Transcription
But as for most people, we have a mechanism that will allow us, that makes us extremely sensitive to the small losses that you incur along the way, in a way that may not be compensated by the extreme win. The story is similar on the other side. I'll come back to it. Yeah, effectively, that's what this explanation is: why you went to Stockholm in 2002. That's exactly prospect theory. Danny discovered the following: you'd rather make a million dollars over a year in small amounts. You get more pleasure if you're going to make money; make it in small amounts. And if you're going to lose money or have a bad event, have it all at once, because losing—you'd rather lose a million dollars in one day than lose a little bit of money, also even smaller amounts, okay, over two years, because by the third day it's like Chinese torture. No, and and that's prospect theory; that's the reason he had the the Nobel; he's the reason he, you know, that's the whole thing, and people still haven't absorbed that point. The prospects here, that's what what and and when we met in 2003, I I immediately found, you know, the embodiment of my idea right there, you know, in in in in prospect theory, in in that equation.
But in a way, what you are—I mean, if we link it with prospect theory—what you're prescribing goes against the grain. You're prescribing a way of being or a way of doing things that exposes an individual to to a long series of small losses in the hope of a very large game. It's not not quite what I'm doing. Is the opposite: trying to tell people, "Do not uh mortgage your future for small gains." Now, and they get it when you present it that way. There's another psychological thing: that people tend to create a narrative that, you know, the large event will never happen. So, and there's another dimension of why do we have uh Bankers, for example? They make pennies; they make pennies; make pennies. And when a crisis happens, they lose everything they've made before. And effectively, in 1982, I was writing on the Black Swan. I got so many hate letters from Bankers in 1982. I showed why the banks lost in one quarter more money than they made in the history of banking until then, history; Money Center banking. They repeated it in 1991 and of course 2007. You don't need more, you know, examples. So, and every time that there's another dimension: it's not their money they're losing; it's your money. Anyone here who files that piece of paper on April 15th is subsidizing them, because when they make the money it's theirs, and when they lose the money it's ours, on April 15th; taxpayer sponsors it. So we have here what I call a transfer of anti-fragility: a banker is anti-fragile; he has upside, no downside; taxpayer has downside, no upside. So you're going to have a lot of risk hiding on top of the psychological thing. So, and then you told me, you know, there is the two effect, and I call them one, Fooled by Randomness, the other, Crooks of Randomness. Okay, so there's the fools of Randomness and the Crooks of Randomness. You see, it's a combination that we see present in society. If you remove one, the Crooks of randomness, you would have much less of it. This, of course, is phenomenal; would prevail, although there's something called dread risk; people may be scared by extreme events if you present it to them properly, as you have shown, but uh but the the phenomenon, Crooks of Randomness, is what we definitely can remedy.
But I have one more thing to say: A system that does not convert stressors, problems, variability into fuel is doomed. Well, I keep going back to the same point: this is not really what people want to do. Yeah, that is, I certainly uh, you know, many of us certainly go almost directly in New York from heating to air conditioning and vice versa, because we do like the constant temperature. So it, you are making a point which I think is true and deep, that in in some situations uh that we are made for variability, that as we are designed by evolution uh to to be able to cope with stresses, and indeed, as a point you made absolutely correctly, to benefit from stresses, but we're also designed to avoid stresses, to try to avoid stresses identical to Randomness. We're made to hate randomness because the environment was given us Randomness and it prevented us from dying, prevented us from encountering the big uh, you know, large-scale event. So we made to hate all kind of Randomness because we're not, you know, fine-tuned, you know, for for such uh subtlety, okay, that some Randomness and small amounts is good for us. So we realize Randomness is bad; it's bad, okay. So it's the same way, the same way we think that stressors are bad, when in fact bad big stressors are bad, small stresses are beneficial. This is the non-linearity that we don't capture intellectually. Well, the psychology of it is the following: that we're actually relatively more sensitive to small losses than to Big losses, and to small harms than to big harms. That is, this: we have a limited ability actually to feel pain, and we feel a lot of pain for very little harm, and then it doesn't get worse proportionately. So that in some, in a very real sense, we're designed against what you want.
