Tag: Warren Buffett

Leverage: Gaining Disproportionate Strength

“It is easier to conquer than to administer.
With enough leverage, a finger could overturn the world;
but to support the world, one must have the shoulders of Hercules.”
— Jean-Jacques Rousseau, The Social Contract

***

The Basics

A good place to begin understanding the concept of leverage is the etymology of the word. We can trace its origins back to the Proto-Indo-European ‘legwh’ which described something light, agile, or easy. From this, the Latin ‘levare’ formed, which referred to something that was ‘not heavy.’ But the word absorbed into English in the 14th century from Old French, where ‘levier’ referred to raising something (hence the reflexive verb, ‘se lever’ which, in general, is used in the context of getting up in the morning.) So in essence, leverage refers to making something light by raising it in a specific manner.

The fusion of these two ideas perfectly describes a physical lever- a pole connected to a fulcrum which serves to create additional strength or force. A lever does not bend or create additional friction.

Three main types of physical levers have been identified

1. Levers with the fulcrum in the middle. A force is applied on one side and the load is on the other side (such as a crowbar.)
2. Levers where the load is placed in the middle and the force is applied on one side, with the fulcrum located on the other (such as a bottle opener.)
3. Levers where the force is applied in the middle (such as our lower jaw bones.)

Archimedes is credited with establishing the concept of leverage, over 2000 years ago. He famously stated that, given a lever long enough and enough distance, he could lift the earth.

In On the Equilibrium of Planes, Archimedes wrote: “Magnitudes in equilibrium at distances are reciprocally proportional to their weights.”

However, the Peripatetic School (the followers of Aristotle) wrote of levers before the birth of Archimedes. In Mechanica, a work believed to have been written by members of this school of thought, they state:

Why is it that small forces can move great weights by means of a lever, as was said at the beginning of the treatise, seeing that one naturally adds the weight of the lever? For surely the smaller weight is easier to move, and it is smaller without the lever. Is the lever the reason, being equivalent to a beam with a cord attached below, and divided into two equal parts? For the fulcrum acts as the attached cord: for both these remain stationary, and act as a centre. For since under the impulse of the same weight the greater radius from the centre moves the more rapidly, and there are three elements in the lever, the fulcrum, that is the cord or centre, and the two weights, the one which causes the movement, and the one that is moved : now the ratio of the weight moved to the weight moving it is the inverse ratio of the distances from the centre. Now, the greater the distance from the fulcrum, the more easily it will move. The reason has been given before that the point further from the centre describes the greater circle, so that by the use of the same force, when the motive force is farther from the lever, it will cause a greater movement.

Like many of our mental models, leverage is a scientific concept which has applications in many other areas.

Leverage is an idea which humans have used to great effect for thousands of years, enabling them to gain disproportionate strength. For example, the ancient Egyptians used levers to lift stones weighing up to 100 tons in order to build the pyramids and obelisks. Many of humanity’s tools, used for centuries all over the world, incorporate levers- scissors, pliers, door handles, wheelbarrows, fishing rods and more.

The concept of leverage has been applied to other areas over the last century or so. In Decision Making, Alan C McLucas defines leverage and leverage points as:

Leverage is built on the notion that small, well-focused actions can sometimes produce significant, enduring improvements if they are applied in the right place. Tacking a difficult problem is often a matter of seeing where the high leverage lies.

… A leverage point is where a small difference can make a large difference. Leverage points provide kernel ides and procedures for formulating solutions. Identifying leverage points helps us: create new courses of action, develop increased awareness of those things that may cause a difficult before there are any obvious signs of trouble and figure out what is causing a difficult.

Leverage in Negotiations and Business

“You don’t convince people by challenging their longest and most firmly held opinions. You find common ground and work from there. Or you look for leverage to make them listen. Or you create an alternative with so much support from other people that the opposition voluntarily abandons its views and joins your camp.”
— Ryan Holiday, The Obstacle Is the Way

***

Roger J Volkema provides an example of how people use leverage for their own benefit in negotiations:

It is one of the hottest days of the year and something is wrong with your refrigerator…the temperature seems too warm. You contact a repairman who promises to come that afternoon. You ask about the likely cost. He says it could be around \$80… The repairman arrives, late in the afternoon. He believes the problem is with your freezer. He takes out all the frozen foods, unscrews panels, cuts wires. There is the problem: a coil had gone bad. It will cost you \$230. Sound familiar? You are now at the mercy of the repairman. You know little to nothing about freezer coils…you lack a choice and agree to pay the price. This story has been repeated dozens of times in your life…in each case, you felt at a disadvantage… They had leverage.

