#739: Brené Brown and Edward O. Thorp  ## Metadata - Author: [[The Tim Ferriss Show]] - Full Title: #739: Brené Brown and Edward O. Thorp - Category: #podcasts - URL: https://share.snipd.com/episode/3310b7d3-0684-4799-9caf-e4b72b24efc6 ## Document Notes ## Highlights - **Self-Acceptance and Change** - Lasting, meaningful change must be driven by self-acceptance. - Self-accepted complacency may not exist; it could be an oxymoron. Transcript: Brené Brown You can have self-love and self-acceptance and want to be better in ways. Here are the things I want to unwind. I don't think you can truly change for the better in a lasting, meaningful way, unless it is driven by self-acceptance. Tim Ferriss I agree with that. Brené Brown So I think being the shit out of yourself for performance, which, you know, I work with a lot of sports people now, like it works. And if all you have to do is pay someone for one season or all you do is one game or one, whatever, you're okay. But lasting meaningful change has to be driven by self-acceptance. The other thing that is just so shocking to me about complacency and self-acceptance is as I think back, and I would really have to go into the data, but just sitting here, I don't think I have ever come across a single person, not a single person that I can think of, who was complacent driven by self-acceptance. I don't know that that is not an oxymoron. I got to tell you that self-aware complacency doesn't work for me as a construct. ([Time 0:07:30](https://share.snipd.com/snip/bf0a26b5-a372-4b59-b648-81a884d5eb11)) - **Achievement vs. Happiness** - High achievement doesn't guarantee happiness; many achievers are miserable. - Self-awareness is crucial for examining one's consciousness and finding inner peace. Transcript: Tim Ferriss I agree. Yeah. So this is getting out there a bit, but this is the type of stuff that sometimes I worry that I lose, that I've lost my audience. Can I make a confession? Yeah. Because for a long time, I was thinking about writing a blog post about this, but for a very long time, if you look at all the books that I've written, it's like book on entrepreneurship, Book on physical performance, book on cognitive performance and learning for our chef, et cetera, et cetera. It's mostly developmental. It's about improving performance in one or more areas. And now what I've spent more and more time on, like we're spending time on it right now, is the inner game. For sure. And the importance of developing a keen level of self-awareness so that you can examine the contents of your, this is going to get super woo for a second, the contents of your consciousness, Wherever you go, you're carrying your mind with you. And so to develop a familiarity with that, I think is the crux skill that underlies everything else. And you I both know plenty of achievers who are miserable, who are high performing, well-known people who are utterly miserable. And to me, the question of why is that? How can that be the case? Is the question that I'm extremely interested in these days. ([Time 0:10:50](https://share.snipd.com/snip/b1ff5f49-e3f5-4417-9463-13285ee948ef)) - **Unlocking People** - Unlocking people is harder than unlocking performance or skills. - Self-awareness is the capstone conversation because it addresses the deeper question of purpose. Transcript: Brené Brown So a couple of things. One, the go, go, go audience that you've built, this may scare them, but I mean, as someone who works with elite athletes and professional folks and CEOs and those things, what I can tell You is this is the hardest challenge you've issued. And it's not about the conceptual complexity of what we're talking about. It's about unlocking performance is one thing, unlocking people way harder, way scarier and unlocking ourselves and creating self-awareness, to me, you would be remiss not to go Here. Because I don't know, I think something you said when you were talking about, we all know a lot of narcissists and they love themselves, but that's actually not true. Do you know that narcissism is the most shame-based of all the personality disorders? Narcissism is not about self-love at all. It's about grandiosity driven by high performance and self-hatred. You know, I define it as the shame-based fear of being ordinary. And so you have, to me, you have this audience that, and I'm one of them. I mean, like, and I'm probably an outlier, I guess, it's like me being a Rush fan. Like, there's always outliers. Tim Ferriss The audience is like 40 to 50% female. But I appreciate it. Yeah. Yeah, it is. It's shifted a lot in the last handful of years. Brené Brown Yeah. But I think when I get invited in by a Fortune 50 CEO and here she says, look, we need help. We need help with the team. They're not asking me to help with time productivity. They're not helping me to set up a scrum or agile process for software development. They're saying we're at each other's throats. We hate each other. It's a shame-based finger pointing. It's all about self-awareness and changing those behaviors. And to me, the hard thing about this area and your work is a lot of what I've learned from you that has changed my life has been