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Sunday, April 27, 2008


Here’s the anatomy of an idea—which follows two phenomena (the first: mutation/selection; the second: that all new things are combinations or permutations of existing things). As Harry Truman said, “there’s nothing new—just history you don’t know. A mutation of this quote can be observed in the work of Paul Romer--who deserves a Nobel in economics for his new growth theory that all growth comes from new combinations of existing resources. As well as every molecular magician that has artfully or stochastically tinkered with the periodic table of elements to yield life-saving drugs, synthetic fabrics, new forms of energy or materials that support 2,000-ton bridges or two-ton cars. Matter matters.

Anyway: here’s the anatomy of the idea: Last month, I got married in Barbados. The locals eat a dish called roti. I misread the word and saw roit (mutation). This then combined with a known concept ROIC (return on invested capital) and triggered a thought (selection) that the “t” could stand for time. ROIT: return on invested time.

That’s the anatomy; here’s the thought: the sources of information you choose (TV, radio, web) the conversation partners you choose; frankly all the choices (and necessary trade-offs) you make with the most precious and scarce resource you have (ie. time)--all have different returns on the time you invest in them. Choose between: reading a perennial investment classic or the latest best-seller; listening to a lecture or an album; talking with a ‘doer’ or a ‘bluffer’; networking at conference cocktail hour or hitting the gym. Whether you measure those returns in units of quantitative capital or qualitative emotion is up to you. But there is no escaping the reality that reading those sentences (and the ones that follow) just cost you whatever your next best alternative is to invest your time. Time waits for no man.

And when it comes to informational attention: I (mostly) prefer information presented visually to audio information presented serially. Patience is not a virtue of mine. Sure, Tolstoy might’ve said “The two most powerful warriors are patience and time.” And Saint Augustine that “Patience is the companion of wisdom.”…But Oscar Wilde also said, “Things may come to those who wait, but only the things left by those who hustle.”

And speaking of speed and time, Wired magazine just profiled Rick Graves, a NASCAR photographer who uses his finger and his lens to freeze time. He's clearly a rare talent: but it was his words even more than his images that captivated me. In refreshing self-aware honesty, he tells the mag, "Failure is necessary--and a lot of times, success is luck."

How true this is for startups, investment managers, authors and any number of people engaged in pursuits with low probability, high impact outcomes.

We think we know experts when we see them, but often context matters. Dress an average guy up in a suit and put him on TV (“appeal to authority” bias) and we’ll believe him more than the same average guy dressed plainly on the street. I previously wrote about this actually happening a few years ago on cable news when the wrong guy was interviewed live. The guy on camera came to the studio to apply for the job, but he was mistaken for the scheduled guest and put on air. The clip is out there for you to see for yourself.

How about an even more extreme example? Take the inverse: we can just as easily miss a skilled expert if they are placed in a context we don’t expect them in. Earlier this year a world-famous virtuoso violinist plopped down in a Washington DC subway station during rush-hour opened his violin case for tips and on a three-century old violin valued at over $3 million played masterpiece after masterpiece for nearly an hour. Over 1,000 people passed by. How many do you think spotted him, stopped to appreciate his masterful performance of legendary music, or gave him money? Remember this is a guy who fills concert symphony halls around the world and where the cheapest seat is over $100.

The answer: seven people. Only seven people stopped for more than a minute and he had a grand total of $32 and some change. Context matters.

I’ve written often about skill versus luck. That when things go well we attribute it to skill, but when they go badly, we blame bad luck. Predictions that don’t come true, bad calls or even sports outcomes are chalked up to fluke events. We try to blame bad outcomes not on bad process but on exogenous events (in behavioral finance its’ commitment and consistency biases that keep us insisting the fault wasn’t ours but just a near-miss because of some unexpected outlier, “if only xyz didn’t…”).

These same biases have been proven by psychologists using basketball. First they asked volunteers to imagine how a random team would win a game. The volunteers were more likely to be convinced that team would actually win—and they’d even bet cash on it. Focusing on one outcome (availability bias) leads people to overweight the odds of that outcome and underweight the probabilities of all the variables and outcomes they aren’t focusing on. And the higher estimation of odds leads people to put there money where their irrationality, er-mouth is.

It’s also why pessimists do better at casinos. They expect to lose and walk away after winning. Whereas the optimist hopes (and reinvests) until he’s broke.

The same psychologists went back to a NCAA basketball game from over 25 years ago. Team A was down by a few points losing to Team B. Team B stole the ball and was about to score and extend the lead, but after someone from Team A knocked into him, the Team B player blew the hoop. The refs didn’t call foul and sure enough Team A came back from behind and clinched it.

Now, here’s what the psychologists did: They asked the losing fans of Team B if their team would win a rematch. Only 25% said yes. But when reminded of the near-miss; foul—nearly 75% of the losing team fans said yes. Meanwhile, the fans of the winning team when asked the first question and when reminded still thought their team, Team A would win again. Thus proving again that context matters: that winners believe themselves (or their team) more skillful, while losers blame their misfortunes on near-misses (uncalled fouls) and bad luck. Consistent with the observed wisdom that success has many fathers; failure is an orphan.




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