Yeah, but except that guess what saved us from this religion? I mean, I'm Greek Orthodox, all right, I'm not practicing, but sort of sometimes practicing for dietary reasons. Okay, we have, and we have, I mean, think about it: the religions force you to fast, force you to to have variability in your food, especially we have 40 Days for Lent, 40 days plus every Wednesday and Friday. No, and you're vegan, so you're vegan so many days, why? To prevent you from having protein, because we're we're part lion, part cow. The lion in us gets the protein with with a random frequency, whereas the cow in us eats a salad without dressing every day, all the time, right? So you see the boring and and the the hunter. So if you're made to get protein episodically, intermittently, and you get it all the time, you may be harmed. Religions have evolved to prevent us from that by banning it, from eating protein seven days a week, you see. So you can look at the fast and Ramadan; it has this very same purpose. So you see all these rituals were there to help us cope, forces on grounds, you know, of course the religion is like someone packaging the story uh for a uh, you know, giving you a story in fact to force you to do something else, and that was, I mean, so we have had mechanisms to correct for this uh for the diseases of abundance. I mean, we live in a world today where a lot more people are dying of over-nutrition than under-nutrition, you see. We have 700 million people supposed to be under uh, you know, uh fed, but but of these the really ill, very small number.
Well uh, you I want to change the subject. Yeah, another great uh mental model is doing things which have asymmetry, and doing things where uh downside is muted or non-existent and upside is unknown uh, you know, and in fact if you look at a person like Jeff Bezos or Amazon uh that's what they do; they basically throw a lot of stuff against the wall uh they're all relatively small bets; most of them don't work uh but a few do, and then when they do you get huge payoffs. Anytime you can identify asymmetry uh in some action or something that you could take uh you should go for it. So for example uh, you know, Charlie Charlie told me, and I've seen it with him, is he likes to introduce Randomness into his life. So sometimes when I meet him, you know, from his coat pocket he'll remove a bunch of letters he's received from people all over the world, you know, there's a lot of people write to him, and whatever, and he'll go through a few letters and say, okay, this one uh uh I'm gonna have breakfast with this person. I'm just thinking, you know, that guy's gonna fall off his chair, and uh someone from uh, you know, Charlie's assistant contacts him or something uh but Charlie likes likes that Randomness; it has led to uh many great friendships and in some cases business partnerships uh for him. And again, there's no downside anyway uh like I said, I think that it's it's led to so many things uh and I I think I should do more; I don't do enough with asymmetry uh I think Amazon does an awesome job with asymmetry uh I think Tencent does an awesome job in asymmetry um I think Facebook does a terrible job with asymmetry. So the difference between Amazon and Facebook, even though you didn't ask, is, you know, uh the two Jeffs throw a lot of stuff against the wall and uh and basically um basically more stuff doesn't work, but it's small bets, and uh you know at Meta there's a massive multi-billion single bet and uh good luck with that; that kind of violates the rules. Reflections [Music]
Besides the distortion, insensitivity caused by the magnitude level of the gain or loss, we can also notice another important bias in the graph, and that is that for the same unit of loss or gain, we feel more the pain than the happiness. This bias is called loss aversion. This is one of the most important biases in human nature, and it explains a great deal of our reactions. This is why it is said that 70 percent of all consumer purchases are done to avoid a loss, and 30 percent to get a positive benefit, according to ex-FBI negotiator and business leader Chris Voss, or to some extent why people are afraid of variability in general, so afraid that in the financial markets people often even use volatility, that is the fluctuation of prices, as a measure of risk, which in an objective sense doesn't make any sense, because real risk is only the potential for permanent loss of capital. Embracing Randomness, having some variability in the sense of adventure in your life, is also way more fun than having a monotonous life in which you already know what you are going to be doing at each hour or minute of your day. This is what Nassim calls touristification of your life: just like in a tour, everything has a specific time in the schedule; your life becomes a tour in itself if you already know in advance what you will be doing at each moment of your day. Also, having everything timely planned makes you more fragile, because an unexpected event can only be negative; that is, there is only the downside, whereas if you are adventurous, unexpected events will definitely have more upside than downside. Some aphorisms from Nassim to live on: If you know in the morning what your day looks like, with any precision, you are a little bit dead. The more precision, the more that you are, you have a calibrated life, when most of what you fear has a T+T lighting Prospect of Adventure. The consistency bias makes the prospect theory even more powerful: we think that the big and frequent event, positive or negative, will never happen, so we do not seek the big potential payoff or prepare ourselves for a big potential loss, and we get complacent with small frequent gains to feel like we are doing well, since it maximizes pleasure, and that we are in the right path, and everyone in our social circle respects or accepts us, not only because you are often winning, but also because most people will choose this path. Falling prey of the prospect theory and consistency bias will make you way more likely to find and stay in a stable job rather than starting an entrepreneurial banter.