This tactic is used commonly by businesses. Buying a drink or snack on an airplane will always be expensive because the airline knows people lack an alternative, giving them the leverage. Spotify and Youtube can subject users to endless advertisements because the service is otherwise free and this gives them control. Companies with a monopoly (due to a patent, for example) can charge more because they own a particular market. A doctor can present an extortionate bill because we have no option to return the service (“hey doc, can you undo these stitches? I can get a cheaper operation elsewhere.”)

Volkema goes on to explain the key principles of leverage:

1. Leverage is based on perceptions. If a party to a negotiation has an advantage and nobody perceives that the advantage exists…there is no leverage. This is especially true for the party with the disadvantage…Thus, it is perceived cost, real or imaginary that enables leverage.
… 2. Leverage is dynamic. Leverage can change as quickly as new information becomes available…These sorts of changes occur during formal business negotiations as well. If, for example, information central to an upcoming bidding process known only to one company becomes available to the other company, then leverage among companies has shifted.
…3. Leverage is situation specific…The aforementioned company with privileged information might have an advantage over another company, but in another situation, the advantage could be reversed (for example, the second company has just made a technical breakthrough the will revolutionize the industry.) Sometimes the situations that create leverage overlap or can be linked in some way.
…4. Leverage is a social or relational construct. Therefore, one has advantage over another individual only as long as the relationship exists. If one part leaves the relationship…leverage ceases to exist…Without another party, it is like being on a seesaw by yourself.

In one of his iconic letters to shareholders, Warren Buffett declared: “Don’t ask the barber whether you need a haircut.” To do so transfers leverage to the barber, who will always say yes. To retain leverage would necessitate telling the barber you certainly do not need a haircut, leading them to offer you an attractive deal.

Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.

Another amusing example of leverage in negotiation comes from Jarod Kintz:

Money is not equal for all people. A strong personal brand adds more lift and leverage. One dollar from me may buy a soda from a car dealership, but one dollar from Justin Bieber may get him a Ferrari. And they would pay him to drive away.

Related Mental Models and Concepts

• Critical mass — Also known as a boiling point or tipping point, critical mass is the point where something (an idea, belief, trend, virus, behavior etc) is prevalent enough to grow at an exponential rate. It becomes contagious and is everywhere in a short span of time. We can combine this mental model with leverage to understand how drastic changes can be created with minimal effort. The critical mass serves as a lever. Imagine a teacher who wants to encourage the 30 pupils in her class to read more. Research has shown that just 10% of a population are necessary to form a critical mass. Rather than seeking to convince all 30 pupils to read more, she needs to persuade 3 popular ones. Once they begin reading more, the teacher can leverage them to spread their new love of books. Once this is achieved, it can pass on to the rest of the school.
• Power law — A power law is a relationship between two things when a change in one can lead to a large change in the other, regardless of the initial quantities. In the case of leverage, a power law relationship exists between the effort exerted on the lever (actual or metaphorical) and the outcome. For example, consider two children on a seesaw. If both children are an equal weight, the seesaw will go up and down with ease. If one goes away and a heavier child replaces them, a small difference in their weights will lead to a large increase in the speed at which the seesaw moves.
• Pareto’s principle — This principle states that 80% of outcomes are the result of 20% of inputs. Recognizing the 20% can provide us with a great deal of leverage. If a business receives 80% of its income from 20% of customers, the latter group can be leveraged to increase profits (e.g. by offering special deals and treatment to them, increasing their loyalty.)If 20% of the foods we eat comprise 80% of our diets, we can leverage these to improve our health (e.g. if a person eats bread each day, they could switch from white bread to wholegrain.)
• Tribal leadership This concept involves leveraging ‘tribes’ within an organisation to further an agenda and grow a company culture. Tribes go through five stages towards maximum productivity and each has different leverage points.
• Outsourcing — Outsourcing certain tasks (such as cleaning or making transcripts) enables us to leverage one asset – money- to free up more time and make more money as a result.
• Commitment consistency bias We have a desire to remain consistent with our past behaviour. Companies and manipulative people leverage this cleverly. If our favorite coffee shop raises their prices, we are unlikely to switch to somewhere else- after all, we have a loyalty card and the baristas know our usual order. If we realize the interest rates at our bank are lower than elsewhere, we are unlikely to change- we must have chosen them in the first place for a good reason. If an old friend suddenly becomes obnoxious and insulting, we are unlikely to stop spending time with them, due to the sunken costs of all the time spent together in the past
• Activation energy — Activation energy is the initial amount of energy necessary to commence a chemical reaction. We can apply this to leverage – the energy required to move the lever is the activation energy required to create movement.

