Key Moments
Michael Mauboussin — How Great Investors Make Decisions | The Tim Ferriss Podcast
Tim FerrissKey Moments
Michael Mauboussin discusses decision-making, cognitive biases, and learning from diverse perspectives.
Key Insights
Embrace a 'beginner's mind' and question assumptions, as a lack of prior knowledge can be an asset.
Consilience, the unification of knowledge across disciplines, is crucial for tackling complex problems.
Understand markets as complex adaptive systems, where diversity, aggregation, and incentives are key to wisdom.
Distinguish between social category diversity and cognitive diversity; the latter is more critical for problem-solving.
Base rates (the outside view) are essential for robust predictions, countering the overconfidence of the inside view.
Great investors are defined by sound decision-making, not just analytical tools, often involving managing biases like overconfidence and confirmation bias.
THE POWER OF FIRST PRINCIPLES AND CONSILIENCE
Michael Mauboussin emphasizes the value of approaching problems with a 'beginner's mind,' unburdened by pre-existing notions. This perspective, akin to seeking first principles, allows for a deeper understanding than relying on conventional wisdom or rules of thumb. He champions 'consilience,' the unification of knowledge across disparate disciplines, citing E.O. Wilson's work. Mauboussin believes that complex challenges often lie at the intersection of fields, necessitating an integrative approach to find effective solutions.
UNDERSTANDING MARKETS AS COMPLEX ADAPTIVE SYSTEMS
Viewing financial markets through the lens of complex adaptive systems provides profound insights. Such systems involve numerous agents with adaptive decision rules, where the emergent behavior of the whole is greater than the sum of its parts. This contrasts with traditional efficient market hypotheses that rely solely on rationality or arbitrage. Mauboussin draws parallels with James Surowiecki's 'Wisdom of Crowds,' highlighting diversity, effective aggregation mechanisms, and incentives as crucial conditions for crowds to be wise, and their violation as causes for market irrationality.
COGNITIVE DIVERSITY: THE ENGINE OF EFFECTIVE DECISION-MAKING
Mauboussin distinguishes between social category diversity (differences in demographics) and cognitive diversity (differences in perspectives, mental models, and training). He stresses that cognitive diversity is paramount for effective problem-solving. While social diversity can be a beneficial byproduct, it's the variety of thought processes that truly enhances collective intelligence. He cites Scott E. Page's mathematical work demonstrating how cognitive diversity, along with individual intelligence, improves prediction accuracy.
THE CRITICAL ROLE OF BASE RATES AND THE OUTSIDE VIEW
A cornerstone of better decision-making is the systematic use of base rates, or the 'outside view.' This involves viewing a specific problem as an instance of a larger reference class and examining historical data from similar situations. This approach counteracts the 'inside view,' which focuses predominantly on unique details and personal inputs, often leading to overconfidence. Mauboussin illustrates this with the example of a Triple Crown-winning horse, where historical base rates revealed a much lower probability of success than market odds suggested.
THE ART OF DECISION-MAKING: BEYOND ANALYTICAL TOOLS
Mauboussin argues that what separates 'good' from 'great' investors is less about analytical prowess and more about the quality of their decision-making. Key challenges include overcoming biases like overconfidence and confirmation bias, which impede objective updating of views. Furthermore, investors must develop the fortitude to hold contrarian views that are ultimately correct, a process he describes as having an 'antisocial component' due to the inherent pressures of market fluctuations and social conformity.
NAVIGATING EXPERTISE, INTUITION, AND COMPLEXITY
Mauboussin expresses skepticism towards over-reliance on 'experts,' distinguishing true expertise (possessing a working predictive model) from mere experience. He notes that algorithms and diverse crowds often outperform individual experts. Intuition, he explains, is the result of a well-trained 'System 1' mind in stable, linear domains. However, in complex or rapidly changing environments, intuition can be misleading. He advocates for techniques like premortems and red teaming to explore alternative possibilities and mitigate the risks associated with a narrow focus or adherence to outdated expertise.
THE FOUNDATION OF HIGH PERFORMANCE: SLEEP, EXERCISE, AND MINDSET
Mauboussin emphasizes that high cognitive performance hinges on fundamental physical well-being, prioritizing sleep as the cornerstone. He describes being 'religious' about 8 hours of sleep, followed by consistent exercise and mindful diet. This focus on the 'mental athlete' framework is crucial for sustained intellectual work. He also highlights the importance of a supportive life partner and embracing lifelong learning, underscoring that continuous improvement and intellectual curiosity are hallmarks of successful individuals across various fields.
