#739: Brené Brown and Edward O. Thorp

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Hello boys and girls ladies and germs. This is Tim Ferris. Welcome to another episode of the Tim Ferris show where it is my job to sit down with world class performers from every field imaginable to tease out the habits, routines, favorite books and so on that you can apply and test in your own lives. This episode is a two for one and that's because the podcast recently hit its 10th year anniversary, which is insane to think about and past one billion downloads to celebrate.

I've curated some of the best of the best some of my favorites from more than 700 episodes over the last decade. I could not be more excited to give you these super combo episodes and internally we've been calling these the super combo episodes because my goal is to encourage you to yes, enjoy the household names, the super famous folks, but to also introduce you to lesser known people I consider stars.

These are people who have transformed my life and I feel like they can do the same for many of you. Perhaps they got lost in a busy news cycle. Perhaps you missed an episode. Just trust me on this one. We went to great pains to put these pairings together and for the bios of all guests, you can find that and more at Tim.log slash combo. And now with a further ado, please enjoy and thank you for listening.

First up, Dr. Brunei Brown, a research professor at the University of Houston and author of six number one New York Times best sellers, including Atlas of the Heart, Dare to lead and the gifts of imperfection. You can find Brunei at Brunei Brown dot com. I think 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.

I agree with that. So I think being a 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 like self aware complacency doesn't work for me as a construct. Self aware. No. Self accepted complacency. I don't know that I believe that. Yeah, I mean, I'll push I'll push a little bit.

I would say you're going to get the look on your face. I would say I would say and I think that I'm struggling for the right terminology. But I think we all know people who are alcoholics have various issues and they are in denial of having problems. Yes. Go ahead and let me stop you there. Yeah. And say that is neither self awareness nor self acceptance. Definitely not self awareness. But not self acceptance either. Well, I would.

And maybe there's a better word, but I would just say that there are people who are delusional to the extent that they either believe they don't have a problem that they have or they have a problem and refuse to accept it as a problem. We can go a lot of directions with this, but I would say that I think we can agree there are complacent people and there are complacent people and among those complacent people, I think there are those who hate themselves.

There are those who sort of love themselves and are narcissistic and I know a number of these. And then there's a lot in between and I think that you there are complacent in some respects complacent narcissists who almost by definition being a narcissist love themselves. So is that self acceptance? Maybe yes, maybe no. I would say that it is, but it's a disabling self acceptance, whereas to your point about lasting behavioral change.

I think that at least psychologically, if you are divorcing parts of yourself, if you hate parts of yourself aspects of yourself that have been informed by your history. And I'm borrowing this phrase from somewhere else, but like what you resist persists and that you are going to carry that unproductive and in some ways self defeating tension within you, even if someone is forcing you to change your behavior or incentivizing you to change your external behavior.

And so even if technically you're changing a behavior, if you carry self-loathing, even partial self-loathing with you hating an aspect of yourself or certain emotion within yourself, I view that as a loss. 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.

Could 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 woofer for a second, we're just going to assemble 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 and 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, but I worry that having built an audience who is largely not entirely kind of go go go,

or when, when, when there's nothing wrong with that, but people who are trying to develop skills and then competitive advantages and so on, then I may lose a large portion of those people in shifting into talking about more of these things. We'll see where it goes, but that's something that has occurred to me, and I think I'm willing to make that trade. I think I'm willing to take that if that's a cost of doing business. I don't know.

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 a lead 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. 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, and you're it's like maybe in a rush fan, like, but there's always outliers. The audience is like 40 40 to 50% female, but I appreciate it. Yeah, it is. It's shifted a lot in the last handful of years.

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 ad job 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 like 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 base 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.

It's like, I'm no plans to write that. Yeah, 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 because what's it all in four? Yeah, you know, like I'm fit. I'm winning. I'm smart. I'm successful. And I'm on my third marriage. And I don't speak to any of my children. Yeah, like, which you see a lot or I mean, I see all the time. Yeah.

Right, because I'm going to tell you not to dismiss the importance of that work. That's easier. Yeah, yeah, it is easier. It is easier. You know, because the thing about these conversations that you know, I end up having every time we sit down or this is the second time that 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 say 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.

And I have a question. I'll give you about that. So my question related to armor is I'll get to through a segue, which is a quote that I want to say terror rock. The well known meditation teacher also writer radical acceptance is a fantastic book.

Share this 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 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. 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 them into the deep waters of emotions that they've kept under lock and key for so long.

And it helps someone like that. What do you suggest to them because it does get messy. It's going to get messy before it gets clean. Yeah, in my experience, it's like you're going to spring cleaning. Guess what you got to take all the things are up on the shelves, all the things in the drawers, all the things that are hanging on code hangers and you're going to put them in the middle of the room.

And that's going to be a fucking mess. Yeah, it's going to be pissed that you did it. And that is, but 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, like I get it. And yet, what do I do because I've had on this armor for so long.

So I 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 when 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?

Yeah, I like that. 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. 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 settle before we work in the organizational way.

But what I would say to people that I always say is the same for me. And I'm sure the same for you that we all grew up and experienced very, very degrees trauma disappointment. How you know, 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?

Like I've been said 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. Of a black coffee and a cigarette, but you know, 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 quit essentially, this is the developmental milestone of midlife from late 30s to through probably your 60s. This is the question. Yeah, this is when the universe comes down and puts her hands on your shoulders and pulls you close and whispers in your ear. I'm not fucking around your halfway to dead. The armor is keeping you from going into the gifts of giving 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. And I've only seen this is a fork in the road. I've only seen two responses to this visit from the universe. There was my response, which I was like screw you, bring it.

You think you can best me. And then it was just one nightmare situation after another until you're not going to win that fight. I think if you say, you know what, I'm not going to do it. Then you've got to double down. These are the people that walk through the world, double down on their own shit and denial. You know, cheek squeezed as they walk and cause so much pain in the world. To themselves as well. I mean, yes, because it is so much easier to offload pain than to feel pain.

Yeah. And so you really have a choice in midlife. The first step of it, the whole process is what armor I'm not saying just pull off all the armor and streak through Austin. Because I think you can replace the armor with something. I think it's curiosity is what you replace that you just become very curious about yourself about the world. Why did I react that way when Tim asked me that question I wanted to like hit him over the head with a topo Chica model. You know what was going on there.

Do you know what I mean? Like what is my obsession about this? You just become very curious is curiosity is really the superpower for the second half of our lives. Because it keeps us learning it keeps us asking questions and increases our self awareness. But when you see and I think it's really hard because you know I walk into a situation and there'll be the person who invited me is usually the CEO.

And then you'll have like the cross armed pissed off clenched cheek like F you looking person usually an operations or technology. You know and then they're like what's the business case for you being here. Like because here's our stock price here's what's going on here's evaluation like what do you need. And then you know the CEO usually say fucking hate each other. And this can only last for so long.