not only effectiveness based, but efficiency based. And so where you can lose people with this conversation is this is not an efficient process. Yeah. Right. Do you know what I mean? There's no, I don't think there's a four hour self-awareness. Tim Ferriss It's like, I have no plans to write that. Yeah. Brené Brown But I mean, but I, but people would love it if you could, if you could unlock that fast. But to me, this is the capstone conversation for you. Yeah. Do you know what I mean? Like I do. ([Time 0:12:42](https://share.snipd.com/snip/3e0b97e1-0c7c-438a-bc31-6fd6c15e80e6)) - **Pathology as Armor** - The human need for connection and the burden of past experiences shape our behavior. - Pathology is often armor developed to protect oneself from hurt, but it can become a hindrance. Transcript: Brené Brown Because I'm going to tell you not to dismiss the importance of that work. Easier. Tim Ferriss Yeah. Yeah, it is easier. Brené Brown It is easier, you know, because the thing about these conversations that you and I end up having every time we sit down, or this is the second time, but both times we've sat down, is what Differentiates us as a social species is the need to be seen and known and loved and the need to see and know and love others. And no one rides for free. Like we all come into this adulthood with hard stuff. And what I would is true about complacency. And 95% of what I see that people call pathology is its armor. Yeah. It's behaviors and ways of thinking that I've developed to protect myself from being hurt. I have a question to you about that. Tim Ferriss So my question related to armor is, I'll get to through a segue, which is a quote that I want to say Tara Brock, the well-known meditation teacher, also writer, Radical Acceptance is A fantastic book, shared with me, which I'm going to paraphrase, and it's along the lines of, you know, a great sage once said, there's only one real question that matters, and that is, What are you unwilling to feel? I've thought about that a lot. And not to say I have any concise answers to that, but I think it's an anecdote really worth meditating on. I've thought about it. What do you say to the people you meet who are on the third marriage, their kids don't talk to them, and there are certain things that they have convinced themselves subconsciously or Otherwise, maybe through an abusive upbringing or trauma, whatever it might be, that it is unsafe to feel certain things. And you come in, they've asked for help, but they do not want to open Pandora's box. They do not want someone to drag into the deep waters of emotions that they've kept under lock and key for so long. How do you help someone like that? What do you suggest to them? Because it does get messy, right? It's going to get messy before it gets clean, right? At least in my experience, it's like, oh, you're going to do spring cleaning? Guess what? You got to take all the things that are up on the shelves, all the things in the drawers, all the things that are hanging on coat hangers, and you're going to put them in the middle of the Room. And it's going to be a mess. It's going to be a fucking mess. Yeah. You're going to be pissed that you did it halfway through. But you can't really get past go without that type of step. So for someone who's listening to this and says, you know what, I buy it. I get it. And yet, what do I do? Because I've had on this armor for so long. Brené Brown So would say a couple of things. I mean, the first thing I always feel like is really important to say is that I'm a researcher and so I'm not a therapist. That would be differentiate me with Esther. Like I don't see clients. If I go in and I'm working with CEOs and this question comes up all the time, what I would say to people is Pandora's box is closed right now, but are you under the impression that you're Living outside of the box or in the box? Tim Ferriss Like, yeah, I like that. Brené Brown You don't want to open Pandora's box. That's strange to me because you're living inside Pandora's box. And what I feel like you've asked me to come here to open it up. We're not going to do this process without walking through some deep shit where there's going to be deep, swift water. And if the water is super deep and swift, you need to go through that with a therapist and get that settled before we work in the organizational way. But what I would say to people, what I always say is the same for me, and I'm sure the same for you, that we all grew up and experienced to varying degrees trauma, disappointment, how hard Stuff we armored up. And at some point, that armor no longer serves us. And so what I think I would say to that person is, how is not talking about this serving you? I've been sober for 23 years. So someone in AA would be like, how's that shit working for you? I probably would put a softer spin on it than that over black coffee and a cigarette. But I would say that it's not serving anymore. And now the weight of the armor is too heavy and it's not protecting you. It's keeping you from being seen and known by others. And so this is, I mean, just how you quintessentially, this is the developmental milestone of