The Tim Ferriss Show: Michael Mauboussin – How Great Investors Make Decisions Podcast Summary

Michael Mauboussin — How Great Investors Make Decisions, Harnessing The Wisdom (vs. Madness) of Crowds, Lessons from Race Horses, and More (#659) – The Blog of Author Tim Ferriss | Free Podcast Summary

The Tim Ferriss Show: Michael Mauboussin – How Great Investors Make Decisions

Experts rely on unconscious learning and supportive relationships, while prioritizing a love for learning to sustain energy and motivation. Success is a combination of hard work, intuition, and personal structures.

Question everything

Question everything you are taught and focus on understanding principles instead of just memorizing equations. Apply these mottos to your studies, approach learning with an open mind, and learn from first principles.

Being open-minded, understanding value creation through cash flow, and making strategic choices can lead to success in finance. Strategy and valuation are linked, and stock prices reflect expectations. Look to those with unique perspectives and a deep understanding of financial cash flows and asset values for guidance.

It’s the little things

Small things can set the course of our lives. Bringing ideas together is essential to knowledge unification, or consilience.

Consilience teaches that by looking at topics through different lenses and bringing together different ideas, we can thoughtfully address issues. Paying attention to small details and using them to our advantage can transform our lives.

Understanding markets

In order to understand markets, it is crucial to recognize the concept of complex adaptive systems and appreciate the three critical conditions of wisdom in crowds: diversity, appropriate aggregation mechanism, and incentives.

Investing in diversity of decision-making rules can aid in making better decisions, avoiding groupthink and biases, and optimizing strategies for businesses and investors.

Cognitive diversity

Cognitive diversity, which involves different perspectives, mental models, and personalities, is the most important form of diversity for problem-solving in organizations.

Researcher Scott E. Page has shown mathematically why the combination of smart and diverse people is crucial for success. The power of collective intelligence can also be seen in the wisdom of crowds and the jelly bean-guessing exercise.

Groupthink is not the best decision making

Social conformity can lead to groupthink, but the “wisdom of crowds” can lead to better decision-making. Cognitive diversity is crucial for this concept to work effectively.

Group brainstorming and collective guesses can outperform individual guesses, but diverse perspectives are necessary for success.

The Diversity Prediction theorem

Incorporating a range of thinking styles in the classroom can lead to more accurate predictions and diverse opinions, ultimately benefiting the learning experience of all students.

The Diversity Prediction Theorem suggests that the collective accuracy of a group depends on factors such as individual intelligence, background diversity, and group size.

The “two-thirds game” emphasizes the importance of considering others’ decision-making and empathy in negotiation and life. Prediction markets can offer valuable solutions, and understanding risk and complexity can aid in decision-making.

The origin of ideas

Understanding the origin and evolution of ideas is essential for progress in education and finance. Books such as ‘Against the Gods’ and ‘Capital Ideas’ shed light on the history of finance, while ‘Bionomics’ and ‘Complexity’ explore the intersection of biology, economics, and adaptive systems.

Learning from the blind spots and evolution of ideas can lead to economic progress.

Making accurate predictions

To make accurate predictions, it’s important not to rely solely on personal views and biases. Instead, considering outside information like base rates or past experiences helps to make more informed choices. In instances like horse racing, past performances of similar horses can indicate outcomes, leading to more reliable predictions.

Making good investment decisions requires relying on analytical tools and being aware of biases. Historical data and reference classes can inform our understanding and expectations of prospects. Biases such as overconfidence can hinder sound decision-making, making it important to base decisions on appropriate historical data.

Investing objectively

In investing, it’s important to recognize and overcome biases, including overconfidence and confirmation bias. Staying objective and open to new information can help make better decisions.

Additionally, having a unique perspective can lead to successful investments, but stress can shorten our time horizon and lead to impulsive decisions. Be aware of these factors to make better long-term investment decisions.

Algorithm, crowdsourcing and intuition

While experts can be valuable, algorithms and crowds can often provide better solutions. Intuition can be useful but can also be influenced by biases and heuristics. Understanding the two systems of the mind and recognizing when to rely on experts or the bigger picture can lead to better decision-making.

Intuition can be subjective and prone to biases and sampling errors. System Two, a slower and more deliberate process, can help overcome these issues but requires conscious effort and training in stable, linear systems. Achieving automatic competence through practice is possible but can be disrupted by changes, necessitating retraining.

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