You know it's the end of every great band right. Like this is going to come to an end and it's going to be terrible. And so I don't know I think you can't pull it all off at once for all of us. There's trauma. Yeah. And people are like no there's not trauma for all of us. There's trauma for you know people who had it have had been abused.

Physically sexually you know emotionally there's trauma for people of color and people who have been on the margins. There's trauma for all of us. It's just different levels of trauma. Yeah. You know I mean escape childhood with nothing is I haven't met that person yet. I have a new. Right. So the trauma staff literally the trauma message in our body is you take this armor off we die. So you protect us at all cost and leave this on a lot of that work has to be done with the therapist.

The other two hacks that I think have saved our marriage. The size 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 to be 50 50 it's the biggest crock of bull should 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. Just in terms of energy just energy investment kindness patients at 20 and I'll be like I'll cover you I got your brother I'll pull the 80.

Sometimes we come home which we've done a lot my mom has been sick and I'll say I've got 10 and see 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.

Yeah because the thing is marriage is not something that's 50 50 a partnership works when you can carry their 20 are they can carry your 20. And that when you both just have 20 you have a plan where you don't hurt each other. Yeah it's the your thread bear. Yeah and so 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 cancel anything with people that we really actually don't like so how can we create some buffer in the system. No we do that so like and then you know then we'll like a day or two later I'm like he'll be like I'm riding a 60 I'm like my God work is kicking my ass I'm still at 20's like I got you but we're a spare 20.

So you know it was actually if he wants to skip water polo practice today and let's all turn in at eight o'clock huge the other thing I would say to that now I'm thinking about that is we made a determination very early there's kid focus families parent focus families and family focus families. We're a family focus family. So that means that if you want to do water polo Eagle Scouts tennis and ski shooting then that comes to the family.

And the family agrees what will keep the family healthy like I've got a book launch I've got this Steve's got patients he's taking another you know he's a pediatrician he's doing this so what works for our family right now is you can do two extra curriculars and I'm going to have a two week tour not a four week tour but we put the family as the system that we serve it's not the kids at the parents cost or the parents of the kids cost it's the family and it is remarkable. How do you weigh.

If you do at all the voting system so to speak rants if you all come to the table does everyone have equal vote in the decision making process. That was a dictatorship yeah yeah we don't even bullshit around that it's like when my kids like if I say like oh shit my kids are like you can't say that I'm like I say anything I want you can say that and when you're old enough you can do whatever you want you get your cursing.

Yeah you but right now I can totally do that watch me so we have very we talked to our kids about everything we're super open Steve and I both have veto power. We really use it I've been I pulled out my veto card once in the last five years. Vito meaning kids as I want to do acts and you say can't do or Steve or Steve yeah I'm like I have to veto that I cannot do that and then we really respect the video because we don't overuse it so our thing with.

I'm not a kid's this is my theory on parenting my theory on parenting is the best we can do is a loving course from compliance to commitment. That your kids need to do what you're asking them to do out of compliance and don't run into the street don't do this you're not allowed to watch that kind of TV you're not allowed to play that kind of video game you need to comply otherwise there's some natural consequences.

At some point I've got a 14 year old now he's at other people's house doing video right and so if all I teach him is compliance and don't give him the why about why you can't do that. If I don't say yes every time I can and explain the nose.

Then when he's there and I can tell you that like we got a call from a parent maybe a month ago and said the boys were having a sleep over they wanted to watch on those some are rated violent thing and Charlie said can we watch something else my parents are not cool with us. He didn't have to do that but he's moved to a commitment to our family values because we say yes every time we can.

We don't do any of that stuff that my parents did because I said no. Just a quick thanks to one of our sponsors and we'll be right back to the show. This episode is brought to you by LinkedIn ads as a business to business marketer your needs are unique the B2B buying cycles are long and your customers face incredibly complex decisions isn't it time you had a marketing platform those built specifically for you and your needs.

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Check it out go to LinkedIn dot com slash TFS to claim your credit that is LinkedIn dot com slash TFS is in Tim Ferris show one more time LinkedIn dot com slash TFS terms and conditions apply. And now Edward O Thorpe legendary blackjack player hedge fund manager and mathematics professor and author of beat the dealer and a man for all markets from Las Vegas to Wall Street how I beat the dealer and the market find him on Twitter at Edward O Thorpe.

Ed it is so nice to see you and thank you for making the time pleasure to be here Jim. I've enjoyed many of your podcasts. 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 I was born in Chicago during the rain of Herbert Hoover president number 31 so I've seen 16 presidents. I moved out to California with my parents during World War 2 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 and mathematics so I got my PhD in math and then I went on to teach at UCLA MIT New Mexico State University and family University of California for a while. Now how did gambling or interest in those types of applications of physics or mathematics enter the picture for you?

Well I'm a curious person and you could say that it happened purely by chance when I was teaching 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 gamble 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 nothing about the game and they were.

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 that 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 the system to beat the game then I said 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 size.

The refrigerator size 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 there's 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 a mathematics a couple of times.

So I went shopping for somebody who could get me quick publication and turned out that on the MIT campus there was a man who I knew nothing about and then 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 before I wrote a quick publication in the proceedings of the National Academy 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 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 lunch for five minutes after we talk.

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 favorable strategy for 21 which sounded better. He didn't want to make two bold statements for the National Academy and make it look like this was a just a gambling paper.

So anyhow the paper got sent in and it caused a sensation because I had submitted an abstract to the American mathematical side meeting in Washington DC 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 be gambling games but on the abstract committee was a person I knew well from UCL.

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 the abstract. So I went there and I presented when 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 launched for my little handout I brought 50 handouts thinking 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 Wolf 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 eleven thousand dollars which is about that with a zero on the end and today's money. This isn't about twenty hours of serious play so I had a lunch money at MIT for a very long time thereafter. Let me just jump in for a moment so a couple of questions I could have a thousand follow questions but I'll just a limited to a handful.

The first was four that eleven thousand which would be say a hundred and ten thousand in today's dollars. Twenty hours of serious play do you recall roughly what the the bank roll was yeah was ten thousand dollars. Oh that was the starting okay got it we started and we had eleven thousand I see I see got on top of that and my prediction before we went was that's what would happen.

So it it paned out are two other questions rewinding a bit to your earlier story when you're first sitting at that black jet table if I heard you correctly said you had a little card if I heard you correctly could you describe what that was on the card. Yeah it was a set of rules for hitting and standing doubling down and pierced leading and it was the best way to play with a higher degree of approximation it was the best way to play against a full deck.

What was left of a randomly shovel deck if you didn't know anything more about the cards that have been used up and my contribution after I understood this was to figure out what would happen when some of the cards are missing from the deck because the cards that are used up are not a representative sample of the cards in the deck they can very quite radically for example you might use all the aces early and that would be bad for the player.

