1 00:00:15,604 --> 00:00:26,244 Speaker 1: Pushkin. Welcome back to Risky Business, a show about making 2 00:00:26,284 --> 00:00:28,684 Speaker 1: better decisions. I'm Maria Kanakova. 3 00:00:28,484 --> 00:00:31,164 Speaker 2: And I'm Nate Silvery. Today on the show, we'll talk 4 00:00:31,164 --> 00:00:33,684 Speaker 2: about my new presidential election forecast. 5 00:00:34,204 --> 00:00:38,364 Speaker 1: Well also talk about insurance. Although Nate, I'm really excited 6 00:00:38,364 --> 00:00:40,844 Speaker 1: to hear about your election forecasts. 7 00:00:40,684 --> 00:00:43,204 Speaker 2: You might want to ensure against that feeling, Marie, you 8 00:00:43,244 --> 00:00:45,164 Speaker 2: may not like what it has to say. I'm talking 9 00:00:45,164 --> 00:00:47,484 Speaker 2: about our top three ways that people get risk wrong. 10 00:00:54,084 --> 00:00:56,324 Speaker 1: Nate, let's talk about your election model for the twenty 11 00:00:56,364 --> 00:00:59,284 Speaker 1: twenty four elections, which is out this week. You've been 12 00:00:59,324 --> 00:01:02,284 Speaker 1: working on this election model, tweaking it, developing it for 13 00:01:02,484 --> 00:01:06,164 Speaker 1: sixteen years, and it's been remarkably accurate. So I'm actually 14 00:01:06,244 --> 00:01:08,724 Speaker 1: really excited to talk about it and get into it 15 00:01:08,764 --> 00:01:10,964 Speaker 1: with you, even you told me that I really shouldn't 16 00:01:11,004 --> 00:01:13,004 Speaker 1: be so, I mean, I'm a little scared, too. 17 00:01:12,884 --> 00:01:15,364 Speaker 2: Careful, careful what you wish for. I want you to 18 00:01:15,444 --> 00:01:19,324 Speaker 2: guess what number it has in the chance that trumpel 19 00:01:19,404 --> 00:01:19,964 Speaker 2: with the election. 20 00:01:20,884 --> 00:01:23,324 Speaker 1: Oh night, this is are you gonna break my heart? 21 00:01:23,484 --> 00:01:26,524 Speaker 1: Is it okay? Fifty eight percent? 22 00:01:27,124 --> 00:01:27,404 Speaker 2: Higher? 23 00:01:28,524 --> 00:01:28,804 Speaker 1: Fuck? 24 00:01:29,884 --> 00:01:33,444 Speaker 2: I don't feel the exact number because we're we chake 25 00:01:33,484 --> 00:01:35,284 Speaker 2: a couple days in advance. By the time the model 26 00:01:35,324 --> 00:01:37,244 Speaker 2: is released, there could be new polls and so forth. 27 00:01:37,364 --> 00:01:39,044 Speaker 2: I mean, we'll see what it says when it comes out. 28 00:01:39,044 --> 00:01:41,484 Speaker 2: But we're in the We're in the load of mid 29 00:01:41,564 --> 00:01:44,564 Speaker 2: sixties is kind of where the where the forecast is landing. 30 00:01:45,084 --> 00:01:47,644 Speaker 1: Fucking you fuck fuck fuck is my is my response 31 00:01:47,684 --> 00:01:49,404 Speaker 1: to that night. You're usually the one dropping the f 32 00:01:49,404 --> 00:01:53,404 Speaker 1: phones on the show, but I think it's my turn. Yeah. 33 00:01:53,604 --> 00:01:57,324 Speaker 2: Look, my job here is not to tell you who 34 00:01:57,364 --> 00:02:00,564 Speaker 2: you should vote for. It's to forecast the election as 35 00:02:00,564 --> 00:02:04,204 Speaker 2: best I can. And I think it's disingenuous too to 36 00:02:04,324 --> 00:02:06,444 Speaker 2: call the race a toss up. You can kind of 37 00:02:06,964 --> 00:02:11,644 Speaker 2: squint and say, oh, if you look at national polls 38 00:02:11,764 --> 00:02:14,164 Speaker 2: and Biden's maybe only down by half a pointer or so. 39 00:02:14,284 --> 00:02:15,884 Speaker 2: But the problem in the US is that we don't 40 00:02:15,884 --> 00:02:19,244 Speaker 2: determine elections by the popular vote. Right, if it was 41 00:02:19,244 --> 00:02:20,924 Speaker 2: a popular vote, the model things it would be a 42 00:02:21,004 --> 00:02:24,604 Speaker 2: toss up, or maybe Biden slightly favored. In the electoral college. 