THE TEACHER I WISH I HAD
In late 1942, 104 German tanks sat in the grasslands outside the city of Stalingrad. Called into action, the unthinkable happened. Sixty-two of the tanks didn’t work. Field mice nesting inside the tanks that made up the 22nd Panzer Division had eaten the insulation covering the electrical systems leaving them crippled.
I discovered this story in the writings of Morgan Housel who observes, “you can plan for every risk except the things that are too crazy to cross your mind.”
Housel is a financial writer and a partner at the Collaborative Fund, an early-stage VC.
His writings are worthy of a wider audience because:
He has an ability to see the key concepts, ideas or events that can be obscured by complexity.
He takes a relentlessly interdisciplinary approach to writing about finance that makes it accessible.
His writings offer lessons that are widely applicable beyond the world of finance. As he says, “the real world isn’t segregated by academic departments. Most fields share at least some lessons and laws between them.”
Housel’s work has helped me realise that effective communication is about the art of repetition. I’m not talking about Theresa May’s unwavering use of “Brexit means Brexit”. There are recurring themes throughout his writing such as risk, bias, predictions, new ideas, leadership and much more. But it always seems fresh, never tired because of how he repackages ideas that he thinks are important.
He is a prodigious writer so I’ve curated ten of his most powerful ideas below:
1. Be wary of drawing too many lessons from your own personal experiences
Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works. People believe what they’ve seen happen exponentially more than what they read about has happened to other people, if they read about other people at all. We’re all biased to our own personal history. Everyone.
2. Great leadership often requires having character traits that are opposites of one another
Sears. Blockbuster. Nokia. AOL. Each started with a great idea that few could comprehend, and clung to it with conviction as they themselves became blind to new ideas that they couldn’t comprehend…
People talk about traits that make good investors and good business leaders. They’re usually skills that push you in the same direction: Intelligence and patience, creativity and ingenuity, leadership and charisma. But lasting results often requires traits that are polar opposite to each other, like unwavering conviction and the ability to move on from an idea when its time is up.
3. Taking a longer view allows you to see things you otherwise wouldn’t
Everything’s been done before. The scenes change but the behaviors and outcomes don’t. Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.” The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today… Same stuff that guides today, and will guide tomorrow.
A minority of things drive the majority of outcomes. It’s one of the most important concepts in investing, where a few positions may account for most of your lifetime returns… History is no different. World War II, World War I, and the Great Depression influenced nearly every important event of the 20th century. Industrialization and the Civil War did the same in the 19th. Demographics, inequality, and information access will have a huge impact on the coming decades. How those Big Things end is a story yet to be told.
In Three Big Things: The Most Important Forces Shaping the World
See also The Tyranny of Improvement, 2020: What a Time To Be Alive and How All This Happened, Common Plots of Economic History
4. Using the past to prepare for the future is a poor way to manage risk
History is abused when specific events are used as a guide to the future.
If you experience a problem and then fix that problem, you’re only safer to the extent that the same problem was likely to repeat in the future. But you’re worse off if that problem was rare while your fix gives you a false sense of confidence in your overall safety.
The biggest economic risk is what no one’s talking about, because if no one’s talking about no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives.
Google News cites 8.4 million mentions of “trade war” in recent years. People might be worried, but no one is surprised. Businesses might be frustrated, but many have prepared as much as they can.
Compare that to what in hindsight have actually been the biggest risks. To name a few: 9/11, Lehman Brothers’ inability to find a buyer, Iraq invading Kuwait, the 1973 OPEC embargo, Pearl Harbor, and a small Austrian bank called Creditanstalt whose 1931 bankruptcy set off a chain reaction of global bank failures that ignited the Great Depression.
These were big events. What turned them into disasters was that few discussed them even moments before they occurred.
Paying attention to known risks is smart. But we should acknowledge that what we can’t see, aren’t talking about, and aren’t prepared for will likely be more consequential than all the known risks combined.
5. Use a “regret minimization framework” to manage risk
Risk management starts with what Jeff Bezos calls the “regret minimization framework.” Project yourself to age 80, or age 90. “Looking back on your life, you want to minimize the number of regrets you have,” he says.
Good risks are those that you will both regret not taking and won’t regret if they backfire.
Actual risk management is understanding that even if you do everything you can to avoid regrets, you are at best dealing with odds, and all reasonable odds are less than 100. So there is a measurable chance you’ll be disappointed, no matter how hard you’ll try or how smart you are. The biggest risk – the biggest regret – happens when you ignore that reality.
6. Overcome confirmation bias by finding someone you respect who you agree with on most things, but disagree with on one topic
Benedict Evans: “The more the Internet exposes people to new points of view, the angrier people get that different views exist.” Handling that challenge without digging the hole deeper is one the 21st century’s most important skills.
If you’re not blessed with perfect empathy, the trick to opening your mind to those you disagree with is to find people whose views on one topic you respect – that checks the box in your head that says “this person isn’t totally crazy” – and debate them on the topics you disagree about. Without the first step it’s too easy to write someone off before you’ve heard their full argument.
7. Watch out for the things that you think are below you or that you don’t understand
The most important problems anyone faces are the ones that outwardly seem beneath your qualifications, because they’re the problems you’re likeliest to ignore.
8. Getting buy-in for new ideas is hard because you have to get people to listen, overcome the existing way of doing things and their high expectations
The distinction between “wrong” vs. “early” has less to do with analytics than the social ability to prevent listeners from giving up on you.
… few people in 1919 knew how bad they had it. They thought they were living in a technoutopia. They weren’t comparing their lives to 2019; they were looking at how things had changed for the better since, say, 1880. A hard thing when studying history is how blinded you become to hindsight bias. It’s easy to assume everyone in the past was dying for new technology to come along and end what we, today, consider to be suffering. But in real time people don’t want to think they’re suffering, partly because they don’t know what future technology they’re missing
When something is familiar and common, you set a low reference point. So most bad outcomes are placed in the “Oh well, you got unlucky. Next time you’ll do better,” category, while all wins are placed in the, “Easy money!” category.
When something is new and unfamiliar, the high reference point means not only will bad outcomes be punished, but some good outcomes aren’t good enough to beat “par.” So even high-probability bets are avoided.
Newcomers have to not only convince other people that their idea has a positive expected value. They also have to show it can clear a high reference point. Nailing the first part but ignoring or discounting the second explains why a lot of good ideas aren’t taken seriously, or take far longer to be taken seriously than you’d imagine.
In Newcomers
9. Look carefully at incentives of the person making a prediction or offering analysis
Credibility is not impartial: Your willingness to believe a prediction is influenced by how much you need that prediction to be true.
Predictions are often calibrated to promote or preserve your reputation and career goals.
In law and public policy… equally qualified expert witnesses can come to opposite conclusions.
… training and data can be overwhelmed by ideological beliefs and life experiences. This is especially true in fields that study people. There are no conservative meteorologists or liberal geologists, but we happily accept the equivalent in economics and sociology.
… incentives are the most powerful force in the world. They not only get people to say things that aren’t true, but actually believe those things if it’s in their career interest to do so.
10. The key to convincing people is to use reference points that they understand
The key to persuasion is teaching people something new through the lens of something they already understand. This is critical in writing. Readers want to learn something new, and they learn best when they can relate a new subject to something they’re familiar with.
Morgan Housel’s book The Psychology of Money is out later this year. If you are interested in discussing and reading this as part of a book club, get in touch.