Where you might use none of them until late in the game and that would be quite good for the player. And with clod Shannon the person who doesn't meet anyone you said you were able to get five minutes at lunch why were you able to get time with clod or why do you think he was willing to spend time with you turns out that he was willing to spend five minutes I think probably just to get rid of me but after we talk.

He kept asking me questions and it became 15 minutes and then he approved the paper that I wanted to submit and then he said what else are you working on. So I said well there's another project which actually I started before blackjack and which got me interested in gambling and that's a way of beating Bollett and clod Shannon turns out was probably the king of gadget tears he built many ingenious machines.

Over the course of his life he built robots that would run mazes machines that played chess he just loved all that sort of thing and he had a house full of gadgets and equipment hundreds of thousands of dollars worth in valued money back in 1958-59.

So when you hear about roulette and I explain to him what my ideas were there he got very excited so we continue to talk and this five minute meeting became half an hour and then an hour and then we adjourned to the cafeteria at MIT to grab a bite and we went on for another couple of hours and we decided that we would join together and make an all out effort to build a machine that would allow us to project the outcome of our game.

And the house and casinos have had to I was going to say adapt but really counteract your strategies and tools by changing the rules so could you say more about what you then devised in the case of roulette.

What we did was we built a small computer that we had about 11 transistors in it 11 or 12 I don't remember which because we have two versions and I forget whether we ended up with the 11 or 12 transistor version the computers now at the MIT museum in Cambridge said spin on exhibit in various parts of the world at one time or another.

In any case over about nine or ten month period we worked in shenan's basement almost full time and we built this wearable computer turn up the first wearable computer according to the MIT media lab and one person would wear the computer and enter bush button information about the position and velocity of the ball and the rotating wheel in the center and then the computer would instantly.

There's a trick there I do mean instantly it instantly tell you where to bet and so the other person would sit at the roulette table apparently connected with the observer who was busy putting in the roulette information and that person would hear a series of musical tones and when the musical tone stopped the last tone in the octave would tell him what section of the wheel to bet on we divided the wheel into eight sections with a little bit of overlap.

So the person who bet which happened to be me was able to quickly put down money on five neighboring numbers on the wheel and had a massive edge of 44% so the piles of dimes we started out with with our experiment dimeships became huge piles of dimes very quickly.

So I computer work wonderfully well. I want to take a step back just for for people who are listening and say that there are many reasons that I wanted to have this conversation with you and it is not specifically related to gambling in the sense that what most there are many things that interest me about your life and your thinking and my hope is that for people listening they get a window into at least two things one would be.

Your methods of thinking frames works for thinking how you think about thinking and then also your personal approach to health and fitness because as people may have picked up with some of the references could you tell everyone listening what your ages as we speak today. I'm a nine and for those people can't see video you look like you're in your 60s and I am just beyond excited to to hop right into that so we're going to jump around quite a bit we want to do this exactly chronologically but.

Could you perhaps describe your approach to health and fitness and you could tackle that starting wherever you like is it just that you were given the right parents and out of the box have tremendous genetics is there more to it how would you begin to unpack this.

I kind of wandered into health and sit by accident initially just like I wanted into blackjack and roulette I'm curious and always looking for things to understand I like the idea of self improvement to so I was walking behind the student co up one night when I was about 20 and heard a bunch of clanking and I looked down in the basement and there were some fairly burly guys down there pumping iron and I walked in and I said you know this is this is the waste of time this is ridiculous so one of them said to me.

I'll bet you a milkshake that if you work out with us for a year just one hour and evening three evenings a week you'll double your strengths in a set of exercise that they describe. So I said I don't believe it let's try it. I went down and the four exercises were the squad with a barbell on a rack the military overhead press the bench press and deadlift wasn't that lift was something else I forget the fourth one at the moment but I'll think of it.

Yeah clean and jerk maybe who knows our bet row it was something almost lines but a compound exercise like like the others yeah so there was a fourth exercise so anyhow what happened was I was a I wouldn't say 98 pound weekly but maybe a hundred and fifty pound weekly. At the end of the year I could military press 185 which was at least double what I started with I could bench press 375 I could do 15 at 325 and I could yeah I could squat with 375 I could do sets.

I could go with the other one was wish I could remember it in any case I was astounded that all this came to pass so maybe pay attention to strength at least and some time went by and I was a little swimming because I got interested in scuba diving and then one day in my 30s I was jogging along the beach with my brother in law and he said let's go for a little jog I went about quarter mile and I was getting a little bit of a kick.

I got a quarter mile and I was gasping I was 35 and then I remember I said this is awful I'm I'm a terrible shape I have to do something about this so they had a book on aerobics by somebody named Ken Cooper who has a battle add down in Texas and started in large part the aerobics a revolution that swept the country so I started to keep in track of his points he gave you points for various degrees of aerobic effort.

I think if you did a mile in between 12 and 15 minutes you got one point in between like 10 and a half and 12 you got two points and so forth so I started trying to run a mile a day and I did that well I ran a mile every Saturday to start with and then.

One Saturday I decided to try a little further so I ran two and then three and then I said I'll try a 10 mile race so I got under 10 mile race which was kind of foolish but I finished I did reasonably well so then I said I'll try a marathon so then I got into marathon running and I really like that I did that for about 20 years until I hurt my back weight lifting all my bad events that been from pushing myself athletically.

So hurting my back is probably the worst thing I've ever needed to do is I had to stop had to stop heavy pounding heavy running but 20 years of road running well more than that maybe 25 years and I'm marathoning gave me I think a very good base for going forward and so now I do things like a walk about three miles three or four times a week and I spend about two days in the gym doing stretching and strength exercising core strength and so on.

A lot of emphasis on core because of my back which is just fine now. I was just going to ask how your approach seems like it is evolved and changed over time say after 50 years of age or in the last say 40 years or so are there any particular changes that you made in addition to the core strengthening to support the back that you think have contributed to your longevity.

I 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 more things that you kind of like that you can build on and then you just keep getting better at it.

I was probably in my best shape at around 55 to 65 because of all this that is inspiring I am just about to turn 45 and even amongst my just to say age cohort it's very common for me to see people giving up even in their 40s and blaming it on age but with you sitting in front of me describing your trajectory and sort of adaptive habits. I feel like those excuses don't hold a whole lot of weight.

One thing that's pretty neat is a race walking I did that for a while and that's something that is lower impact than running but you can get the same kind of aerobic workout so that's something I direct people towards. What does your strength training look like now or over the last few decades.

Well it's as I get older it declines I get weaker and it gets a little harder to do things and I feel a little tired I can't do as many reps or sets of things so I have a mix of things that I do now I will do squats. Usually now just body weight and I try to do dumbbell squats or lunges with a lot of emphasis on one leg and then shift and do a lot of weight on the other leg do pull ups.