If you're an employee, you have small frequent gains, that is your monthly salary; you feel good because you are feeling the pleasure of the gain in many doses, but you also set the potential big event of losing your job and even defaulting on your mortgage if you get any. Maybe this structure of having certain and frequent gains is one motive for Nassim's aphorism: the three three most harmful addictions are heroin, carbohydrates, and a monthly salary. If you're an entrepreneur, you're bleeding a bit every day, but you also set yourself up to profit from a big or frequent gain at some point in the future, and also because the upside potential in the entrepreneurship is unlimited; you could make way more money than the accumulated small gains of a corporate job. In terms of biased feelings, you feel bad every day, and the day you win big you don't feel it that much, because our sensitivity to feel decreases, so it sucks from a feelings perspective, but in absolute terms, in terms of Financial Freedom or freedom in general, I think you're way better off. In words of Navarro: We can't—if you're willing to bleed a little bit every day, but in exchange you will win big later, you will do better. That is, by the way, entrepreneurship; entrepreneurs bleed every day; they are not making money; they are losing money; they are constantly stressed out; all the responsibility is upon them, but when they win they win big; on average they will make more. Would you like to get access to the finest nuggets from the best non-fiction books out there? If you do, you should check out Shortform. For disclosure, Shortform is not sponsoring this video, but there is an affiliate link in the video description. Why am I promoting Shortform? Well, my purpose through this channel is to collect valuable insights from videos of people that I deeply admire. Now imagine if you can easily get the most valuable insights from the best non-fiction books; this is what you can find on Shortform: a curated selection of the best books, and for each book you can find a carefully crafted summary in which all the book's relevant ideas are analyzed. This is why I absolutely love to read on Shortform and would recommend it to anyone. As Charlie Munger argues, to have a good, unsuccessful life, you have to create a mental model from all the big ideas from all the big disciplines, and Shortform can be extremely helpful for this matter, as it literally extracts all the big ideas from the best non-fiction books, helping you to create this mental model in a faster and more efficient way. And with these valuable ideas becoming second nature to us over time, I think we will be able to build our best lives by standing on the shoulders of giants, as Sir Isaac Newton would put it. Now the way I personally read on Shortform is to pick from my personal library any book that sparks my interest at that moment and start reading it; typically I will read sometimes in the morning after waking up, sometimes at night before going to sleep, and many times I will do a short read on the mobile phone app when, for instance, I'm in a restaurant alone waiting for the food or commuting somewhere. I created my personal library by quickly scanning through all the books on Shortform, and for any book to make it on my library it has not only to interest me, but it also must fulfill at least one of two conditions: one is that I already know the author of the book from an interview in some podcast or any other source that I personally trust, and the other is that the book itself has been publicly recommended by people who I deeply admire. If you are interested in Shortform, you can visit my special link, shortform.com/pickingnuggets. I will also leave the link in the description of the video. By joining with my affiliate link, you will be supporting this channel, and you can have unlimited access for 5 days and a 20% discount on the annual subscription if you do choose to keep going after the end of your trial. Thanks for watching.