43 00:02:24,924 --> 00:02:27,444 Speaker 2: There has been for the past two cycles with Trump 44 00:02:27,444 --> 00:02:31,764 Speaker 2: on the ballot, a gap that favors a GOP. In 45 00:02:31,764 --> 00:02:35,364 Speaker 2: twenty and twenty, Biden won the popular vote by four 46 00:02:35,364 --> 00:02:37,004 Speaker 2: and a half points, which is a pretty good margin 47 00:02:37,044 --> 00:02:40,964 Speaker 2: against an incumbent. But all these key states Georgia and 48 00:02:41,484 --> 00:02:44,124 Speaker 2: Wisconsin and Pennsylvania and so forth, the only win by 49 00:02:44,164 --> 00:02:49,124 Speaker 2: about one point. So if we're now in twenty twenty 50 00:02:49,164 --> 00:02:52,004 Speaker 2: four and Biden's trailing by half a point instead of 51 00:02:52,004 --> 00:02:54,244 Speaker 2: winning by four and a half points in the popular vote, 52 00:02:54,364 --> 00:02:57,724 Speaker 2: that's a shift of five points. If you have a 53 00:02:57,764 --> 00:03:00,324 Speaker 2: state like Pennsylvania that you win by one point and 54 00:03:00,364 --> 00:03:03,844 Speaker 2: you shift it by five points, that's not very good. Now. 55 00:03:04,404 --> 00:03:06,644 Speaker 2: What's happening in practice is that there's a bit of 56 00:03:06,644 --> 00:03:11,044 Speaker 2: a bifurcation between the Midwestern swing states is kind of 57 00:03:11,084 --> 00:03:13,764 Speaker 2: trio of rust Belt states Pennsylvania, maybe even maybe not 58 00:03:13,764 --> 00:03:17,124 Speaker 2: at the Midwest per se, but Pennsylvania, Wisconsin, Michigan, where 59 00:03:17,164 --> 00:03:20,964 Speaker 2: BIA's polling is closer usually within the point maybe two 60 00:03:20,964 --> 00:03:24,164 Speaker 2: point Trump lead, versus the sun Belt states, the new 61 00:03:24,244 --> 00:03:29,044 Speaker 2: fangled Georgia, Nevada, Arizona, where Biden's polling is very bad. 62 00:03:29,084 --> 00:03:33,764 Speaker 2: He might be down five or six points. Now. If 63 00:03:33,764 --> 00:03:37,524 Speaker 2: he wins Michigan and Pennsylvania and Wisconsin and holds all 64 00:03:37,564 --> 00:03:41,324 Speaker 2: the other states so like New Hampshire, Virginia and so forth, 65 00:03:42,964 --> 00:03:45,524 Speaker 2: then he would finish with exactly two hundred and seventy 66 00:03:45,564 --> 00:03:48,884 Speaker 2: electoral votes when you need to sixty nine to win. 67 00:03:49,404 --> 00:03:53,084 Speaker 2: So there is a path, but not a whole lot 68 00:03:53,084 --> 00:03:53,964 Speaker 2: of margin. For aer. 69 00:03:55,324 --> 00:03:57,524 Speaker 1: Nate, this is not the way that I wanted to 70 00:03:57,564 --> 00:03:59,964 Speaker 1: start off my week. So I think I think we're 71 00:04:00,004 --> 00:04:03,364 Speaker 1: done with the podcast, goodbye, good bye luck as I 72 00:04:03,484 --> 00:04:07,084 Speaker 1: go and hide in a cave. But no, in all honesty, 73 00:04:07,164 --> 00:04:10,324 Speaker 1: this is sobering news. I so don't want Trump to 74 00:04:10,364 --> 00:04:13,484 Speaker 1: win because I know I think it's going to have 75 00:04:13,644 --> 00:04:20,244 Speaker 1: incredibly dire consequences for democracy. So I want to kind 76 00:04:20,244 --> 00:04:22,444 Speaker 1: of squint and say, yeah, but there's this path and 77 00:04:22,444 --> 00:04:24,004 Speaker 1: look at these states, and we're going to do it. 78 00:04:24,364 --> 00:04:26,164 Speaker 1: But I think that you need to be realistic and 79 00:04:26,204 --> 00:04:29,524 Speaker 1: try to figure out, Okay, given this, there's still it's 80 00:04:29,564 --> 00:04:32,564 Speaker 1: not like the election is tomorrow, right, So what can 81 00:04:32,604 --> 00:04:37,244 Speaker 1: we do? What shifts in your election model would actually 82 00:04:37,324 --> 00:04:40,204 Speaker 1: change that outcome and bring that percentage back down? Are 83 00:04:40,244 --> 00:04:43,284 Speaker 1: there certain lovers? Are there certain things that are actually 84 00:04:43,284 --> 00:04:46,004 Speaker 1: going to be kind of the most meaningful as you 85 00:04:46,044 --> 00:04:47,884 Speaker 1: play around with the inputs and the numbers. 