The Metagame: How Bill Belichick and Warren Buffett Play a Different Game

The metagame is playing a different game than your competitors. A game they can't play.

The metagame is a strategy that involves understanding the structural or unconscious reasons that things are the way they are. This is the strategy that Warren Buffett and Bill Belichick use to create an advantage. It's what smart managers like Ken Iverson do to get the best out of people.

There is an interesting section in an obscure poker book called The Raiser's Edge that explains the concept of a metagame:

The metagame is this psychological game that exists among players, involving adjustments – adjustments based on how an opponent is likely to interpret a given set of actions. Better players adjust their strategies and styles to those of particular opponents, always analyzing how the opponents are playing in terms of how the opponents believe they're playing.

Maintaining a well-balanced strategy, while deciphering your opponents' strategies, is the key to the metagame. If you comprehend the concept of the metagame, accurately perceive the flow of your table and then tournament, and stay alerted to and aware of current strategy trends, you'll be able to successfully mix up your play when considering your image and that of your opponents. In return, your game will be highly unpredictable and difficult to read, which should be your ultimate goal.

Warren Buffett and Bill Belichick both use the metagame to create an advantage that others have a hard time matching.

Let's look at Buffett first.

Buffett is widely considered to be the best investor in the world. The company he controls, Berkshire Hathaway, often purchases companies that are public and makes them (effectively) private. For better or worse, public companies have certain environmental constraints. There are numbers to meet (or manage, depending on how you look at it). Expectations to meet. Shareholders who want different things.

The environmental impact of being public often nudges companies toward a path away from their best long-term interest. The timelines of CEOs and shareholders are often not the same.

For example, even if the investment made long-term sense, established companies would have a hard time increasing investment in research and development without an immediate impact (as this reduces earnings.) They'd also have a hard time building inventory (as this increases the amount of the capital required to operate the business).

This divide creates an interesting scenario where public companies can be at a long-term disadvantage to private companies. Private companies can do things that public companies can't do because of the perceived (or real) environmental norms.

This is where Buffett comes in. He can encourage the CEO of the companies he acquires to take another path. They can take a longer-term view. They can make investments without penalty that won't pay off for years. They can increase inventory. They can run the company without the worry of meeting quarterly expectations. Because they can take advantage of the environmental factors that public companies are under, private companies can't easily be copied in this sense.

This isn't limited to finance and investments. It relates to everything. Bill Belichick, perhaps the best coach in NFL history, uses the same strategy. He plays a different game.

Here's an example. Last year Belichick traded away one of the team's most gifted athletes (Jamie Collins) in the first part of the season. While Belichick never came out publicly to say the reasons Collins was traded, he effectively traded one of the teams best players for nothing. Very few coaches would have traded away a star for nothing. Belichick, was playing a version of metagame. He was able to do something that was for the good of the team that would be controversial in the media. A strategy that almost no other coach could get away with.

The ancient Romans employed the same strategy. They were excellent at hand-to-hand combat but lacked the have the naval capabilities of Carthage. So they played a different game … one that played to their strengths and used the enemies strengths against them.

Now you can argue that Buffett and Belichick can do things no other person can. You can argue these are Hall-Of-Famers that get more leeway. But interestingly, that's the point. Part of their greatness comes from identifying the constraints of others and capitalizing on those structural disadvantages, just like the Romans did.

In any system where there are norms, there are strengths and weaknesses to those norms. If you follow the norms of the system, the results you get are likely to be the norm. When you play a different game, a metagame, you have the opportunity to outperform.

