If You Want To Be Happy, Be – Tolstoy

smiley-happiness

Happiness is subject I spend a lot of time thinking about. Is it something we can control? Can we simply choose to be happy or is it something that we discover without looking? Are we genetically predisposed to being happy? Despite the complexity of the answer, the question can be asked simply – are you happy

The truth is, we still can’t define what makes a person happy. We could stimulate the chemical response that makes us feel happy but then that is only a short term fix – much like coping with drugs, alcohol, or erratic behavior. We could take trips, buy new clothes or a new car, or sleep around. Is it money? Studies show that we only need a salary of $50,000 (or $24/hour) to maximize our happiness with money so big raises and winning the lottery don’t improve our long term happiness either.

We’re all going to eventually drift back to our baseline level of happiness so the real question then becomes, how can we improve our base level of happiness? The happiness and enjoyment with life we feel day-to-day? We can start by ceasing to compare yourself with others and focus on the present. It’s best to think of it as a process and not an ultimate goal

A quote from Epictetus sums this up nicely:

There is only one way to happiness and that is to cease worrying about things which are beyond the power of our will.

 

From One, All – Don’t Make a Bad Leap in Judgement

from-one-all

There is a behavior common among people. Maybe we think we are smarter than we are. Maybe we’re just lazy. But the tendency of taking a sample of one and making sweeping generalizations about the population can be tremendously misleading and can lead to poor decision making.

Example

Just this morning I was working with a client on a proposal they were submitting for a design job. I had a question about a statement in their proposal and here is a little of how it went:

Me: “Why are we saying X here? Does that need to be stated?”
Reply: “Yes, because no one else does this. Everyone else’s is generic, our’s is specific.”
Me: “How do we know that no one else does this? Who is everyone?”
Reply: “Company Z gives a generic list.”
Me: “Is that the only example we have?”
Reply: “Yes. That’s because it’s from Company Z and they’re the biggest.”

Analysis

Sweeping generalizations from a single sample of the population. Granted, this company was larger and more well-known, but does that automatically mean every single firm in that industry follows the same practice? There are roughly 25 firms that could provide a comparable product/proposal in that geographic region. We can’t say that everyone does this because we only know of one specific example.

It makes decision making easy to assume that the entire population has a certain quality because one individual possess it. Our brain creates these representations because it is lazy. It looks for patterns so that way we don’t have to think hard. This is what Daniel Kahneman would call System 1 thinking and it allows us to flip on the auto-pilot and cruise through the day so we can focus on other things and not “waste” brain power.

But easy isn’t better or right. Lazy thinking yields potentially hazardous results. The example above is a relatively innocuous example without harmful implications. But it is very easy to draw the line from that pattern of thinking to much more impactful ones.

Conclusion

We cannot derive assumptions of the group from a single member of the group. This type of thinking occurs in all sorts of decision we make on a day-to-day basis.

Its like going on a bad date and assuming “all guys are jerks” or “all QBs from Univ. of Wisconsin are great” because Russell Wilson won the Super Bowl. You simply can’t make that leap in judgement from single observations.

Realize that this sort of approach is not the smartest approach you can make. Challenge the basis of you assumptions; flip them on their head and do as Charlie Munger says: “invert, always invert.”

Nate Silver and the Science of Prediction

This was a great little interview of Nate Silver done by Nesta. Silver briefly gives his views on the science of prediction and forecasting. This is a rare opprtunity as Nate Silver is usually a little longer winded! I have to say I agree with a couple things he said: first, that we are really not getting better at prediction despite advances and second, large amounts of data make us lazy.

Most of our data analysis techniques give us great measures of frequency but are terrible at measuring the magnitude of events. We can generally answer “yes or no” to the question of “will it rain” but we have tremendous difficulty in predicting exactly how much it will rain. As for the data, I have experienced several important decision makers rely on spurious correlations to justify business decisions. Without sound analysis and good theory to back it up, we can’t simply rely on correlation analysis.