midlife. From late 30s to through probably your 60s, this is the question. This is when the universe comes down and puts your hands on your shoulders and pulls you close and whispers in your ear, I'm not fucking around. You're halfway to dead. The armor is keeping you from growing into the gifts I've given you. That is not without penalty. Time is up. So this is what you see happen to people in midlife. And it's not a crisis. It's a slow, brutal unraveling. And this is where everything that we thought protected us keeps us from being the partners, the parents, the professionals, the people that we want to be. ([Time 0:15:29](https://share.snipd.com/snip/f86d5017-84d0-4234-858f-aa72fd365433)) - **Cultivating Curiosity** - Replace armor with curiosity about yourself and the world. - Ask yourself: "Why did I react that way?" Transcript: Brené Brown A lot of that work has to be done with a therapist. The other two hacks that I think have saved our marriage besides just showing up and kind of using some of these things like what's working, what was hard is the 80-20. So everyone says marriage should be 50-50. It's the biggest crack of bullshit I've ever heard. It's never 50-50 ever. And so what we do is we quantify where we are. So if Steve comes home and he'll be like, I got 20. Tim Ferriss Just in terms of energy. Brené Brown Just energy, investment, kindness, patience, I have 20. And I'll be like, I'll cover you. I got you, brother. I'll pull the 80. Sometimes we come home, which we have done a lot. My mom has been sick and I'll say, I've got 10. And she like two days ago said, I'm riding a solid 25. So we know that we have to sit down at the table anytime we have less than a hundred combined and figure out a plan of kindness toward each other. ([Time 0:23:29](https://share.snipd.com/snip/5fbe6b1b-5ebd-4215-9f6e-2c711c891033)) - **The 80/20 Marriage Hack** - View marriage as a partnership where you carry each other's burdens. - Quantify energy levels and create a plan of kindness, especially when both partners are low. Transcript: Brené Brown Oh, I love that. Yeah. Because the thing is marriage is not something that's 50, 50, a partnership works when you can carry their 20 or they can carry your 20. And that when you both just have 20, you have a plan where you don't hurt each other. Tim Ferriss Yeah. You're threadbare, right? Yeah. Brené Brown And so what we'll say is I'm like, I've got 10. And he'll be like, I got maybe 25. We're like, put all the groceries that are supposed to be great and healthy in the freezer. We're ordering out, get the housekeeper here an extra day. And we're canceling anything with people that we really actually don't like. ([Time 0:24:27](https://share.snipd.com/snip/fea0c5fe-0a89-41c3-b8b3-99835b2b482c)) - **Embrace Curiosity** - Be curious and look for opportunities to apply knowledge in unexpected ways. - Don't be afraid to challenge assumptions, even in areas where you lack experience. Transcript: Tim Ferriss It's lovely to finally connect and perhaps we'll get to the small world that connected us at some point, but I thought we could begin with a little bit of background for people who may Not have the entire context and then we can fill in the gaps. So perhaps you could speak to a little bit of your growing up and your formal education, if you wouldn't mind. Edward O. Thorp I was born in Chicago during the reign of Herbert Hoover, president number 31. So I've seen 16 presidents. I moved out to California with my parents during World War II and basically grew up in California, went through junior high school and high school out here, and then went to UC Berkeley And UCLA. And I got a bachelor's degree and a master's degree in physics. And then in the middle of my PhD for physics, I realized I needed more math, so I started taking it, and then I saw I could graduate more rapidly in mathematics. So I got my PhD in math instead. And then I went on to teach at UCLA, MIT, New Mexico State University, and finally, University of California, Irvine. Tim Ferriss Now, how did gambling or interest in those types of applications of physics or mathematics enter the picture for you? Edward O. Thorp Well, I'm a curious person, and you could say that it happened purely by chance. When I was teaching at UCLA, I got interested in beating blackjack. Somebody told me about an article that would let me play almost even. So one Christmas vacation, my wife and I went out, actually Christmas vacation of 1958, just after I got my PhD, we went out to Las Vegas and I never gambled because I knew it was a loser For most people. And the odds were against you but I bet $10 and I played for about 40 minutes and I had an interesting experience. The first 20 minutes I had a little card telling me what to do and people thought I was a fool who knew nothing about the game and they were right that I knew nothing about the game but the Card made me much smarter than the other players. I made some remarkable plays attracted their attention. And then they all hovered around. They wanted to see how I was making these plays. In one of them, I got a seven card 21, which is very rare and in most places paid a bonus. They