Book Recommendations by the Legendary Washington Post CEO Don Graham

“My goal in reading a book is to entertain myself and perhaps to learn.
You won’t read much unless what you read is enjoyable for you.”
— Don Graham

***

In 1973, Warren Buffett famously began investing in the stock of the newly public Washington Post. Watergate was on, the stock market was crashing, and the Post, led by Katherine Graham, was a wonderful company selling at a cheap price.

Over time, Mrs. Graham would pass the CEO mantle to her son, Don Graham. With Buffett’s board level influence, Graham would become one of the most successful and admired CEO’s in the media business, financially and editorially.

While other papers were busy buying up news or television properties one after another, mostly financed with debt, Buffett encouraged Graham to stick to his knitting. And so when media properties (including the Post) began to rapidly lose their value in the 1990’s and 2000’s thanks to the Internet, the Post survived intact. (Helped along by the shrewd purchase of Kaplan Inc.)

The Grahams’ reign running the Post was so successful that it was later profiled in The Outsiders, a book by Columbia’s William Thorndike which showed how a group of “unconventional” CEOs generated way above average shareholder returns through smart capital allocation and decentralized operating management.

Graham, now the CEO of Graham Holdings and the lead independent director of Facebook, seems woefully understudied as an operator and a human being. But we do have one window into the man: His book recommendations.

Graham actively answers questions on Quora, mostly about books, so we went through and collected some of his thoughts.

The long time head of a major media organization is someone who must, by the nature of their work, be broadly educated and broadly wise. And his interest in books shows it: Graham is clearly a fan of the classics and of biography and history. (Not altogether surprising for a man who was part of the Pulitzer Prize board for many years.)

Among his answers are his favourite fiction and non-fiction books and the book that will stay with him forever. (One obvious choice would be his mother's wonderful memoir.)

***

First, his response to a 14-year old asking which books he should read, to which Graham gave a wonderful answer:

I would—for a lifetime—think first about “what will I enjoy reading,” and only second about “what is good for me.” If you like novels, I’d read novels. If you like biographies, I’d read biographies. If you like science fiction, mysteries, or science books, I’d read those. But read the best, and keep asking what that is.

***

What is that one book that will stay with you forever?

The Plays of William Shakespeare by William Shakespeare (“They are incomparable.”)

What is Your Favorite Non-Fiction book?

The Life of Samuel Johnson by James Boswell (Also his answer to: What is the most instructive biography you've ever read?)

The Civil War by Shelby Foote (“The greatest work of American history.”)

What is your Favorite Fiction book?

Anna Karenina by Leo Tolstoy

Middlemarch by George Eliot

Which book are you currently reading?

Margaret Thatcher: From Grantham to the Falklands by Charles Moore

What was the last book you read?

Everybody's Fool by Richard Russo (“I would not only recommend it; I’d say it is my favorite contemporary American novel.”)

Who was the most peace-oriented US President?

Ike's Bluff: President Eisenhower's Secret Battle to Save the World by Evan Thomas (“If the subject of your question is of great interest to you, I strongly recommend reading it.

Can you suggest a book about a survivor of an extreme experience?

The Man Who Stayed Behind by Sidney Rittenberg and Amanda Bennett (“As a discharged GI in China with leftist sympathies, he hitchhiked across China to Yenan, lived in the caves with Mao Zedong and the whole leadership, and became Mao's translator, among other things.”)

What are the best literary nonfiction books about the Gilded Age?

The Robber Barons by Matthew Josephson (“The classic history of this aspect of the age.”)

Jim Fisk by W.A. Swanberg and The Murder of Jim Fisk by H. W. Brands (“Both excellent.”)

What are some books that were well-written and popular for awhile but are now largely forgotten?

Second Readings by Jonathan Yardley

A Literary Education and Other Essays by Joseph Epstein

What books should the privileged read in order to gain perspective and empathy for the underprivileged?

Behind the Beautiful Forevers by Katharine Boo (“It is a great, great book.”)

What are the best books written about the Supreme Court?

John Marshall by Jean Edward Smith

The Supreme Court by William Rehnquist

What are some good books to help one understand communism?

The Great Terror by Robert Conquest. (“Almost unbearable in its chapter-by-chapter description of life under Stalin’s rule.”)

Gulag by Anne Applebaum

What book would you recommend for becoming a “gentleman”?