Video transcript below:

Nesta: What is the Science of Prediction?
Nate Silver: Well, I prefer to use the term forecasting instead of prediction. When the word forecasting came into our language, it meant “planning under conditions of uncertainty.” So it’s as much about knowing what we don’t know as what we do know.

Nesta: Are we getting better at forecasting the future?
Silver: So is society getting better at prediction? I think, as a whole, not by a lot. Maybe a little bit at a time. I mean, technology gradually improves in fits and starts and scientific knowledge becomes more complete. But it’s still very incomplete relative to the whole scope of questions that we have. Also, some things in human endeavors, society becomes more complex and so you might have better methods, arguable, or more data but you also are running against a moving target where the system itself becomes more complicated.

Nesta: Is forecasting an art or a science?
Silver: It ought to be a science, but it requires judgement, I think. Judgement is not the same as gut instinct. It requires what Daniel Kahneman might say is “thinking slowly.” Our gut instincts are often rather poor when it comes to thinking in terms of probabilities. We have a lot of biases that get in the way. So it’s a science but it’s a difficult science.

In theory, if you get more data, then it should make prediction better, other things being equal. But in fact, people can get very distracted by having a large volume of data. They can cherry pick their evidence. They can do what’s called “over fit” a model so you describe the past very accurately but won’t hold up very well with making predictions. Experiments aren’t always validated. You have false positive results. So it’s a risk as well as an opportunity.

Nesta: Will we ever be able to accurately predict the weather?
Silver: There’s actually been a great deal of success. We probably won’t have exact predictions where we say “100%” or something, but if you look at hurricane forecasts, or just temperature forecasts or rainfall forecasts, they’ve gotten much better over the last 25 years.

Nate Silver – Baseball and Politics are Data Driven

This is a quick highlight from a discussion Nate Silver gave at the USC Bedrosian Center of Governance. I really like a few of the things he touches on because he discusses the rule that correlation is not causation and you are likely to get burned assuming correlations have meaning without an underlying theory to support it.

Video transcript below:

Silver: What happens when you take a society and infuse a lot more information into it? Is that information used to benefit society or is it misconstrued sometimes, is there more noise than signal?

As we’re looking at data, what we really want to see is not just statistics for its own sake but I want to see relationships and connections that allow us to make predictions, make better decisions going forward. As you get more data, you have more truth so to speak but you also have a wider increase in false positives and statistical correlations that don’t have any meaning.

The Federal Reserve now tracks 148,000 economic variables. But if you’re looking at the data, you have a huge volume of things to sort through. You have 10.9 billion correlations to evaluate. But of those 10.9 billion, there are also a lot of spurious correlations.

One infamous one involves the National Football League where, for a number of years, you had a streak where if the NFC team won the Super Bowl, the stock market would have a good year. If the AFC team won instead, the stock market would have a bad year of be flat.

If you’re betting on a correlation that doesn’t have any real causal link, I guess no real reason why investors should be concerned about which football team wins, then you’re likely to get burned sooner or later. Again, this is the problem with assuming volume conquers everything. You have to apply a filter, you have to have some theory apply some scrutiny. There are terrific insights but not without some human intelligence at the console to kinda tell the signal from the noise.

What is a ‘Black Swan’? Nassim Nicholas Taleb Explains

Nassim Taleb explains what a Black Swan is in February 2008 at a talk in San Francisco. This is particularly interesting because in just a few short months, his prediction would come true. An event similar to the ones he describes occurred and we had one of the most severe financial crashes since the Great Depression. Take a look at the way he talks about black swans and try to understand the methodologies he applies to the concept of statistical “outliers.”

Video excerpt below:

What is a Black Swan?
Before the discovery of Australia, we had no reason to believe swans could be any other color but white. Affectionately, there was an expression in medieval England, “you’d sooner see a black swan than…” for example. It was like saying when pigs fly or when… when George Bush does something intelligent or something.

So there was an expression until we saw Australia and effectively, with one sighting of a single bird, destroyed millennia of confirmation. So it was posed as a logical problem: make sure there’s no reason you cannot rule out black swans because you haven’t seen any. So my problem is not a logical question. My black swan is an event, not a bird.