I think the best I've done recently which is not very much is a four underhand pull ups and two over and pull ups ten years ago I could do a dozen of each. Well I do a lot of back exercises regularly on the mat and that's very helpful for keeping my back in shape and keeping my core in pretty good condition. So we may come back to this but let's segue and go back in time yet again and look at investing how did finance or investing.

Enter the scene for you well the way I got into finance and investing was that I made money a blackjack and from book royalties. This first time my life I had any spare money before that as an academic my wife and I were living from months to months with no surplus and then kids were coming and that made it even tougher.

So once I had some money from both gambling and book royalties I wanted to figure out what to do with it and so investing made good sense to me I would put some capital aside and let it grow. I started out by making a lot of foolish beginner mistakes which cost me and then I decided to sit down and really figured this thing out and so I began to study investing in my spare time.

So I spent the summer 1964 which was I guess the 30 euros in New Mexico State just reading all summer in a big bookstore in Beverly Hills, Martin Dales reading all the investment books and newspapers they had. And then I started to get them in the summer of 65 reading whatever I could find and I happened to get a little book on warrants common stock purchase warrants which were the forerunner to what people call call options now.

And when I saw that a light came on and I realized that I could math and I could figure out how to value these things and if I did that I'd probably be head of the crowd who didn't know how to do these things and so I'd probably have an edge.

By chance I came to UC Irvine when it opened in the fall of 1965 and I was telling one of the deans there about this idea that I had and that I was working on me said oh we have someone also does that and turn it to be a sheen Kassouf and so the two of us hooked up and sheen Kassouf had actually been doing it in practice and it already made an elementary model for trying to charge warrants.

So we decided to write a book together and work out more of the details and theory and so that became the book Beath a Market and that launched both of us into separate businesses and so I began to do what I call warrants hedges and basically you buy cheap warrant and you short common stock against it that's one way or you buy an overpriced warrant and you short it.

I said buy you short an overpriced warrant and you buy the common stock against it hedge the risk because they tend to move together in the case of the overpriced warrant as the collapses towards zero or towards conversion value you capture an excess return and what I found was that you could make a steady 25% a year with practically no risk doing this.

So I was doing myself and then words spread around UCI campus and people wanted to sign up so I signed up the dean of the graduate division and I also signed up the secretary to the chancellor and some people in the math department and so forth so I was managing a whole collection of little accounts for people and they were making 25% a year and they kept telling everybody about it.

The dean of the graduate division happened to be an investor also with a felony and born buffet and war and buffet was at that point shutting down his partnership because everything was overpriced back in 1968 prices were crazy and the dean of the graduate division wanted to know where to move his money to so he introduced me to war and buffet to kind of check me out to see if I might be a good place to put it and so war and I got a long fine and apparently I passed the test because the dean gave me his money to invest.

And so I got to know Warren Buffet and I was sorry to see that he was going on a business because I thought as I told my wife that this is going to be the richest man in the world will come back to that a little later. I think you'll find the follow up to that quite interesting. So I need know I got the idea of forming a hedge fund from Warren Buffet who was just closing down his hedge fund.

So I went into business managing accounts and then merged the accounts into the hedge fund and started this hedge fund for private limited partnership that ran for about 20 years and used ideas that I kept generating mathematical finance ideas to keep staying ahead of other investors and making access returns. And in 20 years we only had three down months out of all those months and those down months were less than 1%.

So basically just printed money every month and it made just under 20% annualized during that time. I'm very risk averse as you'll find this we continue to talk and so this thing ran with extremely low risk but yet had very high return. So that was my entree into investing. That's one hell of an entree. 20 to 25% annually. Let's touch on a few points here. So there were two other people who I believe read Beat the Market or were influenced by it. Fisher Black and Myron Sholes.

Could you just perhaps fill in the dots with that because Nassim Talib refers to the Black Sholes model with a different name. Perhaps just fill in the gaps there for people who are listening. I actually figured out what this model was back in the middle of 1967. And I decided that I would just use it for myself and then later I kept it quiet for my own investors.

The idea was to basically make a lot of money out of it for everybody and it was fun to me just to develop it and apply it to various things. Now Fisher Black and Myron Sholes read Beat the Market which was sort of a launching pad for me into finding this model. And it was also a launching pad for them. They saw how to improve the ideas in Beat the Market and they made a mathematical finance model that value warrants and options very accurately.

So it was based on a set of assumptions that are fairly narrow but pretty good. And I thought that I was the only one who had this model. So when the Chicago Board Options Exchange opened in 1973, I thought I'd have the feel to myself. But unfortunately, Fisher Black and Myron Sholes published the idea. And they did a better job of the model than I did because they had very tight mathematics behind their derivation.

I had to make a couple of assumptions to get to the same point, but they were reasonable assumptions. We're sure not to stand up and practice and in theory later on. So in any case, they published the model and I thought, oh, I have this hedge fund. I've been running for a few years. It's been doing well. We're going to make a lot of money in options, but now Black and Sholes have told everybody what the secret is. But people didn't catch on right away.

So when the Chicago Board Options Exchange opened for business in April 1973, the only people on the floor were my traders. It was like having machine guns against bulls and arrows. For people who don't know, Sholes went on to win the Nobel Prize for Economics in 1997. Yes. And a Black would have been there too if he hadn't died of cancer before that. Robert Merton was at MIT where they've been doing a lot of good theoretical work on the different types of things.

He worked on the development of warrants and options. And so he wrote some beautiful papers about this theory about the same time that Black and Sholes were doing their work. So the prize was awarded jointly to Merton and Sholes. And I will say this about the prize. The people who publish are the ones who get the prizes. The people who don't publish. It doesn't matter what they figure it out or when they figure it out.

They don't get the prizes. Since they don't deserve to. Because if you don't publish, you haven't really proven to the world that you really did this on the one hand. And you haven't made change the world in the same way that people who publish to. So I think the people who don't publish don't have claims to these prizes. Having the tool in place turned out to be revolutionary for my life because I was able to use this tool.

And I had some shortcuts in using it that other people didn't have for a very long time because I developed it myself beforehand. And they didn't get around to seeing it the way I saw it. These shortcuts were very useful. We stayed ahead of the marching legions of PhDs who came later. We stayed ahead of them all the way through into the atomic plasma partnership in 1988. Let me hop in for a moment here to ask a few questions about your meeting or at least one.

With Warren Buffett, why in that meeting did you come away saying you thought he would end up being the richest man in the world? What did you see or hear or observe in that meeting that led you to that? I saw that he was compounding in a high rate of return that he'd been doing it for a long time. It was very, very smart and that he really knew a tremendous amount about companies. So he was a good evaluator of companies.