86 00:04:49,364 --> 00:04:54,044 Speaker 2: Yeah, look, Biden is struggling with groups that are traditionally 87 00:04:54,084 --> 00:04:57,604 Speaker 2: strong Democratic groups like younger black voters, younger Hispanic voters. 88 00:04:58,324 --> 00:05:01,004 Speaker 2: That's why you see his numbers fading in states like Georgia, 89 00:05:01,164 --> 00:05:04,924 Speaker 2: for instance, whereas he's actually doing okay with these older 90 00:05:04,924 --> 00:05:07,044 Speaker 2: white voters. That seems to be the constituency. It's like 91 00:05:07,364 --> 00:05:10,804 Speaker 2: holding up for him the best. There is a debate today, 92 00:05:10,884 --> 00:05:13,924 Speaker 2: This episode's coming out on Thursday tonight. That's an opportunity 93 00:05:13,964 --> 00:05:18,044 Speaker 2: for Biden to turn things around. You know, the conventions 94 00:05:18,044 --> 00:05:22,004 Speaker 2: have get to happen. The concern for Biden is that 95 00:05:22,084 --> 00:05:27,084 Speaker 2: the race has been extremely steady so far, the steadiest 96 00:05:27,124 --> 00:05:29,524 Speaker 2: you've ever seen Poland. I think in a presidential election 97 00:05:30,684 --> 00:05:32,724 Speaker 2: Biden game maybe half a point to a point in 98 00:05:32,764 --> 00:05:37,524 Speaker 2: the polls following Trump's conviction on thirty However, many it 99 00:05:37,644 --> 00:05:42,284 Speaker 2: was felony counts, you know. But the fact that like 100 00:05:42,324 --> 00:05:45,124 Speaker 2: Trump was convicted of paying hush money payments to like 101 00:05:45,164 --> 00:05:50,524 Speaker 2: at porn star adult film actress, excuse me. And that's 102 00:05:50,524 --> 00:05:52,284 Speaker 2: like a real sentence I can say, And that like 103 00:05:53,004 --> 00:05:54,804 Speaker 2: had half a point worth of difference. I mean, that's 104 00:05:55,124 --> 00:05:58,124 Speaker 2: that's not great for Biden. I think there have been 105 00:05:58,164 --> 00:06:01,364 Speaker 2: a lot of false hopes from Democrats. People say, oh, 106 00:06:01,364 --> 00:06:02,444 Speaker 2: this is going to move the poles. It's going to 107 00:06:02,484 --> 00:06:06,564 Speaker 2: move the polls when the economy has gotten a fair 108 00:06:06,644 --> 00:06:09,284 Speaker 2: bit better over the past six months. Inflation has abate, 109 00:06:09,524 --> 00:06:13,684 Speaker 2: the stock market is way up actually, but like the 110 00:06:13,764 --> 00:06:17,364 Speaker 2: numbers haven't really changed very much. And I don't know. 111 00:06:17,484 --> 00:06:21,684 Speaker 2: I'm sure I'll be called a fascist, biased, republican hack 112 00:06:22,284 --> 00:06:26,324 Speaker 2: by every democratic strategist in the book. But the whole 113 00:06:26,324 --> 00:06:29,124 Speaker 2: point of having a model is that you're applying structured 114 00:06:29,164 --> 00:06:31,964 Speaker 2: thinking where where you don't go in and tweak the 115 00:06:32,004 --> 00:06:35,044 Speaker 2: results once you see what it spits out. Right, The 116 00:06:35,084 --> 00:06:36,924 Speaker 2: whole point of committing to a model is that like 117 00:06:37,844 --> 00:06:40,964 Speaker 2: it does take the emotional component, which I have like 118 00:06:41,044 --> 00:06:45,804 Speaker 2: everybody else, out of the process or reduces it. Let's say, right, 119 00:06:46,884 --> 00:06:49,564 Speaker 2: I'm someone who thinks professionally, it would be great to 120 00:06:49,564 --> 00:06:51,004 Speaker 2: just say, oh, it's a toss of fifty to fifty, 121 00:06:51,004 --> 00:06:52,964 Speaker 2: who knows can't get in triple that way. Well, that's 122 00:06:53,004 --> 00:06:55,604 Speaker 2: dishonest and it's not what the number says, and it's 123 00:06:55,644 --> 00:06:58,404 Speaker 2: not what the process I followed for sixteen year now 124 00:06:58,604 --> 00:07:01,844 Speaker 2: years now is two thousand and eight says right, this 125 00:07:01,924 --> 00:07:05,044 Speaker 2: is not a year that looks terribly uncertain. You don't 126 00:07:05,044 --> 00:07:07,444 Speaker 2: have COVID. You don't have these polls volleying up and 127 00:07:07,484 --> 00:07:09,964 Speaker 2: down like you did in twenty sixteen with Clinton and Trump. 