didn't pay bonus in this particular place, but they thought I was trying for that and I somehow managed to produce it. So I realized they didn't know much about the game, really. And I went back and read carefully the statistics article and realized that I could see from my math background how to actually devise a system to beat the game. ([Time 0:30:00](https://share.snipd.com/snip/5773ffbf-bd58-415c-9482-e41a3a68d583)) - **Beating Blackjack and Roulette** - Edward Thorp developed a winning blackjack system after a trip to Las Vegas. - He collaborated with Claude Shannon to create the first wearable computer to beat roulette. Transcript: Edward O. Thorp Then I set about to do it. And about that time, I moved from UCLA to MIT, and I had access to the big computers at MIT. This was back in 1959. They had an IBM 704, which was a refrigerator-sized machine that served 30 New England universities. So I taught myself how to program. And as I worked my way through with my ideas, I saw that I had a winning system. And it was just a matter of finishing all the calculations. So I went ahead and did that. I wanted to get this system published because I thought that from my experience in mathematics and what I've seen happen elsewhere, other people would claim they did it and grab the Credit. That annoyed me because it already happened to be in mathematics a couple of times. So I went shopping for somebody who could get me quick publication. And it turned out that on the MIT campus, there was a man who I knew nothing about named Claude Shannon, who was an institute professor. And he was a member of the National Academy of Sciences. So he could get me, if he approved of what I wrote, a quick publication in the Proceedings of the National Academy. It would only take a couple of months to get it out. So I looked him up one day, and the secretary at MIT's math department said, there's no point in going to see him. He doesn't see people. He's very private. And if you do get to see him, you're only going to have five minutes. So I finally managed to see him at lunch for five minutes after we talked. He said, well, it looks like you've got all the main ideas here. Yes, I'll put this through, but we have to change the title. The title was A Winning Strategy for Blackjack. And he changed it to something like A Favor strategy for 21, which sounded better. He didn't want to make too bold a statement for the National Academy and make it look like this was just a gambling paper. So anyhow, the paper got sent in, and it caused a sensation because I had submitted an to the American Mathematical Society meeting in Washington, D.C., where I was going to present. By the way, they initially rejected the abstract, saying that this is just another fool with a system that doesn't work because we know you can't beat gambling games. But on the abstract committee was a person I knew well from UCLA, a number theorist named John Selfridge, became quite well known in number theory. And he said, well, if Thorpe says it's true, it probably is. So you should accept this abstract. So I went there and I presented, and I thought there'd be about 50 mathematicians in the audience, but instead there were 300 people. It was jammed. And a lot of people were very odd looking. They had pinky rings on and sunglasses and tropical shirts in the middle of winter. So after I finished, they lunged for my little handout. I brought 50 handouts saying, that's all I need there. And I basically tossed the handouts out and left as quickly as I could. Then it was picked up by a fellow named Tom Wolfe, who became a famous American novelist. He was a young reporter then. He wrote a piece for AP, which went across the country. And so it got massive press. That led to me writing a book and telling everybody how to do it after a couple of years. Between the time I wrote the book, though, and when I told people how to do it by publishing, I went out and played blackjack myself and proved the system worked. I figured that there's no point in writing a book unless I knew it really worked. I knew it worked in theory, but what if you actually tried to do it? And you know, a lot of things, they seem to work in theory, but when you get down and actually put something to the test, you find out there are all kinds of things you didn't think of. Turned out in this case, it worked very well. We made in one weekend with a test $11,000, which is about that with a zero on the end. In today's money, this is in about 20 hours of serious play. So I had a lunch ([Time 0:32:50](https://share.snipd.com/snip/68750c7a-3cd2-4b72-9698-fe989249d63f)) - **Fitness Philosophy** - Listen to your body and do exercises you enjoy. - Some exercise is better than none; do what you can and build upon it. Transcript: Edward O. Thorp You think have contributed to your longevity? I've evolved. I try to listen to my body. So I do what I enjoy. And the rule I started to follow was some is better than none and more up to a point is better than less. So there's no excuse. I mean, if you tell yourself, gee, I'm not going to do this because I can't do the whole program, that's a big mistake. Just start doing it. And I