EXPANDING ALTERNATIVES AND LEARNING FROM FAILURE
To counter decision-making pitfalls, Mauboussin suggests practical techniques such as leveraging base rates to broaden outcome ranges, conducting premortems (imagining a decision's failure to uncover potential issues), and employing red teaming (challenging strategies from an adversarial perspective). He also touches upon the importance of counterfactual thinking and learning from 'favorite failures,' viewing them as crucial learning opportunities that shape future success and adaptation, rather than solely as setbacks.
UNDERSTANDING PARENTING THROUGH CHILDREN'S PROBLEMS
Drawing on Judith Rich Harris's work, Mauboussin suggests a liberating perspective on parenting: distinguishing between parental problems and children's problems. While basic provision of love and shelter is essential, a child's development is significantly influenced by genetics and peer groups. He advocates for parents to empower children to solve their own problems, stepping in only as a supportive resource, thereby fostering independence and problem-solving skills from an early age.
THE WORLD THROUGH THE LENS OF COMPLEX ADAPTIVE SYSTEMS
Exposure to complex adaptive systems has fundamentally altered Mauboussin's worldview, making him more circumspect about control and management. He finds this framework illuminating for understanding markets, ecosystems, and economies, highlighting their non-linear nature and the difficulty in predicting outcomes. This perspective fosters a sense of intellectual humility, accepting that unintended consequences are inherent in interventions within such intricate systems, which can paradoxically be liberating by reducing the need for absolute control.
Mentioned in This Episode
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Common Questions
Michael Mauboussin's unofficial mottos are 'Nullius in verba' (take nobody's word for it, see for yourself) and 'Notions, notations' (focus on intuitions and underlying ideas, not just equations). These principles emphasize open-mindedness, questioning authority, and grasping concepts over mere computation.
Topics
Mentioned in this video
Co-author with Michael Mauboussin of 'Expectations Investing' and author of 'Creating Shareholder Value'.
Author of 'Bionomics', who proposed understanding economics through a biological lens.
The founder of Shopify, whom Tim Ferriss met in 2008 and became an advisor to, observing the company's growth.
A highly skilled food industry analyst at Drexel Burnham Lambert, recognized for his focus on cash flows, share buybacks, and asset values, and his access to management teams.
A researcher at the University of Michigan, whose work on cognitive diversity mathematically demonstrates its value in problem-solving and corporate success.
A famous figure in finance who wrote the article 'The Jelly Bean Jar and Market Efficiency' and was a subject in the Solomon Asch conformity experiment.
A researcher at the University of Pennsylvania known for his work on forecasting tournaments and the concept of 'super forecasters'.
An economist who was one of the main protagonists in 'Complexity', promoting the once-heretical idea of increasing returns (winner-take-all effects).
A mutual acquaintance of Tim Ferriss and Michael Mauboussin, known for his systematic approach to becoming world-class in different domains like chess and martial arts.
Mentioned in the context of the 'free-range kid' concept, related to parents allowing children to solve their own problems.
A keto expert who recommended macadamia nuts on the Tim Ferriss Podcast in 2015.
A venture capitalist and friend of Michael Mauboussin, who invoked Mauboussin's name for his ability to connect ideas from disparate areas.
Author of 'The Wisdom of Crowds', who effectively articulated the conditions under which crowds exhibit wisdom or folly.
A brilliant economist and historian, author of 'Against the Gods' and 'Capital Ideas,' known for his engaging writing on the history of risk and finance.
The general manager of the Oakland A's, profiled in 'Moneyball', who provided a cover quote for Michael Mauboussin's book 'Think Twice'.
Mentioned by Tim Ferriss as discussing counterfactuals with him, noting historians' reluctance to embrace them.
Known for his work in the 1950s demonstrating that algorithms often outperform clinical psychologists (experts) in predictive tasks.
A professor at Princeton whose seminar notes Tim Ferriss still keeps, and a celebrated writer.
Vice Chairman of Berkshire Hathaway, known for his quote, 'People calculate too much and think too little.'