128 00:07:10,244 --> 00:07:14,404 Speaker 2: They're very well known candidates, and so Trump's advantage is narrow, 129 00:07:15,564 --> 00:07:19,604 Speaker 2: but it's been persistent, and he has the more robust paths. 130 00:07:20,764 --> 00:07:23,964 Speaker 2: The fact that Biden has to win all three of 131 00:07:23,964 --> 00:07:29,044 Speaker 2: those Michigan, Wisconsin, Pennsylvania trio, all where he probably trails 132 00:07:29,044 --> 00:07:30,324 Speaker 2: by a point or so, but he has to win 133 00:07:30,364 --> 00:07:33,924 Speaker 2: all three and hold these other states. The fact that 134 00:07:33,964 --> 00:07:36,404 Speaker 2: like the next best wing states like Arizona for Biden, 135 00:07:36,444 --> 00:07:38,764 Speaker 2: where he's down by like four or five points, that's 136 00:07:38,764 --> 00:07:41,924 Speaker 2: a real deficit. I don't think you can sit here 137 00:07:41,924 --> 00:07:45,444 Speaker 2: with a straight face and say you'd rather be by 138 00:07:45,964 --> 00:07:47,724 Speaker 2: I think you can say you'd rather be Trump. 139 00:07:47,924 --> 00:07:50,484 Speaker 1: You started off by saying that it seems that Biden 140 00:07:50,604 --> 00:07:53,364 Speaker 1: is slipping amongst some of those voters who are kind 141 00:07:53,364 --> 00:07:57,604 Speaker 1: of traditionally democratic, right, like the younger black voters. Are 142 00:07:57,724 --> 00:08:01,844 Speaker 1: those voters actually switching to Trump or what's happening to them? 143 00:08:02,524 --> 00:08:06,604 Speaker 1: So where's that loss for Biden evaporating? Two? 144 00:08:06,804 --> 00:08:09,964 Speaker 2: I think there might be, you know, some permissions ructures 145 00:08:10,044 --> 00:08:13,484 Speaker 2: to vote for Trump that didn't exist last time, but no, 146 00:08:13,564 --> 00:08:18,204 Speaker 2: a lot of them are going to undecided, to RFK 147 00:08:18,404 --> 00:08:21,644 Speaker 2: junior or out of the electorate. You know, our model 148 00:08:21,724 --> 00:08:24,844 Speaker 2: projects turn out of something like one hundred and fifty 149 00:08:24,884 --> 00:08:27,204 Speaker 2: million this year, which is which would be down from 150 00:08:28,004 --> 00:08:31,164 Speaker 2: twenty to twenty in all the polls, the indications that 151 00:08:31,204 --> 00:08:34,324 Speaker 2: there's less enthusiasm for this election than there had been. 152 00:08:35,204 --> 00:08:39,684 Speaker 2: Now to Biden this credit, he actually does well. Democrats 153 00:08:39,684 --> 00:08:43,684 Speaker 2: in general do well with these very reliable regular voters. 154 00:08:43,684 --> 00:08:46,724 Speaker 2: So like, lower turnout might actually be beneficial for Biden. 155 00:08:47,044 --> 00:08:51,044 Speaker 1: So Nate, Okay, since we since we are we are here, 156 00:08:51,404 --> 00:08:54,364 Speaker 1: what are kind of if you are at the Biden camp, 157 00:08:54,644 --> 00:08:59,564 Speaker 1: where should they focus their efforts between now and election time? 158 00:08:59,884 --> 00:09:03,204 Speaker 1: Like give us like top top two, top three priorities, 159 00:09:04,004 --> 00:09:06,804 Speaker 1: Like what should the campaign be doing to try to 160 00:09:06,844 --> 00:09:12,884 Speaker 1: get those numbers back to where in more winnable territory? 