And he demonstrated a very large edge already. He'd been running his partnerships from 1956 to 1968 and had about a 30% before fee and a large return rate. And I was sorry that he was going out of business and that things looked so bleak from the standpoint of stockpricing to him at that time. The interesting follow up to that story, what Warren Buffett did at that point was he decided to make a poor tax-style company in...

I forget where he was somewhere in New England called Berkshire Hathaway. He decided to make that his own little private mutual fund. He bought up as many shares as he could and he didn't particularly encourage his ex-existing partners to take shares in that company because he wanted them himself. They didn't have a choice. They could take cash or they could take shares in Berkshire and not knowing what to do. Many of them just took cash and exited.

Some of them took Berkshire, though. Berkshire, I think, was... they would have gotten it at something like $12 a share in 1964. Now it's a little under $500,000 a share. But Berkshire's kind of interesting. I knew how smart he was and I said the way he's compounding he's going to be my opinion in the richest man in the world. In a while, it'll just take time. I lost track of him. I figured he was just working for his own account and there was no opportunity for an investor.

That was largely the case. But then up in 1982, I happened to see an article about Berkshire Hathaway and I saw that he was running it. And then I decided to take a look and I said, oh, it's gone from 12 to 982. So, is the opportunity gone? Many people who owned it had sold on the way up, taking their enormous profit of a multiple of five or 10 or 15.

And I said, I know what he's doing. I know this man. I know what he's going to do. I'm buying a 982. Even though I missed out the move from 12 to 982. And of course, buy a 982. Turn out to be a good move. Yeah, I would say so. Just a quick thanks to one of our sponsors and we'll be right back to the show.

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Let me ask you if you were teaching a let's just say what could be undergraduate or graduate seminar in investing now. So you were teaching a class of the Neophytes how to invest and some are, say mathematically inclined and some are not. It's a very mixed group. What types of tools or thinking frameworks, heuristics, mental models, anything would you focus on in the first handful of lectures?

Well, the first thing I 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. The answer is if you're a long-term investor, you should just buy and hold equities.

That's place to have bought hold equities has been the US for the last couple of hundred years. Overall, equities here have compounded it about 10 or 10 and a half percent for 200 years. The data for the first summer of 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 mathematical arguments and I won't go into all the details or 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 of 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 and a half percent if you don't pay all these people. You might make 8 or 7 or 6 percent to pay the crowd of people waiting to court help you.

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. We weren't buffered, but we didn't do much better. I found with my edge 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, the walk-ins 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'd subtract the index part out and the rest is like the index too. So the people who aren't buying the index that are like the index is a group are busy paying all these costs, taxes, investment of eyes and so forth. So on average, that whole group does worse. You're paying basically casino vigor 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, somebody luck and somebody skill, who end up doing better. So you basically, you're betting against the odds if you just dip 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. Now on 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 on 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. If you're the kind of person who can take a lesson in one part of life and transport it to another part of life, what are some of those transfer bowl lessons in your mind?

Let's take a risk as a good example. You learn about investment risk and how you want to avoid very great risks or minimize them. Great investment risks can take you out of the game altogether. So you might have a thing where you multiply money by 10 times, but you might also lose it all. Some things that are highly volatile like buying cryptocurrency are in this category where you may have the chance of a very large gain, but also the chance of a very large loss.

And if you lose most of your capital, it's very hard to climb back out. For instance, if you lose 90% of your capital, you've got to multiply what's left by 10 in order to get back to even, which means you've got to make 900% to offset that 90% loss. That's not going to be easy to do. It takes a long time. So you want to avoid really bad outcomes.

So I applied that, for example, to COVID. I thought about what to do and how to deal with it. And I said, you know, at my age, the stats from China, which came over in early 2020, showed that people 85 and up were dying at the rate of, if they were male, 18%. And even now, the death rate is very high for those who get it. If they're unvaccinated, it's probably pretty close to that. If they're vaccinated, it's maybe attempt that.

So I consider that a risk that can take me out of the game with a fairly high probability. So I'm going to avoid getting COVID if I possibly can. I'm going to mask up and going to avoid crowds. I'm going to think about what the risks of various activities are that I do and decide whether it's worth it.

So I did my own analysis of COVID and its risks and tried to be very careful from that on. I think it's paid off and it's paid off from my family too. I've passed this information on to people around me. Do you have any recommendations for, and this might sound a little meta, but how people should think about long term thinking or the long term because the, the recommendation for, say, an equity index or index ETFs was predicated on investing and holding for a long period of time.

What would you consider the minimal viable long period of time if you haven't answered that and how can people become more aware of their own weaknesses related to short termism or short term thinking and switch to more long term. I tend to be a long term thinker. You might say well if you're 89, I'm going to be a long term thinker. Well, I have children and grandchildren. I also feeling pretty good and staying in good shape. So 89 may not be all at all at this point.

In any case, I would say that if you're looking out 15 or 20 years or more, maybe you have a dynasty trust or something like that or you have descendants and yourself expect to live 15 or 20 years or more. The best investment, I think, is the buy almost entirely equities and hold it. You might have one have a little cash around. I think above it recommends 90% index and 10% bonds or short term intermediate term bonds for cash.

That does just about as well as a 100% equities. I just put it all in equities because I have enough so I don't worry about fluctuations up and down. If you have a shorter time horizon, you may want to do things differently. It depends on how much you're going to need and how much you have. I have a set of rules that are a little bit helpful here. There's, I'll start with what I call the 4% rule.

Suppose that you're going to retire and you want enough to last you from your capital throughout the rest of your life. I would say a pretty good working rule put it mostly in equities and spend 4% of your capital each year or less if you can. And that ought to last you from say the 60s till the end of your life. It's not guaranteed but pretty good chance that will. Then I have the 2% rule which I've found by studies both mathematical and by simulation of stock returns.

If you only drain 2% out per year then that money will probably grow in perpetuity. There's a small chance it'll be extinguished by really bad downturns but very small. There is an organization that freezes people and they ask me for advice about how to invest their endowment fund. Freezing me a meeting cryogenically freezing. And so I said for the endowment fund which is going to get people out of being frozen sometime in the far future 50 or 200 years out.

But that fund you're going to want to invest long term in a little run because that's going to get you the most money down the road. And if you're going to attempt to reanimate somebody there's no specific timetable. If you don't have enough money to reanimate a minute at certain time you can wait a few years and let the money grow a little more. So you want money to grow to as big an amount as possible in the far future.

And so the 2% rule for the endowment fund I think was a pretty good rule for spending because all the simulations showed that it would grow to a very large amount over a period of time. So that's long term thinking. The intermediate term I think of that is maybe 5 to 15 or 20 years. And there's something like the 4% rule that I described might be good. And for short term it's just a matter of what your needs are and what you're going to have to come up with.