A value investor who introduced Michael Mauboussin to the Santa Fe Institute in the 1990s, known for his intellectual curiosity and wide reading.
A famous handicapper and brilliant writer who Michael Mauboussin consulted regarding the Big Brown Triple Crown race.
Mentioned by Michael Mauboussin in the context of skill matching and figuring out what one is good at.
A psychologist who distinguishes between experience and expertise, defining an expert as someone with a predictive model that works.
A mathematician whose quote, 'Notions, notations,' emphasizes grasping intuitions before computations, a concept Michael Mauboussin uses in his course.
Associated with high-yield bonds and Drexel Burnham Lambert in the 1980s.
A neurobiologist and primatologist at Stanford University, author of 'Behave' and 'Why Zebras Don't Get Ulcers', known for his research on stress and human nature.
Nobel Prize-winning psychologist who coined the 'inside versus outside view' and highlighted heuristics and biases, engaging in an adversarial collaboration with Gary Klein.
Head of Consilient Research on Counterpoint Global at Morgan Stanley Investment Management, author, adjunct professor at Columbia Business School, and faculty at the Heilbrunn Center for Graham & Dodd Investing.
A Harvard biologist, renowned for his work on ants and evolutionary biology, and author of the book 'Consilience'.
A Victorian polymath and cousin of Charles Darwin, whose ox-weight guessing experiment at a fair illustrated the wisdom of crowds, with the collective guess being surprisingly accurate.
A psychologist known for his social psychology experiment on conformity, where subjects were influenced by a majority's incorrect answer on a visual task.
A professor and author of 'More Heat Than Light', detailing the historical mathematization of economics.
The author of the book 'Complexity', which chronicles the Santa Fe Institute's origins and its scientific breakthroughs.
Founder of the concept of value investing, often associated with buying statistically cheap stocks (low P/E, P/B ratios), and a professor at Columbia Business School.
A board member of the Santa Fe Institute, connected through intellectual curiosity.
A mutual acquaintance and podcaster, who contributed questions for the interview.
A Princeton alumnus and celebrated author, mentioned as inspiring by his writing.
An independent scholar and author of 'The Nurture Assumption' and 'No Two Alike', whose work on twin studies fundamentally changed Mauboussin's perspective on parenting by emphasizing the role of nature over nurture.
A titan in the field of complex adaptive systems, possibly having coined the term, who worked with Melanie Mitchell. He has passed away.
Author of 'The Psychology of Intelligence Analysis', known for his insights on the difficulty of unlearning for experts when the world changes.
Author of 'Fooled by Randomness'.
A psychologist who developed the concept of premortems and is a strong advocate for naturalistic decision-making.
A sleep expert whose ideas on cognitive degradation due to lack of sleep are highlighted as powerful by Michael Mauboussin.
A resident faculty at the Santa Fe Institute and author of 'Complexity: A Guided Tour', recommended for understanding complex adaptive systems.
Co-author with Philip Tetlock of 'Superforecasting'.
A leading center for multidisciplinary research in complex systems theory, where Michael Mauboussin is chairman emeritus of the board of trustees.
A publication where Gary Klein wrote an article about premortems.
An academic center focused on value investing, where Michael Mauboussin is on the faculty.
The US intelligence agency whose website hosts a PDF of 'The Psychology of Intelligence Analysis'.
Where Michael Mauboussin has been an adjunct professor of finance since 1993.
A scientific journal where Francis Galton published his observations on the ox-weight guessing contest, analyzing crowd foolishness.
A newspaper that conducted a version of the 'two-thirds game' experiment.
A division of Morgan Stanley Investment Management, where Michael Mauboussin is Head of Consilient Research.
Where Michael Mauboussin earned his AB degree.
The oldest scientific society in the world, whose motto 'Nullius in verba' (take nobody's word for it) resonates with Mauboussin's teaching philosophy.
Where Tim Ferriss took a seminar with John McPhee and where Michael Lewis also studied.
Michael Mauboussin's first employer in the 1980s, known for Michael Milken's high-yield bonds, which later went bankrupt after the 1987 crash.
Acquired by Quaker Oats, known for its product Gatorade, which was a 'little jewel' that became an incredible brand.
A financial institution where Michael Mauboussin held roles as Head of Global Financial Strategies and Chief US Investment Strategist.
An investment management firm where Michael Mauboussin holds a leadership position in research.