Letters to His Son on Becoming a Man of the World and a Gentleman by Lord Chesterfield

Which U.S. President was the best writer?

Lincoln: Speeches and Writings: 1859-1865 by Abraham Lincoln (“There's only one choice.”)

Bias from Disliking/Hating

(This is a follow-up to our post on the Bias from Liking/Loving, which you can find here.)

Think of a cat snarling and spitting, lashing with its tail and standing with its back curved. Her pulse is elevated, blood vessels constricted and muscles tense. This reaction may sound familiar, because everyone has experienced the same tensed-up feeling of rage at least once in their lives.

When rage is directed towards an external object, it becomes hate. Just as we learn to love certain things or people, we learn to hate others.

There are several cognitive processes that awaken the hate within us and most of them stem from our need for self-protection.

Reciprocation

We tend to dislike people who dislike us (and, true to Newton, with equal strength.) The more we perceive they hate us, the more we hate them.

Competition

A lot of hate comes from scarcity and competition. Whenever we compete for resources, our own mistakes can mean good fortune for others. In these cases, we affirm our own standing and preserve our self-esteem by blaming others.

Robert Cialdini explains that because of the competitive environment in American classrooms, school desegregation may increase the tension between children of different races instead of decreasing it. Imagine being a secondary school child:

If you knew the right answer and the teacher called on someone else, you probably hoped that he or she would make a mistake so that you would have a chance to display your knowledge. If you were called on and failed, or if you didn't even raise your hand to compete, you probably envied and resented your classmates who knew the answer.

At first we are merely annoyed. But then as the situation fails to improve and our frustration grows, we are slowly drawn into false attributions and hate. We keep blaming and associating “the others” who are doing better with the loss and scarcity we are experiencing (or perceive we are experiencing). That is one way our emotional frustration boils into hate.

Us vs. Them

The ability to separate friends from enemies has been critical for our safety and survival. Because mistaking the two can be deadly, our mental processes have evolved to quickly spot potential threats and react accordingly. We are constantly feeding information about others into our “people information lexicon” that forms not only our view of individuals, whom we must decide how to act around, but entire classes of people, as we average out that information.

To shortcut our reactions, we classify narrowly and think in dichotomies: right or wrong, good or bad, heroes or villains. (The type of Grey Thinking we espouse is almost certainly unnatural, but, then again, so is a good golf swing.) Since most of us are merely average at everything we do, even superficial and small differences, such as race or religious affiliation, can become an important source of identification. We are, after all, creatures who seek to belong to groups above all else.

Seeing ourselves as part of a special, different and, in its own way, superior group, decreases our willingness to empathize with the other side. This works both ways – the hostility towards the others also increases the solidarity of the group. In extreme cases, we are so drawn towards the inside view that we create a strong picture of the enemy that has little to do with reality or our initial perceptions.

From Compassion to Hate

We think of ourselves as compassionate, empathetic and cooperative. So why do we learn to hate?

Part of the answer lies in the fact that we think of ourselves in a specific way. If we cannot reach a consensus, then the other side, which is in some way different from us, must necessarily be uncooperative for our assumptions about our own qualities to hold true.

Our inability to examine the situation from all sides and shake our beliefs, together with self-justifying behavior, can lead us to conclude that others are the problem. Such asymmetric views, amplified by strong perceived differences, often fuel hate.

What started off as odd or difficult to understand, has quickly turned into unholy.

If the situation is characterized by competition, we may also see ourselves as a victim. The others, who abuse our rights, take away our privileges or restrict our freedom are seen as bullies who deserve to be punished. We convince ourselves that we are doing good by doing harm to those who threaten to cross the line.

This is understandable. In critical times our survival indeed may depend on our ability to quickly spot and neutralize dangers. The cost of a false positive – mistaking a friend for a foe – is much lower than the potentially fatal false negative of mistaking our adversaries for innocent allies. As a result, it is safest to assume that anything we are not familiar with is dangerous by default. Natural selection, by its nature, “keeps what works,” and this tendency towards distrust of the unfamiliar probably survived in that way.

The Displays of Hate

Physical and psychological pain is very mobilizing. We despise foods that make us nauseous and people that have hurt us. Because we are scared to suffer, we end up either avoiding or destroying the “enemy”, which is why revenge can be pursued with such vengeance. In short, hate is a defense against enduring pain repeatedly.