It’s an event that has three properties.
1. It is hard to predict
It is hard to predict based on information before its occurrence (based on historical information). You have here a sample of black swans. The most interesting one is the tie. If someone was going to forecast the future, they’d have to forecast that human beings two thousand years away would constrict their blood supply with this device, for example. So that’s very difficult to predict. The computer was a black swan. It changed the world and nobody thought the computer would do anything. You know, it was initially used for common storage. I mean Watson from IBM did not that this tool could have any use.

black-swan-type-events

The rise of religions, black swans, totally unpredictable. Harry Potter is a black swan. A lot of cultural phenomenon are black swans.

To me the most significant black swan, and the one I’m going to focus on for the next few minutes is the First War. The first war we had after Napoleon, we thought for about 100 years that the world had become civilized and that, you know, people became conscious of the need for peace. And you had this devastating war, the biggest war, something that destroyed a great deal.

Of course it came in two volumes, you had volume one and then you had a sequel. So here we have black swans. Events of low predictability and high consequence.

But the most vicious part is the following one: that before the fact they’re extremely predictable but after the fact, we saw them coming. So we have retrospective distortion – these events are prospectively unpredictable, retrospectively predictable.

We even have disciplines to give us the illusion of understanding the world. We have disciplines that make us misunderstand the world by giving us this illusion of predictability. History, for example, economics, other such things.

Robert Shiller on Market Bubbles and Busts

David Wessel from WSJ Money interviews Robert Shiller about market bubbles and busts – and even where the term “irrational exuberance” came from. I generally enjoy Wessel and this interview was an insightful look into Shiller’s thinking about bubbles. Yes, they should be preventable but the reality is we don’t have an effective way to do it without disrupting the economy and our spirit. I also had no idea Shiller may have been the one to put the term “irrational exuberance” into Alan Greenspan’s ear! That makes for an interesting story.

Video transcript of the interview below:

David Wessel: One theme that runs through your work is that people tend to make mistakes and they seem to make mistakes over and over again. Now that’s quite different than what I learned when I took economics in college – that people are rational. How did you get to this thought? How did you get to the point of thinking about people’s mistakes when they aren’t necessarily rational?
Robert Shiller: Well I think when you went to college, the economics profession had reached an unnatural state. Academics are a bit faddish like everyone else and the efficient market hypothesis was elevated. Mathematical models of rational behavior became the rage, and it was just an abnormal time. I think that I was reading more widely and wanting to come back to reality.

Wessel: Was there something in reality that you knew economic models couldn’t explain that led you to this?
Shiller: Well, bubbles [laughs]. The story about bubbles was that the markets appear random but that’s only because new information is unpredictable; they respond only to new information. I was thinking – new information about what? But it seemed to be almost like a mythology to me. The suggestion was it’s new information about fundamentally important real things and I just didn’t believe it. The idea that people are so optimizing and so calculating and ready to update their information; that’s true of a tiny fraction of 1% of people. It’s not going to explain the whole market.

Wessel: The story you told about the housing market in advance, famously, was that we were in a bubble. That you were one of the people, perhaps one of the most prominent people, to identify this. But, you know, one prediction doesn’t make a track record. Do you think it’s possible in stock markets and housing bubbles to know in advance that this is a bubble? Or is it a gut – sometimes you’re right and sometimes you’re wrong?
Shiller: Well you’ll be wrong sometimes, certainly. There might be a story, a real reason. That would be the efficient market’s theory that it appears mysterious but that’s mysterious only because it’s not concrete yet and people are sensing something. The efficient market hypothesis is not totally wrong, in fact it’s something that I teach and it’s an important insight. It’s just that it’s been carried too far.