find that if you start doing it and you get used to it, you find more and more things that you kind of like that you can build on and then you just keep getting better at it. ([Time 0:48:00](https://share.snipd.com/snip/f74fce85-f278-40c3-8a3c-24f1ce281468)) - **Long-Term Investing** - For long-term investing, buy and hold equities, ideally in a U.S. index fund. - Avoid high trading costs and fees by indexing, which outperforms most active managers. Transcript: Edward O. Thorp The first thing I would tell them is, the answer is really easy for almost everybody, but you're not going to believe me until you work through yourself and understand it. And I'll tell you the answer to start with, and then I'll try to convince you that it's the right answer. So I'll just tell you the answer to start with. The answer is, if you're a long-term investor, you should just buy and hold equities. And the best place to have bought and hold equities has been the U.S. For the last couple of hundred years overall. Equities here have compounded at about 10 or 10.5% for 200 years. The data for the first hundred years is not as good as the data for the last hundred, but the data for the last hundred is quite good and very well documented. How does that do against everybody else? Well, you can prove by logical and mathematical arguments, and I won't go into all the details here. Some of it's in my book. It's also in other places. You can prove that if a person simply buys the index and holds it, he will outperform most all the other players. The people who buy and hold the index will beat the whole collection of people who don't do that. They do way better on average. The ones who don't do that pay trading costs. They have more volatility from diversification generally, from lack of diversification. And they often pay investment advisors and all this, and they also pay taxes when they trade. So the upshot is that you might make 10.5% if you don't pay all these people. You might make 8% or 7% or 6% if you pay the crowd of people waiting to, quote, help you, unquote. So that's the simple answer for people who don't know anything about investing. Now, you might say, well, yeah, but I'm pretty smart. I hear all these stories. I listen to Kramer on TV, jumps around and makes a lot of noise and sounds good. So why can't I do better? Well, the academics have something called the efficient market theory, in which they claim that you can't do better. Now, I've already explained that that's wrong. You can find instances where you can do better. Warren Buffett apparently did much better. I found with my hedge fund I could do much better. But the kind of work you have to put in to do much better is substantial. It doesn't seem like it at first, but when you get into it, there are all kinds of details and follow-ups and things to be checked out. And you end up spending a substantial amount of time and energy figuring out how to do it better. And for everybody who finds out how to do it better, the rest of the crowd who isn't buying the index is doing a little bit worse because you can show that the whole collection of people Who don't buy the index are themselves as a group like the index because everybody as a group is like the index you subtract the index part out and the rest is like the index too so the people Who aren't buying the index, but are like the index as a group are busy paying all these costs, taxes, investment advisors, and so forth. So on average, that whole group does worse. You're paying basically a casino vigorous or whatever, if you're not indexing and you've got to beat that in order to do better than the indexers. And obviously, the group can't beat that. So it's only a small collection of people, some by luck and some by skill, who end up doing better. So you're basically betting against the odds if you just step in and buy stories and invest in various mutual funds that are actively managed and so forth. So that's what I would tell people. Now, the other side of the coin, if you really are interested in investing, it's worth educating yourself and trying to do it, because you will learn a lot about investing. You might actually find a way to win. And you'll learn about how the world works and a lot about life too. The things you learn from what seems like a narrow, specialized field generalize very widely to all kinds of things. ([Time 1:04:33](https://share.snipd.com/snip/11c7f893-eadd-469c-b01f-94592df73104)) - **Madoff Fraud** - Thorp identified Madoff's fraud in 1991 by analyzing trades and finding inconsistencies. - Despite Thorp's warning, many continued investing with Madoff, highlighting the dangers of crowd thinking. Transcript: Edward O. Thorp Back in 1991, I was invited to review the portfolio of McKinsey and Company back in New York. And so they had a profit sharing and a pension plan. And I came and I looked at all the things they had and the things they had were really quite good. But there was one very strange investment they had. It printed out one or two percent a month every month. They've been doing it for years. They had a record going back into the late 60s, supposedly. And I said, how do they do