There are several ways that the bias for disliking and hating display themselves to the outer world. The most obvious of them is war, which seems to have been more or less prevalent throughout the history of mankind.

This would lead us to think that war may well be unavoidable. Charlie Munger offers the more moderate opinion that while hatred and dislike cannot be avoided, the instances of war can be minimized by channeling our hate and fear into less destructive behaviors. (A good political system allows for dissent and disagreement without explosions of blood upheaval.)

Even with the spread of religion, and the advent of advanced civilization, modern war remains pretty savage. But we also get what we observe in present-day Switzerland and the United States, wherein the clever political arrangements of man “channel” the hatreds and dislikings of individuals and groups into nonlethal patterns including elections.

But these dislikings and hatreds that are arguably inherent to our nature never go away completely and transcend themselves into politics. Think of the dichotomies. There is the left versus the right wing, the nationalists versus the communists and libertarians vs. authoritarians. This might be the reason why there are maxims like: “Politics is the art of marshaling hatreds.

Finally, as we move away from politics, arguably the most sophisticated and civilized way of channeling hatred is litigation. Charlie Munger attributes the following words to Warren Buffett:

A major difference between rich and poor people is that the rich people can spend their lives suing their relatives.

While most of us reflect on our memories of growing up with our siblings with fondness, there are cases where the competition for shared attention or resources breeds hatred. If the siblings can afford it, they will sometimes litigate endlessly to lay claims over their parents' property or attention.

Under the Influence of Bias

There are several ways that bias from hating can interfere with our normal judgement and lead to suboptimal decisions.

Ignoring Virtues of The Other Side

Michael Faraday was once asked after a lecture whether he implied that a hated academic rival was always wrong. His reply was short and firm “He’s not that consistent.” Faraday must have recognized the bias from hating and corrected for it with the witty comment.

What we should recognize here is that no situation is ever black or white. We all have our virtues and we all have our weaknesses. However, when possessed by the strong emotions of hate, our perceptions can be distorted to the extent that we fail to recognize any good in the opponent at all. This is driven by consistency bias, which motivates us to form a coherent (“she is all-round bad”) opinion of ourselves and others.

Association Fueled Hate

The principle of association goes that the nature of the news tends to infect the teller. This means that the worse the experience, the worse the impression of anything related to it.

Association is why we blame the messenger who tells us something that we don't want to hear even when they didn't cause the bad news. (Of course, this creates an incentive not to speak truth and avoid giving bad news.)

A classic example is the unfortunate and confused weatherman, who receives hate mail, whenever it rains. One went so far as to seek advice from the Arizona State professor of psychology, Robert Cialdini, whose work we have discussed before.

Cialdini explained to him that in light of the destinies of other messengers, he was born lucky. Rain might ruin someone’s holiday plans, but it will rarely change the destiny of a nation, which was the case of Persian war messengers. Delivering good news meant a feast, whereas delivering bad news resulted in their death.

The weatherman left Cialdini’s office with a sense of privilege and relief.

“Doc,” he said on his way out, “I feel a lot better about my job now. I mean, I'm in Phoenix where the sun shines 300 days a year, right? Thank God I don't do the weather in Buffalo.”

Fact Distortion

Under the influence of liking or disliking bias we tend to fill gaps in our knowledge by building our conclusions on assumptions, which are based on very little evidence.

Imagine you meet a woman at a party and find her to be a self-centered, unpleasant conversation partner. Now her name comes up as someone who could be asked to contribute to a charity. How likely do you feel it is that she will give to the charity?

In reality, you have no useful knowledge, because there is little to nothing that should make you believe that people who are self-centered are not also generous contributors to charity. The two are unrelated, yet because of the well-known fundamental attribution error, we often assume one is correlated to the other.

By association, you are likely to believe that this woman is not likely to be generous towards charities despite lack of any evidence. And because now you also believe she is stingy and ungenerous, you probably dislike her even more.

This is just an innocent example, but the larger effects of such distortions can be so extreme that they lead to a major miscognition. Each side literally believes that every single bad attribute or crime is attributable to the opponent.

