Published March 2022 on YouTube
Ep.96 — How to get better at making decisions w/ Jake Taylor (CEO of Farnam Street Investments)
1. Resetting Our Thinking
Jim explores how we can reset our thinking on issues to avoid getting caught in infinite loops. Through discussions with experts in various fields, including psychology and investing, he offers a fresh perspective on a variety of issues and helps listeners become better investors and more nuanced thinkers.+
2. Jake Taylor
Jake Taylor discusses the iron law of economic survival and how it relates to asset allocation, drawing comparisons to The Wealthy Barber. Jim O'Shaughnessy praises the format of Taylor's book, The Rebel Allocator, and sets the stage for the rest of the episode.+
3. The Iron Law of Economics
Jake Taylor explains the importance of cost, price, and value in relation to each other for a sustainable business. He uses the example of a restaurateur to show how changing prices can affect profitability and brand. Jim O'Shaughnessy adds that running after profits can be suboptimal and there are other important factors to consider.+
4. Return on Invested Capital
Hazards of Chasing Profits:Jake explains how chasing profits at the expense of building the brand can be detrimental in the long run. He emphasizes the importance of maintaining a good return on invested capital and how it's crucial for growth. Jim adds to the conversation by referencing AOL's past mistakes with their CD distribution strategy.+
Quantifying Intangibles:Jim and Jake discuss the challenges of quantifying intangible value in today's economy, particularly in measuring the value of coding and R&D investments. They also touch on the limitations of traditional accounting methods in capturing economic reality.+
Untangling GDP:Jim explains why GDP is irrelevant and how manufacturing companies like Intel are competing on price. He also discusses the need for new tools to make smart investment choices. Jake introduces the jobs to be done framework, which highlights how every good or service we consume is to give us a sense of progress against our wants or needs.+
Value, Price, and Cost:Jake and Jim discuss how the value of a product is determined by the consumer, and how it's divorced from cost. They also touch on the idea that human beings play status and signaling games, and how most useful products started out as frivolities.+
Status and Luxury:Jim and Jake discuss how people hire products and services to signal their status and identity. They explore the history of status items and how luxury beliefs can be powerful offline. They also touch on the significance of color in text messages and how it relates to identity.+
Trapped by Invisible Beliefs:Jim and Jake discuss how quantitative investors are finding new ways to model the changing landscape of wealth creation. Jim shares an interesting story about the origins of the Forbes 400 and how it reflects the shift towards symbol manipulation as a means of creating wealth. They also touch on the importance of uncovering invisible beliefs that can trap us in outdated ways of thinking.+
Checklist Software:Jake discusses the need for a checklist software to improve his productivity and how different learning environments require different approaches to learning.+
Journaling for Better Decisions:Jake and Jim discuss the importance of journaling for better decision making. By recording decisions, predictions, and assigning probabilities, individuals can become better decision makers and shorten the timeline to understand the cause and effect between their decisions. Journaling helps to interface with the brain and make room for good ideas to proliferate.Show transcript +
Journaling Strategies:Jake and Jim discuss the benefits of journaling and the challenges of getting people to start. They explore strategies for making journaling fun and engaging, including the use of gamification.+
Investing Habits:Jake and Jim discuss the importance of forming good habits when it comes to investing. They suggest starting small and using triggers to make it easier to form the habit. They also talk about the importance of the "jobs to be done" framework and making the customer the hero of their investing journey.+
Leveraging Tech Tools:Jake and Jim discuss how technology can help humans leverage their brains and thought processes to better adapt to the non-linear world we live in today. They touch on the free energy principle and the need for tools to shorten feedback loops for decision-making.+
5. Delete Beliefs
Navigating Uncertainty:Jim and Jake discuss the need for a safety net for those who may not thrive in an uncertain world, and the potential consequences if one isn't provided. They also touch on the role of business in addressing these challenges.+
The Power of Belief:Jim and Jake discuss the power of belief and how once you decide on something, your prover gets to work and only proves what you believe. They also talk about the importance of capturing erroneous beliefs and data that shows you're wrong. Finally, they touch on the concept of free energy and how it relates to the power of belief.+
Mental Models and Magic:Jake and Jim discuss the similarities between mental models in human behavior and magic tricks, and wonder if advertising is just the selective turning on or off of mental models in people's brains. They also mention the influence of Michael Mobison's writing on their work.+
6. Decentralized Decision Making
Decision Making Hierarchy:Jim and Jake discuss the importance of pushing decision making down the hierarchy in organizations. They also touch on the issue of information distortion as it moves up the hierarchy, using examples from history and culture.+
Making Real Decisions:Jake discusses the importance of making decisions based on capital T truth and tying feedback loops closer to the customer in order to create a structure of production that is not mismatched with what the customer really wants.+
Empowering Frontline:Jake and Jim discuss the importance of empowering frontline employees and giving them a clear goal to work towards. They highlight the benefits of a decentralized decision-making process and how it can lead to faster and more efficient execution. They also share insights on great leadership and the importance of leaving employees feeling like they accomplished the task themselves.+
7. Complex Adaptive Systems
Complex Adaptive Systems:Jim and Jake discuss the concept of complex adaptive systems and how emergence comes from the interplay between the constituent parts. They also touch on the fatal conceit of knowing the right price of anything in a constantly shifting economy based on billions of interactions.+
Trust and Delegation:Jake discusses how trust is a key ingredient in complex systems and how Berkshire Hathaway has been successful due to their high level of trust, allowing them to delegate decision-making to the front lines. Jim adds that persistence, patience, and action are also important traits to have.+
Shout from Rooftops:Jim emphasizes the importance of taking action and networking to turn ideas into reality. Jake adds that it's easier than ever to find like-minded people and create change in the world.+
Reshaping Possibilities:Jim discusses the implications of the Great Reshuffle and how it has collapsed time, space, and geography. He emphasizes how it is easier to find like-minded people and receive feedback for ideas. The iterative process will go faster and get better, leading to a world with endless possibilities.+
8. Growth Mindset
Jake and Jim discuss the potential of capitalism when practiced in a good way and how it can benefit everyone. They also talk about the importance of agency and having a center of gravity within oneself. Jim emphasizes that free markets are the best system for advancing human society, but acknowledges the need for improvement.+