this? And they said, well, we don't know exactly. They tell us that they won't explain what their method is, but we can show you our accounts. So I looked at their accounts, and I saw that this account bought stock, and it put option positions on call callers. They had to put option a little below the stock price, and they bought a call option a little bit above, and the two things paid for themselves was self-financing. So they didn't have, apparently, a whole lot of risk. But I could show that in a down market, they would lose in a down month. In an up month, they would win. But they won every month. And the reason they won every month was because a mysterious trade was put on involving S&P index options. And it was always in the right direction. So if they were going to lose, it would be a winner. And if they're going to win, it would be a loser. So I said, this is not possible. I said, I want to go over and look at this place. So they called the person in charge, who happened to be at that time, Peter Madoff, the brother of Bernie Madoff. Bernie was off in Europe raising money. This was 1991, mind you. So when Peter Madoff heard I was coming, he said, no, I won't let him in the front door. So I held my nose and I said, I want to take a better look at all this. So I looked at all their trades and I saw that half the trades never happened when I researched them. That is, there was no trades occurred on any exchange at the prices they were making them at for these options. Another quarter of the trades had so much volume that the volume couldn't have happened because there wasn't that much volume on the exchanges where they traded. The last quarter of the trades, which consisted of 40, there were 160 to start with. The last quarter of the trades didn't happen anywhere. There was no explanation. So I said, okay, let's look at some of the trades that actually could have happened. So I went to a vice president of Bear Stearns, rest in peace, and said, know, we do a lot of business together. I'd like to ask you a special favor, which you might or might not be able to grant. I'm going to give you 10 options trades. I'd like to know who was on the other side of these trades. In particular, was Madoff and company on the other side of any of them. So they researched the trades and they came back and said, no, can't find any trace of any Madoff& Company. So I said to McKinsey, this is a fraud. And they said, but we're making 20% a year. And I said, well, you're making 16% a year currently in your other investments. If I'm right, this 20% is not real and the roof's going to fall in someday and you might lose your jobs. On the other hand, if I am right and you move, you have saved this problem. If I'm wrong and you move, you're only going from 20% to 16%. So you know what makes a lot of sense? To just exit. So they exited in two months. And we inquired of everybody we knew, I threw my network, they threw their network, to find out who had investments with Madoff and how much they had. Now, we could only cover a small part of the territory because our network was not comprehensive. And it turned out that about half a billion we were able to identify. Now, that meant that there was a lot more than half a billion out there. How much more, we couldn't say. But things were looking very bad. On the other hand, how could you challenge Madoff? He was a pillar of the National Association of Securities. I think he'd been a past president. He'd been on committees there. He was the biggest third market that is the exchange maker in the country. So a respected person and well-known to everybody. And he had thousands of investors, as it turned out. And because he had so many investors, everybody knew it had to be right, surely those people had checked it all out. Now, the finale of the story is that when I was doing this, the person who invited me, who was a hedge fund manager himself, who invited me to do this for McKinsey, he had been an advisor To them. This person believed in Madoff and continued to go out and raise money for him. And in 2008, when the news came out that Madoff was a fraud, my son called me up and said, you know, dad, the stuff you've been telling me about for 17 years, it finally happened. It blew up. So anyhow, this fellow who had been running a fund of funds and included Madoff in that fund of funds, it's a special type of hedge fund that invests in other hedge funds. He had been doing this and had a very big fund of funds. He was raising money for Madoff the same week that the bad news came out. And he had his own personal money and his family's money and trust fund money with Madoff. But I had explained everything to him in great detail. I knew him quite well. At the time, back in 1991, that McKinsey and company had this analysis explained to them and decided to pull out. So the whole point of this is, here's a person who had all the information. It was explained very clearly, and he just didn't believe it. ([Time 1:16:41](https://share.snipd.com/snip/6eabbd6a-055f-428a-aa64-7833da92e91b)) - **Mental Models** - Learn mental models to improve your thinking; explore resources like Elon Musk's 50-item list. - Beware