Charlie Munger explains this with a relatively recent example:

When the World Trade Center was destroyed, many Pakistanis immediately concluded that the Hindus did it, while many Muslims concluded that the Jews did it. Such factual distortions often make mediation between opponents locked in hatred either difficult or impossible. Mediations between Israelis and Palestinians are difficult because facts in one side's history overlap very little with facts from the other side's. These distortions and the overarching mistrust might be why some conflicts seem to never end.

Avoiding Being Hated

To varying degrees we value acceptance and affirmation from others. Very few of us wake up wanting to be disliked or rejected. Social approval, at its heart the cause of social influence, shapes behavior and contributes to conformity. Francois VI, Duc de La Rochefoucauld wrote: “We only confess our little faults to persuade people that we have no big ones.”

Remember the old adage, “The nail that sticks out gets hammered down.” This is why we don't openly speak the truth or question people, we don't want to be the nail.

How do we resolve hate?

It is only normal that we can find more common ground with some people than with others. But are we really destined to fall into the traps of hate or is there a way to take hold of these biases?

That’s a question worth over a hundred million lives. There are ways that psychologists think that we can minimize prejudice against others.

Firstly, we can engage with others in sustained close contact to breed our familiarity. The contact must not only be prolonged, but also positive and cooperative in nature – either working towards a common cause or against a common enemy.

Secondly, we also reduce prejudice by attaining equal status in all aspects, including education, income and legal rights. This effect is further reinforced, when equality is supported not only “on paper”, but also ingrained within broader social norms.

And finally the obvious – we should practice awareness of our own emotions and ability to hold back on the temptations to dismiss others. Whenever confronted with strong feelings it might simply be best to sit back, breathe and do our best to eliminate the distorted thinking.

***

Want more? Check out the opposite bias of liking/loving, or check out a whole bunch of mental models.

Gradually Getting Closer to the Truth

You can use a big idea without a physics-like need for exact precision. The key to remember is moving closer to reality by updating.

Consider this excerpt from Philip Tetlock and Dan Gardner in Superforecasting

The superforecasters are a numerate bunch: many know about Bayes' theorem and could deploy it if they felt it was worth the trouble. But they rarely crunch the numbers so explicitly. What matters far more to the superforecasters than Bayes' theorem is Bayes' core insight of gradually getting closer to the truth by constantly updating in proportion to the weight of the evidence.

So they know the numbers. This numerate filter is the second of Garrett Hardin‘s three filters we need to think about problems.

Hardin writes:

The numerate temperament is one that habitually looks for approximate dimensions, ratios, proportions, and rates of change in trying to grasp what is going on in the world.

[…]

Just as “literacy” is used here to mean more than merely reading and writing, so also will “numeracy” be used to mean more than measuring and counting. Examination of the origins of the sciences shows that many major discoveries were made with very little measuring and counting. The attitude science requires of its practitioners is respect, bordering on reverence, for ration, proportions, and rates of change.

Rough and ready back-of-the-envelope calculations are often sufficient to reveal the outline of a new and important scientific discovery … In truth, the essence of many of the major insights of science can be grasped with no more than child’s ability to measure, count, and calculate.

We can find another example in investing. Charlie Munger, commenting at the 1996 Berkshire Hathaway Annual Meeting, said: “Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.” Buffett retorted: “It's true. If (the value of a company) doesn't just scream out at you, it's too close.”

Precision is easy to teach but it's missing the point.

Warren Buffett: The Inner Scorecard

“The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.”
— Warren Buffett

***

Human beings are, in large part, driven by the admiration of their peers.

We seek to satisfy a deep biological need by acting in such a way that we feel praise and adulation; for our wealth, our success, our skills, our looks. It could be anything. The trait we are admired for matters less than the admiration itself. The admiration is the token we dance for. We feel envy when others are getting more tokens than us, and we pity ourselves when we're not getting any.

There's nothing inherently wrong with this. The pursuit of (deserved) admiration causes us to drive and accomplish. It's a part of the explanation for why the human world has moved along so far from where it started — we're willing to do extraordinary things that are extraordinarily difficult, like starting a company from scratch, inventing a new and better product, solving some ridiculously complicated theorem, or conquering unknown territory.

This is all well and good.

The problems come when we start compromising our own standards, those we have set for ourselves, in order to earn admiration. False, undeserved admiration.

