assumption seems to be fairly well founded at this point in my life.
For those that were close to me, it seemed logical to give them the benefit of the doubt and interpret them as positively as possible, and since this was my underlying belief, I assumed they would also interpret me in the same manner.  Said another way, I assumed that those I was closest to would always interpret my behavior in the way that it was intended rather than the neutral or negative lens I assumed for strangers.  This line of thinking seemed to make sense to me at the time, since they loved me, and shouldn’t love include interpreting someone in the best possible manner?
Over time, I’ve realized that while this assumption is true to some extent, it doesn’t always hold.  As usual, reality is more nuanced—the interpretations I received depended on many factors, such as the type of relationship, the psychological health of the people involved, whether they were having a good day or a bad day, whether they were distracted, or even if they were in the dreaded ‘hangry’ state.  Moreover, this faulty assumption resulted in some strange behavior on my part, in retrospect.  For strangers or acquaintances, I put effort into interactions, trying to be careful of how I said things, how my behavior might be interpreted, and how my behavior might make them feel.  For my loved ones, this effort did not seem necessary—why waste all that energy, since they would interpret me positively anyway?  As some more extreme examples: if my best friend came up with a business idea that I didn’t think was particularly good, I’d say that bluntly, similar to how I would think to myself.  If my dad said something I didn’t think made sense, I’d argue until it was resolved—after all, I don’t tolerate internal inconsistencies in myself, so why tolerate them with him? 
The results of both the assumption and the resultant behavior are probably obvious to the reader at this point, but they were confusing for my younger self.  Many times I hurt people’s feelings without knowing why, or I would try to do something positive, only to be interpreted in a bewildering way.  As I reflect now, I’m surprised at the extent to which this behavior was tolerated.  The reality is that those I was closest to were more affected by and more sensitive to my unfiltered behavior than the strangers I tried to protect.  Thus, while my loved ones probably did interpret me in a more positive way, I had reached the wrong conclusion—more care and consideration should be taken for those you are closest to.
Being Better
On interpretations, I believe even more that it is important to interpret loved ones as positively as possible—presumably those that are closest have earned that spot, and positive interpretations only make everyone’s life easier and better.  With regard to behavior, I think it is important to be kind to everyone, but doubly so for those that are closest.
On the broader point of rooting out poor behavior, I started with a Munger quote and finishing with his comments on destroying bad ideas seems fitting—to quote him yet again, “I have nothing to add.”
Well I've done so many dumb things that I'm very busy destroying bad ideas because I keep having them. So it's hard for me to just single out one from such a multitude. But I actually like it when I destroy a bad idea because...I think it's my duty to destroy old ideas. I know so many people whose main problem of life, is that the old ideas displace the entry of new ideas that are better. That is the absolute standard outcome in life. There's an old German folk saying...'We're too soon old and we're too late smart.' That's everybody's problem. And the reason we're too late smart is that the stupid ideas we...already have, we can't get rid of!...in most fields you want to get rid of your old ideas. And it's a good habit, and it gives you a big advantage in the competitive game of life since other people are so very bad at it. What happens is, as you spout ideas out, what you're doing is you're pounding them in. And so you get these ideas and then you start agitating and saying them and so forth. And of course, the person you're really convincing is you who already had the ideas. You're just pounding them in harder and harder…The price we pay for [not] being able to accept a new idea is just awesomely large. Indeed a lot of people die because they can't get new ideas through their head. 

December 31, 2017

Financial Essay: Evaluating Performance

Evaluating Performance - Published by Joel Stevens on October 30, 2017

This essay discusses the drawbacks of using trailing returns to evaluate performance and proposes a different statistical method instead. This method is then applied to the investment records for a variety of famous value investors.

Financial Essay: Measuring Returns

Measuring Returns - Published by Joel Stevens on January 5, 2017

This essay discusses various methods of calculating returns--simple rate of return, time weighted rate of return, and internal rate of return. In particular, the essay shows how each return is calculated, discusses common uses of those returns, and provides illustrative examples.

Rational Enlightenment Essay: No Will

No Will

A Path to Right View

Be kind, for everyone you meet is fighting a great battle.
Reverend John Watson

In Free Will, Sam Harris does an elegant job of dispelling the illusion of free will, which I have taken the liberty to dub ‘no will’ for the sake of brevity.  Primarily, Harris presents arguments against our having any conscious control over the actions we take as well as the societal implications of the recognition of that fact, particularly on our penal system.  Although he briefly mentions the positive impact of the framework of ‘no will’ personally, I believe that fully embracing this understanding causes a sea change in how we view the world, akin to the ‘Right View’ teachings of Buddhism.