Wessel: I remember in the late 1990′s when the stock market was looking sort of frothy, you went down to the federal reserve and made a presentation and I remember your wife wrote a Christmas letter which she said that you had expressed concern that you were the one who planted the idea of irrational exuberance in Alan Greenspan’s head and contributed to his use of that phrase. Then the market tanked. So, is that a true story?
Shiller: What you said was absolutely right. Greenspan said the word “irrational exuberance” in an evening speech in Washington and the Tokyo market immediately – which was still open at the time – crashed (by 4%). Then it spread over the whole world as the markets opened. And that’s why the words “irrational exuberance” are famous. Greenspan didn’t coin it, I didn’t coin it. It’s an old phrase. He just happened to use that phrase and the market immediately crashed.

Wessel: Ddi you really feel responsible?
Shiller: I came home and told my wife I may have started a worldwide stock market crash. I said it sort of jokingly but I have believed it. And she said “your ego is getting way out of control.” There was an article about me on the front page of the Wall Street Journal a couple days later about just the same issue. They didn’t say whether I did or didn’t and my wife said “ok ok I apologize.” The thing is, the markets are crazy. The power isn’t in me, it’s in Alan Greenspan. But I had his ear. I spoke before the Board and then I had lunch with him so it’s possible. This is a method of thinking about the economy that’s very different. It makes the economy as unstable and affected by individual people.

Wessel: Do you think that bubbles are always a bad thing? Or do you think they have some good effects?
Shiller: Well, first of all, it’s a free world and people can do what they want. So I’m not proposing that we put the straight jacket on these things. The other thing about it is that human nature needs stimulation and people have to have some sense of opportunity and excitement – it motivates them to action. I think profits are an important motivator. In the long run it’s hard to say that bubbles are really bad. Take the internet bubble of the 1990′s. That generated a lot of start ups, some of them foolish (and failed) and others survived. Is it a bad thing? I find it hard to think of what the alternative would be. We could have had a Fed that tried to lean against the stock market bubble (of the 1990s) or against the later real estate bubble (in the 2000s) and I think that would be a good thing. The problem is, we don’t have any… – ultimately our policies in economics are somewhat intuitive. Our models are not accurate enough to tell us what the right policy is. So I’m thinking that probably we would’ve been better off if we had tamed these bubbles but there’s no good way to be sure. And we certainly don’t want to do draconian things that would upset the whole system just to prevent bubbles.

Getting Personal with Nassim Nicholas Taleb

This video provides a nice glimpse into some areas of Nassim Nicholas Taleb. Going behind the scenes to see his view on stress and what a book should be.

I really value Taleb’s views on stress and have worked to organize my calendar in a way that is stress reducing. It can be difficult to eliminate sources dull, continued stress in favor of the short, more intense beneficial stress. I know I have yet to accomplish this goal but when you keep this in the forefront of your mind, it will change the way you schedule yourself and the way you think about your activities.

Transcript of the video interview:

[We catch Nassim Taleb already talking] Maybe less mysterious than some people make me out to be. You know, people have this idea of some secretive professor because there’s a lot of information about me but nothing personal, strangely. And it confuses people. I don’t know if there’s anything quickly interesting about me that’s not known. Other than that I like to sleep a lot.

Let me tell you a few tricks about my lifestyle, I’ve taken the idea of redundancy to the max by having the smallest amount of appointments on any given day and I know how my productivity rises dramatically.

I decided in 2007 never to be late. So we have built redundancies by going places the day before or the time before and then working from my hotel or cafe is most productive time.

I think that building redundancy into my schedule lowered my risk while at the same time, giving me a huge bonus that time, okay, is somehow like setting aside free time to do important things.

I have zero stress. That’s one thing about my life is I have no stress. I mean zero dull stress. I like to have intense stress of – there’s something called beneficial stress. Stressors are – I wrote about it in the 2nd Edition. Like if you see a lion here and you run away, it’s a beneficial stress, like a shock jumping into very cold water. It’s good for you one in awhile but dull, continued stress – daily stress – is not good. You need recovery. You need stress, then you need recovery. People have the opposite. They don’t recover, they don’t sleep enough. They’re always hurrying, they’re always on their Blackberry.