161 00:09:13,044 --> 00:09:16,524 Speaker 2: Maybe fire some people I don't know, certainly, fire anybody 162 00:09:16,564 --> 00:09:18,484 Speaker 2: in the campaig who's telling you not to believe the polls, right, 163 00:09:18,524 --> 00:09:20,804 Speaker 2: fire them and don't get them a new job. I mean, seriously, 164 00:09:21,884 --> 00:09:24,364 Speaker 2: if you're down, if you know, again, if you're at 165 00:09:24,364 --> 00:09:26,524 Speaker 2: a mid thirties, maybe maybe they'll got up to the 166 00:09:26,524 --> 00:09:28,604 Speaker 2: low forties by the time we published the model, but 167 00:09:28,644 --> 00:09:32,844 Speaker 2: probably mid thirties. If you're in that territory, then you 168 00:09:32,884 --> 00:09:34,924 Speaker 2: know that's the point when again, when a baseball team 169 00:09:35,004 --> 00:09:37,604 Speaker 2: is winning thirty some five six seven percent of its 170 00:09:37,644 --> 00:09:41,404 Speaker 2: ballgames and it tends to fire the manager and there's 171 00:09:41,404 --> 00:09:43,764 Speaker 2: been very little turnover, and like, their theory of the 172 00:09:43,804 --> 00:09:46,724 Speaker 2: case is wrong. They thought that Trump would be relatively 173 00:09:46,724 --> 00:09:48,364 Speaker 2: easy to defeat and they could run back the twenty 174 00:09:48,404 --> 00:09:51,764 Speaker 2: twenty playbook. You're talking about democracy, democracy, democracy, over and 175 00:09:51,764 --> 00:09:54,324 Speaker 2: over and over again, and that this would work. Their 176 00:09:54,404 --> 00:09:57,164 Speaker 2: theory of the case is wrong. They did not expect 177 00:09:57,164 --> 00:10:00,484 Speaker 2: to be down at this point, right. This is why 178 00:10:00,484 --> 00:10:02,484 Speaker 2: they're still doing the RFK junior stuff, because they thought 179 00:10:02,484 --> 00:10:04,964 Speaker 2: they'd be winning, and so you want to reduce variants. 180 00:10:04,964 --> 00:10:08,404 Speaker 2: When you're ahead and getting RFK junior, who's a wild card? 181 00:10:08,404 --> 00:10:09,764 Speaker 2: I guess you can say, off the b it is 182 00:10:09,804 --> 00:10:13,604 Speaker 2: something to do that. You know. Look, I think some 183 00:10:13,684 --> 00:10:18,124 Speaker 2: of this stuff that you've done tactically suggests improvement, but 184 00:10:18,124 --> 00:10:20,524 Speaker 2: but I don't know. I mean, I mean, you know, 185 00:10:20,644 --> 00:10:25,044 Speaker 2: for all the fucking talk about how important the election is, 186 00:10:25,084 --> 00:10:28,204 Speaker 2: and I think some of that talk is we'll scrutinize 187 00:10:28,204 --> 00:10:29,684 Speaker 2: that more. At some point. I think some of it's 188 00:10:29,724 --> 00:10:33,564 Speaker 2: a little precious. But like if you really think that 189 00:10:33,724 --> 00:10:36,644 Speaker 2: like this is the you know, the end all be 190 00:10:36,764 --> 00:10:38,884 Speaker 2: all of elections, then I'm not sure really acting like 191 00:10:38,924 --> 00:10:41,684 Speaker 2: it very much. You know, they're acting like people who 192 00:10:41,804 --> 00:10:45,884 Speaker 2: have incentive. We're called principal agent problems. Right, you don't 193 00:10:45,924 --> 00:10:48,484 Speaker 2: want to be the polster that gives the president bad news. 194 00:10:48,764 --> 00:10:50,484 Speaker 2: You definitely don't want to be the polster or the 195 00:10:50,644 --> 00:10:53,644 Speaker 2: advisor who tells the president, hey, maybe you should stand 196 00:10:53,644 --> 00:10:55,764 Speaker 2: down to think about having someone else run, because then 197 00:10:55,804 --> 00:10:59,124 Speaker 2: you lose your job. But you know, and then there's 198 00:10:59,164 --> 00:11:03,284 Speaker 2: a whole Kamala Harris issue too, where I mean, I 199 00:11:03,284 --> 00:11:05,484 Speaker 2: think if she were more popular, then there's some chance 200 00:11:05,524 --> 00:11:07,564 