of the fundamental attribution error, the human tendency to make unjustified assumptions. Transcript: Tim Ferriss In, we don't have to focus on him necessarily, but since Warren Buffett came up earlier, you have then his partner, Charlie Munger, who is well known for mental models. And I think Buffett describes him as having the best 60 second mind he's ever met, something like that. What mental models do you find helpful or would you teach in that class that I mentioned earlier? And you can really approach it in any way that you think is sensible. But how should people think about mental shortcuts or mental models? And are there any that come to mind that you think are particularly valuable? I'll tell you about a few, and then I'll tell you where to get more. Perfect. Edward O. Thorp Let's take a notion that economists call by their priestly name externalities. Have you heard of that term? I have. I have heard the term. Okay, good. Most people have not, as it turns out. So you're way ahead already. Well, we'll see where we go. An externality, simplistically, is a consequence of somebody's action that's generally not intended. And it's usually bad, but it's sometimes good. I'll give you examples of each of varying sizes. Here's a bad one that happened to me actually last week. I go out to get in my car, and I find out that the tire's flat. I look, and I see a sheet metal screw in the sidewall, which means that this tire's going to have to be replaced. So I end up taking care of the problem. Where did the problem come from? Most likely, I think, down the road from me, there's been a lot of construction going on. I've noticed as I go for walks that pieces of metal are often lying in the road, sheet metal screws, nails, other things that aren't good for tires. I think I'm up when I happen to walk by, but I don't get them all, and the workers are carelessly depositing more. Not very many, but it only takes one to give me a flat. So this is an unintended bad consequence of the work going on there. Who benefits? Well, the homeowner does because he doesn't have to police his guys to clean up carefully and sweep the streets afterwards. He doesn't have to spend another $5 a day on sweeping labor to make sure that none of these things are there. But it cost me $500 for new tires. Unfortunately, it's a Tesla Plaid with a 10 and a half inch wide Michelin tire, so the tires are not cheap. So this is an unintended bad consequence for me that saves a very small amount for the guy who's doing the construction a few doors down. Let's take a little bigger one. When I was a chemistry student back at age 14 in 1946, teaching myself, I mean, there wasn't a decent chemistry class around, I came across a fellow named Svante Arrhenius, a great Swedish Physical chemist from the latter part of the 19th century. He, at that time, and I learned it then, did a study of how gases in the atmosphere trap heat. And he explained how much the heat trapping power was of various gases, including carbon dioxide. And he explained very clearly how much carbon dioxide would contribute to global warming as it increased. So this was known way back then. And I knew it as a 14-year And the mechanism is obvious. You can sit behind a plate glass window when the sun is shining and feel everything heat up around you, the greenhouse effect. So it's simple, it's obvious, it's got plenty of science behind it. What do people do now? Well, they create a negative externality by polluting. People drive around in cars and dump CO2 into the atmosphere. And each individual is convenienced by being able to drive around in his car. But he contributes to a global problem, a problem that won't come back perhaps to haunt him if he doesn't live long enough or maybe so gradually he doesn't notice it. But everybody together is busy contributing this major externality to the world, which leads to a second little mental model. It's called the tragedy of the commons. That's a pretty famous thing by a guy named Garrett Hardin. And the simple example is you've got a village with a little green in the middle, and it's got a lot of grass growing. And only a few people live in the village. So one guy has sheep, he lets his sheep graze on the green and there's plenty of grass, so that's not a problem. A few more people move in, they get some sheep, they turn them loose on the green. Pretty soon, there are too many sheep for the green. It's all eaten up. So each person acts in his own self-interest, but collectively, what they do is against the common good. So that's another little mental model or idea. So the whole collection of these things that are out there that are very valuable for thinking purposes. One collection is, there's a 50-item collection that came out under INC period on the internet from Elon Musk. It's quite good. There's also Charlie Munger's book. Poor Charlie's Almanac. Yeah, which has a lot of these things embedded in it. One of my favorites is it has a strange name of fundamental attribution error. And I didn't like the name. I said, Charlie, why are you calling a fundamental attribution error well charlie actually just picked it up from sociology and