And people are in various ranges of wealth there's what you might call poor where you don't have very much to save or put aside and you're going to be hard to retire and hard to make it. Then there may be middle class people who can put a moderate amount away. I know somebody for example she has saved about a million and a half and she is in her mid 50s.

I think she'll be fine. So I've explained to her pilot all inequities and let it rip. She gets scared of you so often when there's a downturn. She calls me and I tell her, oh fast. And then it goes back up. She's like, I'm pretty glad I held fast. A lot of people are what I call scared rabbits. And when the mark goes up they get confident they start buying.

And then it drops and they get really scared at the bottom and they sell out. And then it goes back up and they buy again. And it drops and they get really scared at the bottom and they go back out again. So they seem to have the worst of it all the time. Yeah. It doesn't feel good to go through life as a scared rabbit. It certainly hurts your financial standing. That's worth thinking for yourself.

You won't hold fast to something unless you understand it yourself. There's no saying give a person a fish and they eat for a day. Teach a person the fish and eat for a lifetime. And there's a simple thing for thinking. If you give somebody advice about a problem they might solve that one problem. If you teach them how to think about problems they can solve problems for the rest of their life. And so that's the way to go.

And also if you give them advice and they don't understand what the advice is or how to think about it. It's a good chance they won't take the advice. I'll give you an example. 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.

And this 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 the tells 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 a put option a little below stock price and they bought a call option a little bit above and that the two things paid for themselves who 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 and a not 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 the 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 made off the brother of Bernie made off. Bernie was off and you're raising money. This is 1991 mind you. So when Peter made off her and 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 listen to 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. As a prices, they were making them out 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, OK, let's look at some of the trades that actually could have happened. So I went to a vice president of bear's turns, rest in peace and said, you 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 made off from 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 made off in company. So I said to McKinsey, this is the fraud and they said, but we're making 20% a year. 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 is going to fall in someday and you might lose your jobs. On the other hand, if I am right and you move, you've saved this problem. If I'm right and you move, you're only going from 20% to 16%. So you know, it makes a lot of sense to just exit. So the exit 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 made off 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 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 made off? 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 has ought to change maker in the country. So a respected person and well known to everybody and he has thousands of investors has turned out and because he had so many investors, everybody knew it had to be right because 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 from McKenzie, he had been a divisor to them. This person believed and made off and continued to go out and raise money for him. And in 2008, when the news came out that made off was fraud. My son called me up and said, you know, dad, the stuff you've been telling me about for 17 years has finally happened.

They blew up. So anyhow, this fellow who had been running a fund of funds and included made off 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 made off the same week that the bad news came out and he had his own personal money and his family's money and trust for money with made off.

But I had explained everything to him in great detail. I knew him quite well at the time back in 1991 that McKenzie and company had this analysis explaining 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. And he himself was in investment business and was very successful. But he was a reporter in Times Pass and his family made a lot of money in the 30s.

He was came from a rich family in Chicago. And the way he figured things out was he would pull people and he would ask people what they thought about something. It would be like I asked you what's the best diet pill I can take. You'd probably say there aren't any good ones and I could probably agree with you. Right. He'd ask 100 people and then they would in fact be a poll and he'd go about the poll.

So just imagine that you asked 10,000 people whether they thought you could travel faster than light. And all but one said, yep, you can do it. I saw on TV and only one guy said no, you can't do it Albert Einstein. So I got like him but overwhelmingly reject Einstein believe the 10,000 average people who just said, yeah, you could do it because the poll was 9,999 to one on one side.

So he doesn't think for himself he lets the crowd think for him. And that I think is a fundamental mistake that many people make. They let the crowd do their thinking. They don't figure it out for themselves. Let's talk about toolkits and bring 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 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 I'll tell you where to get more perfect. Let's take a notion that economists call by their priestly name externalities. Have you heard of that term? I have heard the term. Okay, but most people have not as it turns out. So you're your way had already. Well, we'll see where we go. An externality simplistically is a consequence that's 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 my car and I find out that the tires slapped. I look and I see a sheet metal screw in the sidewalk, which means that this tires 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 for 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 deposit anymore. 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 1 1 2 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 future is 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 Aureneus, 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 at various gases, including carbon dioxide. He explained very clearly how much carbon dioxide would contribute to global warming as it increased.

So this is no way back then. But I knew it was a 14 year old. 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 running cars and dump CO2 into the atmosphere.

And each individual is convinced 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 gradual. So gradually 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 comments. It's a pretty famous thing by a guy named Garrett Harden. 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 and he lets this sheep graze on the green and there's plenty of grass. So there's not a problem.

If you more people move in, they get some sheep. They turn and lose some 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 a 50 item collection that came out under I.N.C. period on the internet from Elon Musk. It's quite good. There's also Charlie Munger's book, or Charlie Zalmanek, which have a lot of these things embedded in it.

And one of my favorites is, it has a strange name of a fundamental attribution error. And I didn't like the name. I said, Charlie, why are you calling this 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 decided it's actually on the bad day after all. Roughly speaking, what it does is it's a human tendency to make assumptions that are not fully justified by the evidence. And so, 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. And then, because 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 accident. And two hours later you find out what actually happened.

It's too bad. And he apologizes profusely. But you didn't have any idea what actually happened. You just started making stuff up. That is something that humans do over and over and were wired for it. It's evolutionary. It ties into a famous book, thinking fast and slow. Daniel Conovan. He's just exactly. And so he has an example there of you're in the forest. And you hear a roar.

You don't stop to find out where the roar is coming from. You run up the nearest tree because it might be a lion. In fact, it might be something entirely different. But you don't take any chance to you react. And if it's not a lion, you've made fundamental attribution error. You attributed to being lion when it wasn't. And life often when it wasn't a attribution error, not ties in with something else, which is learning how to think.

If you think fast, it's kind of emotionally from the gut, responding without really reflecting. You will make a lot of mistakes. Sometimes though, it's a way of saving your life. For example, somebody else fires here at the door of the theater. You run out the door immediately before you find out whether there is a fire. That might or may not have been. But running out the door before the sound of reflecting, which case might be too late is a good thing to do.

I hold it wrong for everybody else to as I run out. I just want to mention a few things on the externalities piece and thinking about the say unintended secondary or tertiary effects on the collective. There can also be positive externalities or externally benefit like if you were to buy fire insurance for your house, your neighbor might be a little bit safer.

Right, so it can go both ways. That's a good example. And it's one that actually was a real life experience for me right here. We had a fire and a wildfire couple of months ago. We all had to evacuate. And I have a job and they have wildfire insurance. And so I have that. And so chop actually had a water truck out here, which protected not only me, but lots of other people in the neighborhood.