Speaker 2: that Biden would have stood down and Democrats to be 201 00:11:07,564 --> 00:11:12,284 Speaker 2: in better shape. So I don't know. Look, all you 202 00:11:12,324 --> 00:11:14,964 Speaker 2: can say is like, if Biden loses, and there's still 203 00:11:15,004 --> 00:11:18,524 Speaker 2: a pretty some chance he wins, it's not like you 204 00:11:18,564 --> 00:11:20,764 Speaker 2: can't see this coming. He has been behind in the 205 00:11:20,804 --> 00:11:26,764 Speaker 2: polls consistently for you know, since Midsummer last year. Voters 206 00:11:26,804 --> 00:11:29,804 Speaker 2: consistently have said you are too old, you should not 207 00:11:29,884 --> 00:11:32,084 Speaker 2: run again. The first term was fine, you should not 208 00:11:32,164 --> 00:11:36,284 Speaker 2: run again. You know they have ignored that message at 209 00:11:36,324 --> 00:11:38,804 Speaker 2: every turn, and that's because the data is ambiguous. Right again, 210 00:11:38,804 --> 00:11:40,364 Speaker 2: you can squint in the right day and look at 211 00:11:40,364 --> 00:11:43,204 Speaker 2: the right poles and see not just a path to 212 00:11:43,244 --> 00:11:45,604 Speaker 2: it Biden victory, but like a case where his chances 213 00:11:45,644 --> 00:11:48,804 Speaker 2: look pretty decent. Right, you can't look at things like 214 00:11:48,804 --> 00:11:52,404 Speaker 2: the twenty twenty two midterms where Democrats did relatively well, 215 00:11:53,404 --> 00:11:55,164 Speaker 2: and you can hope that the polls are biased in 216 00:11:55,164 --> 00:11:59,044 Speaker 2: your favor because biased against you, rather to outperform them, 217 00:11:59,084 --> 00:12:03,724 Speaker 2: because sometimes they are. But that's usually very hard to predict, 218 00:12:04,364 --> 00:12:06,604 Speaker 2: and you don't need many reminders of cases where the 219 00:12:06,604 --> 00:12:09,404 Speaker 2: polls were biased against Trump in stead. 220 00:12:10,284 --> 00:12:13,244 Speaker 1: All right, so shake things up. I think we see 221 00:12:13,244 --> 00:12:15,644 Speaker 1: the old status quo bias that we've talked about week 222 00:12:15,684 --> 00:12:19,364 Speaker 1: after week after week, and firesome people focus on those 223 00:12:19,484 --> 00:12:22,084 Speaker 1: key states and like, just get your ass and gear 224 00:12:22,684 --> 00:12:25,764 Speaker 1: and realize that there's a very very good chance you'll lose. 225 00:12:29,964 --> 00:12:43,044 Speaker 2: We'll be right back. Nay. 226 00:12:43,164 --> 00:12:47,004 Speaker 1: Let's talk about some huge shifts in the home insurance industry. 227 00:12:48,284 --> 00:12:51,244 Speaker 1: There has been a lot of news recently about homeowners 228 00:12:51,284 --> 00:12:56,004 Speaker 1: insurance because insurers are actually getting out of multiple states 229 00:12:56,084 --> 00:12:59,684 Speaker 1: multiple areas and refusing just flat out and refusing to 230 00:12:59,884 --> 00:13:04,404 Speaker 1: ensure homes, which is obviously affecting homeowners, home buyers, people 231 00:13:04,444 --> 00:13:07,204 Speaker 1: who need to get you know, their their home mortgage, 232 00:13:07,524 --> 00:13:10,964 Speaker 1: anything like that, because they like physically cannot get their 233 00:13:10,964 --> 00:13:14,084 Speaker 1: home insured. And Nate, last week, you and I talked 234 00:13:14,084 --> 00:13:17,604 Speaker 1: a lot about climate change and all of those effects, 235 00:13:17,684 --> 00:13:20,444 Speaker 1: and this is directly related to that. So I think 236 00:13:20,484 --> 00:13:23,964 Speaker 1: that this is one way that consumers are feeling what 237 00:13:24,004 --> 00:13:26,004 Speaker 1: it means to be living in a world where the 238 00:13:26,124 --> 00:13:28,764 Speaker 1: risks of one off events are no longer one off events, 239 00:13:28,804 --> 00:13:31,044 Speaker 1: where the