Summary of No Will

There are three main arguments against free will, each strong enough to dispel it alone.  First, there is experimental evidence that consciousness only reflects decisions that have already been made at a lower level in the brain.  As Harris is a neuroscientist, I believe his summary is better than one I can provide:
The physiologist Benjamin Libet famously used EEG to show that activity in the brain’s motor cortex can be detected some 300 milliseconds before a person feels that he has decided to move.  Another lab extended this work using functional magnetic resonance imaging (fMRI): Subjects were asked to press one of two buttons while watching a “clock” composed of a random sequence of letters appearing on a screen.  They reported which letter was visible at the moment they decided to press one button or the other.  The experimenters found two brain regions that contained information about which button subjects would press a full 7 to 10 seconds before the decision was consciously made.  More recently, direct recordings from the cortex showed that the activity of merely 256 neurons was sufficient to predict with 80 percent accuracy a person’s decision to move 700 milliseconds before he became aware of it.
Thus, it appears that the decisions we make are not decisions at all, but instead the recognition of decisions other parts of our brain have already made. 

However, even if we ignore this finding or it is later refined in some manner, we are still left with the fact that our current state is the result of previous causes and effects outside of our influence.  It is telling that psychologists have argued whether our behavior is the result of nature or nurture, neither of which we control.  We do not have any choice over who our parents were, the particular set of genes we inherited from them, or the manner in which we were raised.  We also have little or no control over the external events that impact our lives.  How can we then say we have any influence over the current state of our bodies or minds, which results in the behaviors we undertake?
Finally, borrowing again from Harris, ‘no will’ can be understood simply through paying close attention to our own conscious experience.  What is the next thought you are going to have?  You don’t know.  Where will that thought have come from?  You don’t know.  Take a moment to try to control your thoughts.  How did that go?  Let’s take it one step further—try not to think about Dumbo for the next minute.  Did you have control over my mentioning a flying elephant?  Were you able to stop yourself from thinking about him?  If we are unable to predict or control our conscious thoughts, how could we be in control of the decisions we make even if we assumed our consciousness were in charge of the decision in the first place?

A Tragic Example

Charles Whitman was born in Florida in 1941, the eldest of three children.  He was intelligent, having an IQ of 139 at age six, proficient at piano, and earned the rank of Eagle Scout by age 12.  His father was an authoritarian and often physically and emotionally abused him, his mother, and his siblings.  After high school, he joined the Marine Corps and was reportedly well liked.  During his service, he earned a Good Conduct Medal, a Sharpshooter’s Badge, and an Expeditionary Medal.  Later, he married his wife and enrolled as a student at the University of Texas.  At some point during this time, a tumor began growing in his brain and he became increasingly aggressive.  It seems clear that he was ashamed of this behavior—two of his friends reported that he had told them of striking his wife on two occasions and was “mortally afraid of being like his father”.  He admonished himself in his journal and wrote a daily guide for himself that included: “CONTROL your anger…Don’t let it prove you the fool.  SMILE—It’s contagious.  DON’T be belligerent.  STOP cursing.  CONTROL your passion; DON’T LET IT lead YOU.”  He also visited a psychiatrist to discuss his issues and reported urges to “start shooting people with a deer rifle”.  Unfortunately, this urge was not seen as an imminent threat—he then killed his wife and mother and climbed the tower at UT, killing 14 people and wounding 32 others.  Before doing so, he wrote the following (emphasis added):
I don’t quite understand what it is that compels me to type this letter.  Perhaps it is to leave some vague reason for the actions I have recently performed.  I don’t really understand myself these days.  I am supposed to be an average reasonable and intelligent young man.  However, lately (I can’t recall when it started) I have been a victim of many unusual and irrational thoughts.  These thoughts constantly recur, and it requires a tremendous mental effort to concentrate on useful and progressive tasks.  In March when my parents made a physical break I noticed a great deal of stress.  I consulted a Dr. Cochrum at the University Health Center and asked him to recommend someone that I could consult with about some psychiatric disorders I felt I had.  I talked with a Doctor once for about two hours and tried to convey to him my fears that I felt some overwhelming violent impulses.  After one session I never saw the Doctor again, and since then I have been fighting my mental turmoil alone, and seemingly to no avail.  After my death I wish that an autopsy would be performed on me to see if there is any visible physical disorder.  I have had some tremendous headaches in the past and have consumed two large bottles of Excedrin in the past three months.
It was after much thought that I decided to kill my wife, Kathy, tonight, after I pick her up from work at the telephone company.  I love her dearly, and she has been as fine a wife to me as any man could ever hope to have.  I cannot rationally pinpoint any specific reason for doing this.  I don’t know whether it is selfishness, or if I don’t want her to face the embarrassment of my actions would surely cause her.  At this time, though, the prominent reason in my mind is that I truly do not consider this world worth living in, and am prepared to die, and I do not want to leave her to suffer alone in it.  I intend to kill her as painlessly as possible.
After the local police killed him, an autopsy was performed, and a tumor the size of a pecan was found in his brain.  Experts at the time concluded that “the relationship between the brain tumor and … Whitman’s actions … cannot be established with clarity.  However, the … tumor conceivable could have contributed to his inability to control his emotions and actions”.  More recently, some have proposed that the tumor pressed against the amygdala of his brain, which could explain some of his erratic behavior.