A company producing macadamia nuts and oil, known for their delicious and low-carb keto-friendly snacks.
An e-commerce platform designed to help entrepreneurs sell anything, anywhere, providing resources and tools for online stores.
Where Michael Mauboussin previously served as Director of Research.
Where Michael Mauboussin previously served as Chief Investment Strategist.
The most famous product of Stokely-Van Camp, a 'little jewel' that became an incredible brand after its acquisition by Quaker Oats.
A shorter book by Scott E. Page, providing a concise treatment of the benefits of diversity.
A book by Peter Bernstein that documents the history of finance.
A 2017 book by Robert Sapolsky, described as one of the best books on human nature.
A book by Al Rappaport, published in 1986, which was a professional epiphany for Michael Mauboussin due to its emphasis on cash flow over accounting numbers, linking valuation and strategy, and stock prices reflecting expectations.
A book by Michael Mauboussin, named one of the 100 best business books of all time and recognized for financial wisdom in unconventional places.
A book by E.O. Wilson from the late 1990s, which proposes that many difficult world problems exist at the intersections of disciplines and require bringing ideas together for solutions.
Scott E. Page's major book on diversity, emphasizing the importance of cognitive diversity.
A somewhat obscure book by Michael Rothschild (1990) that argues economics should be understood through biology, challenging the mathematization of economics.
A book that tells the story of the founding of the Santa Fe Institute and the development of ideas around complex adaptive systems.
Philip Tetlock's book (2006-2007) that analyzed the predictions of 400 experts in economic, political, and social domains, finding they were not much better than chance.
Josh Waitzkin's book, which features sections on martial arts and chess, domains that Michael Mauboussin identifies as linear and stable, making intuition effective.
Michael Mauboussin's book, whose premise is to encourage slowing down and using better ways of thinking when faced with certain situations, specifically about avoiding mental missteps.
Jim Surowiecki's book (2004-2005) that describes how crowds are wise under conditions of diversity, appropriate aggregation mechanisms, and incentives.
A book by Melanie Mitchell, recommended as a great starting point for understanding complexity and complex adaptive systems.
A book co-authored by Michael Mauboussin and Alfred Rappaport, focusing on reading stock prices for better returns.
A book by Phil Mirowski documenting how economists mapped equations from Newtonian physics to economics to gain credibility.
A book by Michael Lewis (also mentioned as a Princeton guy) that made sports analytics fascinating to Michael Mauboussin.
Judith Rich Harris's first book, which challenged the conventional wisdom about the importance of parental influence on children's development, highlighting the role of genetics.
A book by Philip Tetlock and Dan Gardner, cited for the quote: 'Beliefs are hypotheses to be tested, not treasures to be protected.'
One of Michael Mauboussin's books, subtitled 'Untangling Skill and Luck in Business, Sports, and Investing'.
Tim Ferriss's 2010 New York Times bestseller, in which he recommended AG1.
A book by Peter Bernstein, offering a brilliant history of human understanding of risk from the Bernoullis to modern times.
A mid-1990s book by Robert Sapolsky about the idea of stress and its physiological impact.
A book that teaches parents to distinguish between their problems and their children's problems, encouraging children's initiative in problem-solving.
A book by Richards Heuer, available as a PDF from the CIA website, known for its insights into unlearning and the baggage of past knowledge, particularly for analysts.
Judith Rich Harris's second book, further exploring the idea of individual differences in children's development.
A book by Nassim Nicholas Taleb (2001) that delves into the topic of luck and randomness.
A decision-making technique developed by Gary Klein where one assumes a decision has failed horribly in the future and works backward to identify potential reasons for failure.
A strategy, originating from military applications and used in cybersecurity, where a 'red team' actively tries to attack a strategy or system to expose vulnerabilities.
A martial art in which Josh Waitzkin competed in world championships, illustrating how rule changes can destabilize an established 'intuitive' system.
A newsletter launched by Michael Mauboussin to explore different topics through various disciplinary lenses, with 'More Than You Know' being a collection of its essays.
An equation promoted by Scott Page stating that collective error is a function of the group's smarts minus cognitive diversity.
A concept where opposing viewpoints collaborate to test hypotheses fairly and objectively, exemplified by Daniel Kahneman and Gary Klein's 'Failure to Disagree' paper.
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