storm of the century is no longer the 240 00:13:31,044 --> 00:13:34,684 Speaker 1: storm of the century, where you can actually see these 241 00:13:34,724 --> 00:13:38,204 Speaker 1: people who use models to try to model out the 242 00:13:38,284 --> 00:13:41,564 Speaker 1: risks losing money and saying, oh shit, we don't want 243 00:13:41,604 --> 00:13:43,844 Speaker 1: to ensure your home anymore. We no longer want to 244 00:13:43,844 --> 00:13:44,564 Speaker 1: take this risk. 245 00:13:47,084 --> 00:13:50,044 Speaker 2: So let me ask, Yeah, what might seem like a 246 00:13:50,124 --> 00:13:55,364 Speaker 2: naive question, right, why can't you just price these risks 247 00:13:55,924 --> 00:13:58,684 Speaker 2: in that you're in California and you know the risk 248 00:13:58,764 --> 00:14:02,044 Speaker 2: of wildfires, you're in Florida, you know the risk of hurricanes. 249 00:14:02,084 --> 00:14:04,564 Speaker 2: You can build a model and then it costs more 250 00:14:05,044 --> 00:14:08,084 Speaker 2: than it might what's a safe state, you know, Wyoming there, 251 00:14:08,164 --> 00:14:11,964 Speaker 2: like Bolcanos there and that anyway, but why can't you 252 00:14:12,764 --> 00:14:15,684 Speaker 2: charge more instead of not offering the risk at all? 253 00:14:16,644 --> 00:14:18,444 Speaker 1: Yeah, I mean, I think that that's a really really 254 00:14:18,484 --> 00:14:21,044 Speaker 1: good point, and I think that some insurance are trying 255 00:14:21,084 --> 00:14:23,324 Speaker 1: to do that and trying to charge more. But I 256 00:14:23,324 --> 00:14:26,764 Speaker 1: think that some are using old data instead of new 257 00:14:26,844 --> 00:14:29,444 Speaker 1: data for the models. And the problem is there are 258 00:14:29,484 --> 00:14:32,204 Speaker 1: no good data, right. How do you model something that's 259 00:14:32,284 --> 00:14:36,084 Speaker 1: changing so rapidly in an environment that's changing rapidly, where 260 00:14:36,084 --> 00:14:39,684 Speaker 1: there's a lot of volatility, and volatility in the actual 261 00:14:39,724 --> 00:14:41,884 Speaker 1: sense of the word, which means that you know, ups 262 00:14:41,924 --> 00:14:45,644 Speaker 1: and downs are very extreme in a short period of time. 263 00:14:46,084 --> 00:14:49,644 Speaker 1: How do I factor in the uncertainty of these risks 264 00:14:49,724 --> 00:14:53,084 Speaker 1: given that we don't have any historical comps, right, given 265 00:14:53,164 --> 00:14:55,484 Speaker 1: that we don't know how it's going to play out 266 00:14:55,484 --> 00:14:57,524 Speaker 1: in the next ten years, because the last ten years 267 00:14:57,564 --> 00:15:00,724 Speaker 1: are not representative of the years before that are not representative, 268 00:15:00,964 --> 00:15:05,204 Speaker 1: and we no longer have this steady model where where 269 00:15:05,244 --> 00:15:07,164 Speaker 1: we can go back and say, Okay, you know, risk 270 00:15:07,204 --> 00:15:11,004 Speaker 1: of this x percent, risk of this experson. I mean, 271 00:15:11,044 --> 00:15:12,884 Speaker 1: I know that one way of handling volatility is to 272 00:15:12,884 --> 00:15:17,164 Speaker 1: price it even higher, but at some point you know 273 00:15:17,244 --> 00:15:20,124 Speaker 1: you're pricing it so high because of the uncertainty that 274 00:15:20,284 --> 00:15:21,684 Speaker 1: it might not make sense anymore. 275 00:15:23,244 --> 00:15:25,844 Speaker 2: Yeah, if you go to the New York Times, they 276 00:15:25,884 --> 00:15:30,764 Speaker 2: have a interactive graphic called the Home Insurance Crunch, see 277 00:15:30,764 --> 00:15:34,124 Speaker 2: What's happening in your state, where it just shows every 278 00:15:34,164 --> 00:15:38,204 Speaker 2: state whether home insurance has been profitable or losing for 279 00:15:38,244 --> 00:15:42,444 Speaker 2: the insurers. And what you quickly discover is that you 280 00:15:42,564 --> 00:15:46,284 Speaker 2: have kind of limited upside where nothing goes wrong you 281 00:15:46,364 --> 00:15:51,004 Speaker 2: do make a profit, but kind of uncapped downside where 282 00:15:51,084 --> 00:15:56,604 Speaker 2: one year with crazy hurricanes or flooding or wildfires or 283 00:15:56,644 --> 00:16:01,124 Speaker 2: things like that can wipe out ten marginally profitable years. 