psychology that's what they call it and i thought it's A terrible name you should call it something else but as i thought about it some more i just said it's actually not a bad name after all roughly speaking what it does is it's a human tendency To make assumptions that are not fully justified by the evidence. For instance, you go to lunch and the person you invited doesn't show up. So you begin to speculate. Well, maybe he just forgot. He's a forgetful guy. Or maybe since we had a little quarrel two weeks ago maybe that was it maybe he's just mad and he's going to show me or something of that sort you start making up stuff to try to explain it But you don't have the evidence for it it turns out that he had a car accident on the way and he's busy dealing with all the fall off in the car ([Time 1:24:20](https://share.snipd.com/snip/e1d942b6-6290-42e8-bdf6-c9a35ee79fef)) - **The Value of Enough** - Focus on enjoying the journey and the people in your life, not just accumulating wealth. - Recognize that endless pursuit of money can become a compulsive, unsatisfying trap. Transcript: Edward O. Thorp I come across often with people who are really good at investing. The way I got into the investment world, I was an academic, and I was curious, and I found things interesting. And I wasn't really in there to get rich. I was in there to deal with interesting math problems that kept coming up. Blackjack, roulette was a math slash physics problem. Investing was, for me, lots and lots of math. So I enjoyed that. I just do things I like. And I don't worry about money. As my former sister-in once said, do what you you love and the money will follow. She wrote a book with that title. And I said, you know, that's right. Do what you love and the money may follow. And if it does, that's fine. If it doesn't, you're still doing what you love. And what's important in life, I think, is the journey and the people you know and you spend your time with and how you spend your time otherwise also. That's how I looked at things. And I started out as a child of the Great Depression, so I knew what it was like to have basically no money. I used to sleep four or five hours a night in high school and get up at two or three in the morning and deliver newspapers. And I made $25 a month, which seemed like really big money. And I saved part of that for college and invested part of it in science equipment, chemistry, telescopes, electronics, and so forth, just because I liked playing with those things And learning about them. My goal wasn't to make money. It was to have a good life and enjoy myself and have fun. And it just so happened that it turned out a lot of money too. What I found, though, in the investment world is lots of people go in it for the money. And when they do, they keep going and going and going. And it's a validation of them. They can't stop. They end up with, oh, five or 10 villas, a yacht, a jet. And let's imagine you have five houses, just to take an example. How much of your time are you going to spend in each house? You can't be, on average, more than a fifth, which is my math. And you're not going to be in your house all the time anyhow. You're going to be vacationing, traveling, meeting, and so on. So maybe it's a sixth or seventh of the time on average. Now, some houses are going to spend more time in it, some less. So you may spend a tenth or fifteenth of your time, or none of your time almost, in one of those houses. So you end up with a whole lot of stuff to manage and take care of. And you end up hiring people to do that. So you don't have to do it. And then you have to manage those people. And then you have to hire people to manage the people who manage the people and so on. ([Time 1:43:30](https://share.snipd.com/snip/ea552def-d4e8-4dee-9d1a-e52f0afae504)) - **Heller's Wisdom** - Joseph Heller, author of Catch-22, valued having enough over endless wealth accumulation. - This highlights the importance of contentment and intrinsic motivation. Transcript: Edward O. Thorp Probably read in my book. It's about Joseph Heller and Kurt Vonnegut. Yes, please. Joseph Heller wrote his famous book, Catch 22, of which they made a movie way back, maybe 50 years ago. I'm not sure exactly when, but it was very well-known and famous at the time. And Kurt Fondigat is well-known, too, for a variety of books. And Joseph Heller died, I'm not sure when, maybe early 2000s. And Kurt Fondigat was writing in The New Yorker about him. And he said, Joseph Heller and I were at a hedge fund mogul's house. I'm not sure if it was a hedge fund mogul, but somebody very, very rich in New York. And I said to Joseph Heller, you know, you've made a lot of money out of Cash22. This guy makes as much money in a day as you're ever going to make he's got penthouses and yachts and jets and villas and models falling off his arm and so on and joseph heller looked back And said you know i have something he'll never have kurt vonnick at his disposal he said what's that? Heller said, I have enough. And that's something that people who endlessly chase money to the end don't figure ([Time 1:52:30](https://share.snipd.com/snip/cb561e68-7ac0-441e-b84c-de975fbb3939))