So is the next step after identifying these externalities, for instance, in the case of the construction site, thinking about how to somehow create an enforce incentives such that someone is acting to the benefit of the collective, for instance, the construction site where someone's not spending five dollars, but it costs individuals who are affected $500 to replace a given tire.

I'm sure there are a million different examples of this. Does that then lead to a study of incentives? Yes, that's a good point that if somebody creates an extra reality that's negative, a good thing to do is to tax it. What we've learned is if you tax something, you get less of it. So let's take carbon, for example, if you tax carbon, you'll get less of it near. So a carbon tax is the rational logical solution to the whole pollution problem.

All you have to do is make the tax big enough and people find other ways to do things than pollute with carbon. However, that leads to another thought principle, which is. The difference between rational solutions to social problems, a rational solution is one that is generally good for almost everybody, as opposed to select few. You can have rational solutions to social problems, but you often can't get them implemented.

So you also have to think about what can you actually accomplish politically? And there's a great book about that. There's a professor at Yale, the strolling professor of political science, Ian Shapiro. I happened to listen to a podcast. Yours included when I go for my walks. And his course was one of the ones I listened to. It's absolutely great.

It talks about how do you actually get something done politically? And we've seen, for example, the Biden administration has had great difficulty getting very much of what it wants to do past. And it could learn a lot from this professor who has a lot of good things to tell them. He has a book called The Wolf at the Door, which it fairly recent, which basically explains the things that I learned in his political science course a few months ago.

And it tells you how to form coalitions that can win and how to pass things that will stay in place. For example, social security stayed in place because it had a strong constituency that created right away. And that constituency was going to defend it forever after. And it politically, even though some politicians and occasional political parties have tried to destroy it.

They have not been successful because the constituency is so embedded and so strong. So anyhow, he has a clear description of how you can actually get things done. And he believes I think that you can make incremental progress discouraging as though it seems these days by doing the right way of putting coalitions together and defending against blocking coalitions.

So it's a very insightful course. Anybody wants to get something done evolutionarily. I would recommend reading his book. And I might say we're in a crisis of democracy now, in my opinion. And simplistically, we have three paths. There's devolution, which I think or undergoing now. There's evolution, which I hope is the way things work out in which we fix things and things get better.

And there's revolution, which is extremely ugly and unpleasant. And one of your previous interviews, Ray Dalio, has a book that I think is very well worth reading, even though it's a tough slog. And maybe I changed the writing a bit, but it's a real contribution to thinking about the crisis that we're going through now. And it talks about the changing world order, I think that's the name of the book and the rise of China as an empire and the decline of the United States as an empire.

And I think that we have some serious thinking to do we can't just sit back on our laurels and say we've been so great. We've been the world superpower and hope that it's going to last. We have to do things differently. I'd recommend that. I also would second that recommendation. Francis Fukuyama has also some fantastic writing that is worth exploring. And I have that Dalio book within 15 feet of me here where I sit right now.

And speaking as someone who studied also in China myself at a pretty, pretty fast, anytime to be there. I was around in Beijing at universities in 1996 and have tracked things pretty closely since that it's definitely worthwhile to read up also on the history of China because that is going to and is coming to bear as we speak on the entire three dimensional chest of geopolitics, which is fascinating and also at times terrifying.

Certainly. Let me ask you if I may what other investors side from Warren Buffett impress you and they could be people who are no longer actively investing. They could be current. But are there any other investors who come to mind who have particularly impressed you outside of Buffett.

And the reason I ask for people who are wondering is related to what you said earlier that by studying investing by participating in investing, you get to stress test and look at how other people stress test thinking and cognitive biases and so on. Is there any anyone who comes to mind for you outside of outside of Buffett.

There are people in the hedge fund world who have done remarkable jobs at various times, but they're not accessible to most people. For example, let's take Jim Simons of Renaissance. Renaissance partners is basically a private operation at this point, but it's been extraordinarily successful uses PhDs and computers and math and code breaking and so forth.

It has from around 1989 or 90 on been spectacular in this performance. Probably the best risk adjusted record in the world from that time forward. And for people who want to read more about Jim Simons, there's a book called The Man Who Solves in the Market, which is a good read. Although you're you're probably not going to be able to, as you mentioned, emulate the sort of quant approach that that he is taking for a million and one reasons.

But absolutely fascinating story. Any other names who come to mind? I'm trying to think of who I would give money to to invest. I don't have anybody now that I'd give money to to invest. There are a few good hedge funds around, but they take too much for the general partner and leave too little for the limited partner. And they also generate income that is highly taxed if you're a taxable investor. So they're only good for nonprofits at this point. Tax exemption investors.

What about past investors say in decades past who you would have given money to willingly? Does anyone come to mind? Well, I did give money to Ken Griffiths Citadel for from the time it started. I think I was investor number one after now. Frank Meyer was the other general partner with Ken Griffith. Frank Meyer was a longtime friend of mine from the past. So that's how I learned about it.

I actually had Ken Griffith after the house when he was about 18 or 19 and I just starting up with Frank and talked to him about how my hedge fund Prince Newport worked and we discussed that some length. The idea of profit centers and subsidiary businesses and I handed them boxes of perspectives that were hard to get on all kinds of convertible securities.

Things would come out when the securities were issued and then they would no longer be findable anywhere they were just like rare books. So I handed them my whole collection of cartels of these things. So I had a very good ride with him and I finally exited recently because the taxes take too big a bite out of the returns that I get.

It's just simple to invest in an index fund. I ended up better off them if I were to remain in Citadel also complicated to get all kinds of papers. I had four feet of paperwork when I find the box that all up the end. That is a lot of paperwork. Now what I know you had the introduction, but what was it at the time about. Ken Griffin and Citadel that made it pass muster for you well they were going to follow the exact plan that I was following when I shut down Prince Newport so that was good.

I got it and I knew Frank and he was smart and capable and Ken seemed very smart and capable and energetic so they were doing what I would be doing. I had a state in business. So let's talk about staying in business because I had a question that I wanted to make sure I touched upon and there are a million others that I would love to talk about.

Could you please speak to having enough. You've spoken about or at least written about how your hedge fund could have taken over your life and you could have just ended up as a capital accumulator as your full time job plus. How did you make the decision to wind it down and how do you think about having enough because it doesn't strike me as something I come across often with people who are really good at investing.

The way I got into the investment world I was in academic and I was curious and I found things interesting. I wasn't really in there to get rich. I was in there to deal with interesting math problems that kept coming up. Blackjack rule that 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 all I once said do what you love and the money will follow. She wrote a book with that title. And I said you know that's 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 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 with a 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 build over newspapers and I made twenty five dollars 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 like playing with those things and learning about them. Michael 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 to what I found though in the investment world is lots of people going 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 five or ten villas a yacht a jet and let's imagine you have five houses just to take an example. How much of your time you're spending each house you can't be on average more than fifth which my math and you're not going to be in your household time.