I was in Dubai and you can see stress hormones. I can detect stress hormones looking at a person walking in an airport lounge. I can tell, well you get used to it. And it’s sort of contagious which is why I don’t take trains. I try to avoid taking planes when they are full because I design my schedule to avoid rush hour. But I noticed that your serenity is disturbed by someone stressed out, walking around. Your productivity drops dramatically with stress. Either as an author or as an investor, anything, I have a lot of activities and it’s so strange how if you eliminate stress how much faster things are when you do them.

Let me tell you one thing as an author I believe that an author should explain his book. So I talk about it because the publisher wants me to go out and talk about the when it’s published. But a book should have it’s own – let’s assume I’m dead, I’m not going to be there to answer any questions. So the book should be designed in a way to be robust to different interpretations.

Nate Silver’s Predictions for the 2016 Election

Nate Silver is interviewed by the Aspen Institute in January 2013 on questions about the 2016 Presidential election. This is a good three years away and he’s already saying that it seems to him that Hillary Clinton will be the Democratic nominee. Will he be right?

Video transcript below:

Interviewer: Do you see any democrats starting to put their toe in the water?
Nate Silver: I think everyone is waiting for Hillary. It’s almost as though she’s, from the standpoint of the party primary, an incumbent President, right? Where she even kind of trumps the VP, who very often wins the nomination after a President is term-limited. You look at polls and like 60% of democrats say they prefer Hillary the nominee. There’s no type of non-incumbent in history with those types of numbers. The problem is she has to decide at some point or it’s going to disadvantage other democrats who would want to run just because a lot of other candidates like Chris Gillibrand to Cuomo in the Northeast might be going for the same donor base. The sense I get from Clinton, from reading the tea leaves, is that she doesn’t really like the campaign all that much but that maybe she’d really like to be President and so forth. So she might have an incentive to wait. She doesn’t have to build up her name-brand at all so she might not have to declare right away but she probably has to at least kinda privately single the Democrats “what am I thinking about” or you’ll have people disadvantaged in the party. There might be some people who privately say “I can’t wait until May 2015, I have to start building my campaign operation” and that might force the issue.

Interviewer: When does she have to privately signal?
Silver: I’d say if she hasn’t privately signaled to a Cuomo or an O’Malley or a Booker or a Biden by New Year’s Day 2015, right then it becomes problematic. If she were to run, she’d say “you know what guys, don’t tell anyone but I’m probably gonna run” and then she could wait until mid or even late 2015 to declare officially. But privately I think a campaign is usually a two year thing at least to go get an operation up and running.

Interviewer: How long is that going to be private? I mean, come on…
Silver: There are all kinds of signals usually. And there’s kind of even a question about how you define when someone is running for office. If someone is talking to donors and lining up a team and they’ve not officially declared then in some sense they’re kind of running for President whether they say so or not. You could say that Hillary is kind of disavowing different PACs and so forth but she’s doing the types of things that you would think a candidate would do if they were running for President. She’s kind of running now but will she stop running. The semantics of when she officially says “I’m in” are maybe not the most important thing because her potential presence in the race and she’s not already disavowing the race, then she’s already blocking out all the other candidates anyway. She doesn’t have to say “I’m in” if it’s already working. But it does take a long time to get geared up for a campaign.

I mean look at a guy like Rick Perry who had different types of issues but here’s a guy had been elected in Texas several times by wide margins and he goes and decides he’s going to run a Presidential campaign and it’s a total disaster basically. It’s very very hard to gear up for a national campaign. Go back and watch tapes from Obama from February/March 2007 when he just declared. I mean he was pretty terrible on the stump and at debates but he had a good team around him. I’m sure Hillary has a little more practice but was not terribly smooth. So you really need a two year planning cycle to do this now.

Robert Shiller Interview with The Guardian

I like when some of our best academics get a chance to talk about ideas and solutions to problems they see. In this Robert Shiller interview, he gets an opportunity to do just that. His views on democratizing financial instruments and making them serve the people is at the heart of many economics theories – but rarely practiced in reality. It wasn’t until after the dust cleared that most of the world found out what they heck credit default obligations were and how they could cause problems.