How much control did Whitman have over all of this?  Did he have any choice in the tumor growing in his brain?  Did he have any choice in his father’s abusive behavior while he was growing up?  It is obvious that he desired to behave in a different way and repeatedly attempted to address his own issues, but how could he do so if he couldn’t stop his own “unusual and irrational thoughts” or “overwhelming violent impulses”?

Despite his horrible actions, I have a great deal of empathy for Whitman.  That is not to say, of course, that he is not responsible for those actions—as the entity that performed them, he clearly is. However, this assertion rings rather hollow if he had influence over neither his stimulus nor his responses.  In that case, what is left?  Whitman’s consciousness, which most would characterize as ultimately who he is, appears to have been held hostage in a body and mind that generated irrational and violent impulses—ones that he apparently tried, but ultimately failed, to stop.  It must have been truly hellish to experience.

We Are Automata

My college roommate majored in computer science and had a great number of complex projects.  One of my favorites was on Artificial Intelligence, where he used genetic algorithms to determine the configuration of computer entities for competition against others designed by fellow class members.  These entities competed on a two-dimensional grid that used the trained configurations to determine behavior and outcomes in the grid, which could watched on a screen.  What I found most fascinating was that you could watch the behaviors of these algorithms and how they changed over time.  Initial algorithms might get “stuck”, or generally behave inefficiently, and might not grow to fill up the space.  Others might show promising growth in the space, but had little or no defense against attacking counterparts.  Some might attack well, but might ultimately be outnumbered, losing the competition in the long run.  Or, some entities might do very well against most competitors, but fail miserably against a select few.  Thus, the outcomes for each entity depended on the values stored in its configuration, the rules governing the competition, and the other entities involved. 

I find it difficult to see any real difference in humans.  The same factors are at play, but amplified to a mind-boggling complexity.  We are unlikely to ever know the exact rules that govern our behavior in any given situation nor the environment and series of actions and reactions that got us to that state in the first place.  However, this increase in complexity does not change the reality—we have as little control over our outcomes as the simulated entities at war with each other.

A Path to Right View

At first, these conclusions seem disorienting and depressing, but they can lead to deep compassion.  If we can truly accept that everyone is at the mercy of their own neuroses and environment that they do not control, then it is difficult to remain angry or upset with them.  After all, we are not typically upset with the weather or even natural disasters—we may wish they didn’t happen or that we weren’t around, but it is nonsensical to be angry with the weather patterns themselves.  In other words, we recognize that a hurricane is simply the natural result of a complex series of interactions  of air pressure and temperature that have fed back on each other, so we may be sad when it destroys a beach and hurts the people who live there, but do not have the need to punish it for having caused the damage.  Thus it is with people, we are all just weather patterns—sometimes a gentle breeze and other times a raging hurricane, but never in control.

So if we take the same attitude towards people that we take to the weather or the simulated entities at war, our anger and desire for retribution dissipates.  For example, instead of being angry at the jerk who just cut you off, you can have compassion for him and recognize that he is not truly to blame for his actions.  Perhaps he had a terrible day or was distracted.  Or maybe he is just an unhappy person because he happened to have genes with a high inclination towards depression and might be at a bad point in his life.  Of course, just as you might seek shelter from the rain, you may then avoid being around him in the future.

Similarly, we can have compassion for ourselves.  Everyone has done something they regret, but were they put back in the same place at the same state, they would do it again—how could they not?  Thus, rather than blaming ourselves using the belief we could have acted differently, we have the option to look back with compassion, knowing we could not have done otherwise, and hopefully learn and improve going forward (though we do not have control over that either!).

Thus, if we can embrace ‘No Will’ fully, we are able to have ‘Right View’ by understanding things as they truly are.  With this view, there is no need or even the impulse for anger to arise in the first place, and we can naturally be kind to everyone.

Financial Essays: Price and Returns and Cost of Leverage

Cost of Leverage - Published by Joel Stevens on October 11, 2016

This essay relates to the "Cost of Leverage" of various different leveraged vehicles for investing in common shares, such as using margin or purchasing calls or warrants. Additionally, the essay explores the relationship of Cost of Leverage as the degree to which the call or put is in or out of the money.

Price and Returns - Published by Joel Stevens on December 31, 2016

This essay relates to the relationship between price and returns. In particular, the essay explores how returns develop over different holding periods, underlying value growth, and prices paid relative to that underlying value.