Anyhow you can be for gazing traveling meeting so on so maybe it's a six or seventh of the time on average now some houses are going to you're going to spend more time in some less you may spend a tenth or 15th of your time or not 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. It's like running a business it's terrible. You don't get to enjoy the important part of your life which is time. Did you have a set point at which point you near going to exit the business so to speak or was there a particular day that prompted particular experience that prompted you to say enough is enough.

I want out do you remember what the catalyst was if there was one. I wasn't having fun anymore it was turning into work. And I said well I don't need to do this I have enough wealth I'm never going to spend it all why keep doing this. So I decided to wind it down it was fun for a long time because there were challenging problems it was challenging to try to figure out new things and to deal with all the issues came up.

But when it became a bureaucratic and paperwork and a grind where I had to do things I didn't want to do that was enough which time time to go it was the same thing and academia I loved academia but the aspects to it that became burdensome committee meetings endless reviews grant proposals what I liked was research and teaching and the people that I met there the students and the faculty that were smart and challenging. And if it was only that I'd still be there but it wasn't only that.

And I found others that were equally or more fulfilling so anyhow I just migrate to where where I want to be I don't have a set thing that I have to keep doing so let's explore that a little bit further nuts him to live.

Many people will know because of books like full by randomness the black swan antifragil wrote the forward to your memoir and in that he writes about your restraint not getting caught up in the the golden fetters of large structures multiple offices morning meetings etc and he highlights the value or the fact that you value independence so what does independence mean to you and how did you spend your time after winding down the investment side of things.

I spent my time reading traveling exercising enjoying my family and my friends and learning things that I could learn and then it's also entertained to casually manage my investments I might just interject here that one of the things that makes you independent is to accumulate capital.

Because then the capital can grow on its own if it's simply invested as I described before it in for example an index fund and once you have capital then you have the chance of independence if you have enough capital it will support you indefinitely when you've cheesed that goal there's no point in spending time doing anything you don't like doing it you can help it.

You know I have to do something you don't like like get all your tax information together every year or go in for routine medical appointments is there anything that you are particularly interested in learning more about now or in the process of learning about or looking forward to learning about.

What I focused on for the last year or so is reading about what's going on in American society what may happen I don't think we can predict for sure what's going to happen but we can map out scenarios we can map out possibilities we won't get them all but we can map out quite a few of them and ask ourselves what will we do with scenario a scenario B scenario C materializes.

And have some sort of preparation readiness for that and I won't go into a list of extreme scenarios except maybe a few you could have an autocratic country where a minority pretty much rules everything and dictates everybody else you could have a turbulent country where large part of country maybe a majority is badly upset and just wants to bust everything up and start over somehow.

So you could have the choice that described a devolution evolution or revolution I don't know how it's going to play out but it's worth thinking about what might happen and whether there's anything any of us can do about it.

And I don't think there's much an individual can do on a grand scale unless he happens to be in a position of great importance or manages to get himself a position of great importance but I think there's a lot that an individual can do on a small scale and I think the best thing we can do is teach every bridge to think for themselves so they don't just take what they're told in the press for example or in the other forms of the media.

Internet Twitter so on they don't just take that and solve it up and believe it but they question it and they ask whether in fact it might not be true what the motives are the people are putting things out and so far when you think of the thing for yourself the whole world changes.

And it becomes much clearer in my opinion and you can manage your life much better fundamental attributioner learning about things like that and putting your own thinking under examination and this has been so fun and I know that there are a million other things we can talk about and hopefully we'll have a chance to do around to at some point but I wanted to be respectful of your time and begin to bring this to a close is there anything else that you would like to.

To mention or call attention to any request of my audience that you would like to make people can certainly find you online at Edward o Thorpe dot com and I'll link to that as well as your books and everything else that we've discussed in the show notes at Tim. So I think you know if you're a book such podcast is there anything else it you would like to bring up before we end this round one conversation. I'll tell you one story that you probably read my book.

It's about Joseph Haller and Kurt vomited. Way back maybe 50 years ago. I'm not sure exactly when but it was a very well-known famous at the time and Kurt Falnigat Is well known too for a variety of books and Joseph heller died. I'm not sure when maybe early 2000s and Kurt Falnigat 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's 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 cash 22 This guy makes this much money in a day is you're ever gonna make he's got

Ben houses and yachts and jets and villas and Models falling off his arm and so on and Just a hello look back and said, you know, I have something he'll never have Kurt Falnigat was personally 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 out That you can have enough and it's better than not having enough It's certainly better than never being stated and yes Staying on that sort of compulsive track and I am so endlessly Fascinated by by you your story your lessons learned and I really hope we have a chance to have another Conversation because I have still so many different notes and questions that I would I would left tackle

But we'll we'll leave people wanting more and hopefully we will make time to have that second conversation But thank you so much for taking the time today at it's been it's been a real joy to spend this time with you Well, I enjoyed very much I was pleasure to meet you and now I know that since I'm on your podcast my wife will listen to me Well, one can hope one can hope one can hope and

Everybody listening. Thank you for tuning in as always and until next time try not to act like a scared rabbit and Be just a little bit kinder then you think you need to be and As always, thank you for tuning in Hey guys, this is Tim again

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It's most likely because even if you're consciously consuming electrolytes you're just not getting enough and It relates to a bunch of stuff like a hormone called a dastero Global blow and insulin is low, but it's suffice to say this is where element against both LMNT can help my favorite flavor By far is citrus salt which is a side note you can also use to make a kick ass no sugar margarita But for special occasions obviously you're probably already familiar with one of the names behind it

Rob wolf our OBB Rob wolf who is a former research biochemist and two-time uartime bestselling author of the paleo solution and wire to eat Rob created element by scratching his own itch That's how it got started his Brazilian jujitsu coaches turned him on to electrolytes as a performance enhancer Things clicked and fam company was born So if you're on a low carb diet or fasting electrolytes play a key role in believing hunger cramps headaches tiredness and dizziness

Sugar artificial ingredients coloring all that's garbage unneeded. There's none of that in element and a lot of

Name you might recognize are already using element. It was recommended to be by one of my favorite athlete friends Three Navy steel teams as prescribed by their master chief marine units FBI sniper teams at least five NFL teams who have Subscriptions they are the exclusive hydration partner to team you as a weightlifting and on and on you can try it risk free If you don't like it element will give you your money back no questions ask they have extremely low return rates

Get your free element sample pack with any drink mixed purchase at drink element dot com slash Tim that's drink LMNT dot com slash Tim And if you're an element insider one of their most loyal customers you have first access to element Sparkling a bold 16 ounce can of sparkling electrolyte water again check it all out drink element dot com slash Tim drink LMNT dot com slash Tim