Shiller interview transcript below:

For me, finance is not about making money as people think about it. It’s about financing activities and that means making things happen. The way that the media interests people in finance tends to be by talking about wealth and power and corruption. The news media tend to find that audiences are most drawn in by an appeal to their anger about the financial situation.

But I don’t want to do that. I want to talk constructively – not to say that people who commit financial crimes shouldn’t go to jail – but I think it’s more important that we do our people in their understanding what the financial institutions really do. So that is a bit of a challenge to me. I have to appeal to people’s self interests which is to say you need to understand how things get done in a modern society and that inevitably involves finance. It’s either government finance or it’s corporate finance or it’s non-profit finance. One way or the other, it’s finance. I hope to interest people in it from that perspective rather than from some appeal to their anger.

Financing any important activity means protecting it for the distant future. Most things we care about – our multi-year projects – that means there has to be some consistency through time. People come and go, they don’t focus on the long-term. Either in terms of long-term social or other important goals but we have to somehow create a financial structure that keeps an activity going through time so that the stewardship, the maintenance, the attention to the real goals that we have.

Capitalism in Adam Smith’s day was largely family businesses or small businesses. We have transformed that into a system of immense complexity now. Large international organizations raise capital from millions of people all over the world and produce services that are extraordinarily complex. Some people are urging putting the toothpaste back in the tube and moving backwards into a pre-financial capitalism. Maybe al Qaeda is an example of someone who is doing that. Not many though, because I think that while people have mixed feelings about financial capitalism and a lot of hostility to some of the successful people in it, we still have a lot of underlying support most people don’t see as an alternative. So, and I’m concurring with that thinking, we beed to move forward with better financial capitalism, more advanced financial capitalism to solve some of the inequities and problems that people see.

I’m not a political advisor but let me say that what comes to mind as to what politicians might mention has a futuristic goal. It’s that financial instruments should be democratized. They should be made to serve the people. That sounds like a campaign, doesn’t it, I think?

Aetheists and the Stock Market by Nassim Nicholas Taleb

This is another in the line of talks Nassim Taleb gave in 2008 in San Francisco. If you’ve ever wondered what aetheists and the stock market have in common, listen to Taleb’s explanation.

Video transcript below:

On of the things I discuss in my next book, I studied religion a little bit. I don’t believe in beliefs, by the way. I don’t believe we as humans use beliefs to act. I think beliefs have some other purpose. But the problem I find very inconsistent – and I don’t know if some Dawkins friends are here – I find it extremely inconsistent to be suspicious of the bishops. OK, here is an orthodox service because I’m orthodox. So be suspicious of the bishop and be a sucker when it comes to the stock market. Or listen to the economists. I don’t understand what metrics double-standard you’re using. You know when Dawkins was saying that he’s got these people who have double standards – talking about post-modernists. He said anybody riding a plane to go to a conference when they doubt the laws of physics is a hypocrite.

To me, anybody invested in the stock market who is critical of religion is a hypocrite. That’s my point, there’s nothing wrong about being critical. You gotta go all the way.

So what happens is our skepticism is domain dependent and we’re gonna test it. There is a very easy metric for me to test skepticism. It took me awhile to figure it out. You show things to see if people see false patterns or not. I have a little lab in London at the London Business School with Dan Goldstein and we’re going to test to see if religious people are mostly fooled by randomness outside of religion and vice versa.

So it is a problem, substituting religion with CNBC stock news. You know that stock market analysts? They’re worse than nothing. A lot worse than nothing. So there is an inconsistency there and incidentally, I figured out one thing is that medicine, for a long time, had an expert problem in medicine. You still have some expert problem in medicine. Medicine killed more people than it saved, particularly in the late 18th century. Until the discovery of Penicillin. Why? Because it’s something I call the illusion of control. By going to a doctor – if you hurt yourself. So going to the Temple of Apollo or something like that – or any form of religion – so long as it takes you away from a doctor, it’s going to be beneficial to you.

I have a notion of religion that’s sort of in conflict with the rest.