Michael Mauboussin — How Great Investors Make Decisions, Harnessing The Wisdom (vs. Madness) of Crowds, Lessons from Race Horses

The Tim Ferris Show is one of the most popular podcasts out there with a fairly diverse array of guests. But this episode will likely go down as our favourite. We have featured Michael Mauboussin’s essays here in the past. In this podcast, Mauboussin shows what sort of insight, a combination of voracious reading, deep thinking and prolific writing can produce. To pretty much every topic of discussion Tim initiates, Mauboussin cites atleast one book that provided the central insight on that subject and shows how he built on that insight to develop his own independent view and more often than not, written about it – a research paper or sometimes even a book. Indeed, he put out a tweet about his favourite books following popular demand from listeners post his podcast. It is worth listening to the two-hour podcast in its entirety as Mauboussin delves into subjects ranging from the power of first principles thinking, complex adaptive systems, cognitive biases to base rates among others as useful concepts for investors. He even comes up with a well-researched view on parenting when Tim casually quizzes him on family towards the end of the podcast. Here are some excerpts we enjoyed:
On first principles thinking:
“…“Nullius In Verba,” which is the motto of The Royal Society. … basically translated, it means “Take nobody’s word for it,” kind of “See for yourself.” And I really like this idea that a lot of the information that people use or even things that they’re taught or things they take from authority and they don’t go figure them out for themselves. And so this idea of constantly having an open mind and seeing for yourself and not working just on authority and questioning everything, that’s the tone I want to set in the course.
…“Notions, not notations.” And the idea is don’t focus on only equations, computations — obviously super important, but really the key is to grasp the intuitions, the underlying ideas, and then allow the computation to serve that rather than the other way around.
Now, sometimes you can solve a problem computationally, and then you have to go back and figure out what the intuition is to get you there, but that’s the main thing. And so, I think that’s, for example, for business school students it’s a potential problem because from time to time they’ll run equations without thinking about what they’re doing, and they’ll forget about the concepts behind them. So, Charlie Munger, the Vice Chairman of Berkshire Hathaway, has got this line where he says, “People calculate too much and think too little.” And I think that’s what we’re trying to fight against with that idea.
…And Wall Street, even to this day, is replete with lots of rules of thumb and sort of old wives’ tales and shorthands for how to do things. And some of these things, when I would sit there and listen to them and try to cobble it all together, just didn’t make sense. And so for me it was this idea of the beginner’s mind and really saying, “How does this stuff really work?””
On Markets as a Complex Adaptive Systems:
“So, “complex” means lots of agents. Those could be neurons in your brain, ants in an ant colony, people in a city, whatever it is. “Adaptive” means that those agents operate with decision rules. They think about how the world works, and so they go out in there and try to do their thing. And as the environment changes, they change their decision rules. So that’s the adaptive part, their decision rules that are attempting to be appropriate for the environment. And then, “system” is the whole is greater than the sum of the parts. It’s very difficult to understand how a system works, an emergent system works, by looking at the underlying components.
….The Wisdom of Crowds says crowds are wise when three conditions are in place. A, we have diversity of the underlying agents, or heterogeneity. Right? So this is one of the reasons that diversity is so important, is because we need different points of view and different decision rules represented. Second is an appropriate aggregation mechanism. So you can have all the information in the world in the heads of people sitting around your boardroom, but if you’re not extracting it and aggregating it, it’s of no value. Right? And then, the third is incentives, which are rewards for being right and penalties for being wrong. In markets, that’s money. But it doesn’t have to be money. It can be reputation. It could be fitness for a species or other measures of incentives that allow you to propagate, basically.”
On Diversity:
“…there are really three types of diversity that we care about. The first is social category diversity, … that people look different, but they have the same sort of way of thinking about the world. When most organizations talk about diversity, they’re almost always talking about social category diversity. And one of the benefits of that is because we can count. Right? We can see how many women there are versus men and so forth.
The second kind of diversity is cognitive diversity. … And that’s really perspectives, point of views, mental models, training, personalities, and so forth. Nearly all the literature I’ve seen suggests that it is cognitive diversity that is the key to solving problems. To your point, it’s possible to have people that look the same and think very differently, or people that look very different but think the same. That’s not likely. Right? There’s some correlation between social category diversity and cognitive diversity, but cognitive diversity is sort of what we’re after.
And then, the third thing is values diversity. And you could rephrase this as almost a sense of purpose. And here we want to be uniform. Right? We want that kind of diversity to be low. So we’d like to really have people that have a common mission.
…And so it’s a combination. It is the cognitive component that diversity seems to be. So you want smart people, and you want diverse people, and both of them are important contributors to solving problems for corporate success.”

If you want to read our other published material, please visit https://marcellus.in/blog/

Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.