Warren Buffett frequently relates an interesting way to frame this problem. From Alice Schroeder's Buffett biography The Snowball:

Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? Now, that’s an interesting question. “Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

Buffett's getting at a rather fundamental model he's used most of his life: The Inner Scorecard. It's a major reason Buffett has stayed so successful for so long, with so little failure or scandal intervening: While most are are “checking the official time,” Buffett is setting his watch by an internal clock!

The investor Guy Spier once won a charity lunch with Buffett, and related his experience in a book called The Education of a Value Investor. He immediately recognized Buffett's lack of falseness:

One of Buffett’s defining characteristics is that he so clearly lives by his own inner scorecard. It isn’t just that he does what’s right, but that he does what’s right for him. As I saw during our lunch, there’s nothing fake or forced about him. He sees no reason to compromise his standards or violate his beliefs. Indeed, he has told Berkshire’s shareholders that there are things he could do that would make the company bigger and more profitable, but he’s not prepared to do them. For example, he resists laying people off or selling holdings that he could easily replace with more profitable businesses. Likewise, some investors have complained that Berkshire would be much more profitable if he’d moved its tax domicile to Bermuda as many other insurers have done. But Buffett doesn’t want to base his company in Bermuda even though it would be legal and would have saved tens of billions in taxes.

We don't, by the way, claim Buffett has an unblemished record. That would not be accurate. But it does seem that his record is far more spotless than others who have climbed as far as he has.

If Buffett was “setting his clock externally” — living by the standards of others — he would not have been able to maintain the independence of mind that led him to avoid a number of financial bubbles and tremendous personal misery.

What Buffett and a lot of other people who have been successful in life — true success, not money — have in common is that they're able to remember what we all set out to do: live a fulfilling life! Not get rich. Not get famous. Not even get admiration, necessarily. But to live a satisfying existence and help others around them do the same.

It's not that getting rich or famous or admired can't be deeply satisfying. It can be! I'm positive Buffett deeply enjoys his wealth and status. He's got more “admiration tokens” than almost anyone in the world.

But all of that can be ruined very, very easily along the way by making too many compromises, by living according to an external scorecard rather than an internal one. How many stories have you heard of famous and/or wealthy folks becoming entrapped in constant lawsuits, bickering, loneliness, and pure unhappiness? A countless number, right?

Bernie Madoff achieved great admiration and wealth, but was he happy? He made it clear, after he'd been caught, that he wasn't. Here was a guy who had all the admiration tokens in the world, an External Scorecard showing an A+, and what happened when he lost it all? He felt relieved.

So, did fame or wealth actually work in giving him a satisfying and fulfilling life? No!

The little mental trick is to remember that success, money, fame, and beauty, all the things we pursue, are merely the numeratorIf the denominator — shame, regret, unhappiness, loneliness — is too large, our “Life Satisfaction Score” ends up being tiny, worthless. Even if we have all that good stuff!

Nassim Taleb once related a very similar idea:

The optimal solution to being independent and upright while remaining a social animal is: to seek first your own self-respect and, secondarily and conditionally, that of others, provided your external image does not conflict with your own self-respect. Most people get it backwards and seek the admiration of the collective and something called “a good reputation” at the expense of self-worth for, alas, the two are in frequent conflict under modernity.

It's so simple. This is why you see people that “should be happy” who are not. Big denominators destroy self-worth.

***

Adam Smith addressed this issue similarly about 225 years ago in his lesser known, though equally useful book The Theory of Moral Sentiments. Here's how he put it:

Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love. He naturally dreads, not only to be hated, but to be hateful; or to be that thing which is the natural and proper object of hatred. He desires, not only praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.

To Smith, happiness was a combination of being loved and lovely: In modern terms, his wording makes it sound like he means “loved by others and also beautiful.”

But as you read on, you see that's not what he meant. He adds “Hated, but hateful.” “Praise, but praiseworthiness.” “Blame, but blame-worthiness.”

He's saying we're only happy if we're successful by an Inner Scorecard! We can't just earn praise, we must be praiseworthy. We can't just be loved, we must be loveable. It makes all the difference in the world. Our dissatisfaction with ourselves will always trump the satisfaction we feel with false rewards. We must, as Charlie Munger puts itearn and deserve the success we desire.

There's a simple word for this: Authenticity. We seek it, and we're only happy when we feel we've achieved it. It can't be faked. And the way to get there is to remember the Inner Scorecard and start grading yourself accordingly.