284 00:16:01,124 --> 00:16:05,444 Speaker 2: And in states like California and Colorado a lot of 285 00:16:05,444 --> 00:16:09,804 Speaker 2: fires Florida, of course, with hurricanes like that happens pretty often, 286 00:16:10,364 --> 00:16:16,204 Speaker 2: so it's hard to measure tail risks, especially if the 287 00:16:16,244 --> 00:16:18,724 Speaker 2: tails are expanding. We talked on the last week's episode 288 00:16:18,764 --> 00:16:22,564 Speaker 2: about how if there's even a small shift in the distribution, 289 00:16:23,124 --> 00:16:25,964 Speaker 2: the part of the curve under the tail can really 290 00:16:26,004 --> 00:16:31,284 Speaker 2: get shifted out where it becomes substantially more probable. Yeah, 291 00:16:31,324 --> 00:16:33,764 Speaker 2: and there's also you know, there's also something called adverse 292 00:16:33,844 --> 00:16:36,564 Speaker 2: selection where maybe the people who want to buy insurance 293 00:16:36,564 --> 00:16:39,684 Speaker 2: are people that are worse risks for you to take. 294 00:16:39,764 --> 00:16:43,364 Speaker 2: Maybe they know something about their home that it's vulnerable 295 00:16:43,404 --> 00:16:46,204 Speaker 2: to landslides, for instance, And therefore you kind of have 296 00:16:46,364 --> 00:16:49,564 Speaker 2: what economists we call like a market for lemons, where 297 00:16:49,604 --> 00:16:52,404 Speaker 2: you don't you have information asymmetries between buyer and seller 298 00:16:52,444 --> 00:16:54,844 Speaker 2: that reduce the overall size of the market. And in 299 00:16:54,844 --> 00:16:57,364 Speaker 2: those cases it might be irrational to might be rational 300 00:16:57,444 --> 00:17:01,604 Speaker 2: rather to not offer a product. There's not a kind 301 00:17:01,604 --> 00:17:02,724 Speaker 2: of market clearing price. 302 00:17:03,204 --> 00:17:06,564 Speaker 1: Wait Nate, one second, let's clarify what exactly a market 303 00:17:06,604 --> 00:17:07,964 Speaker 1: for lemons means. 304 00:17:08,564 --> 00:17:11,124 Speaker 2: Yeah, the term was coined, I believe by the economist 305 00:17:11,284 --> 00:17:15,244 Speaker 2: George Akerlove, who I think is now at Berkeley won 306 00:17:15,284 --> 00:17:18,484 Speaker 2: a Nobel Price. He talks about, I mean, Elemon is 307 00:17:18,724 --> 00:17:23,884 Speaker 2: a defective used car, and it's hard to know everything 308 00:17:23,924 --> 00:17:25,964 Speaker 2: wrong with the car if you take a test drive 309 00:17:26,044 --> 00:17:29,884 Speaker 2: for a few minutes or something like that. But basically, 310 00:17:29,924 --> 00:17:34,964 Speaker 2: it's like when buyers don't have any way to trust sellers. 311 00:17:35,004 --> 00:17:38,044 Speaker 2: There's no third party vouching for the reliability of these 312 00:17:38,124 --> 00:17:41,404 Speaker 2: used cars. What happens is just the volume of transactions 313 00:17:42,364 --> 00:17:45,244 Speaker 2: goes way down. Right, You have dead weight loss when 314 00:17:45,244 --> 00:17:49,484 Speaker 2: there's no credible way to achieve trust. So the theory 315 00:17:49,484 --> 00:17:51,204 Speaker 2: here would be, like, you know, if we think that 316 00:17:51,844 --> 00:17:55,084 Speaker 2: insurance is a win win transaction, right, someone's paying some 317 00:17:55,164 --> 00:17:57,804 Speaker 2: expected value on average, you lose money if you buy insurance, 318 00:17:57,844 --> 00:18:00,644 Speaker 2: but they protect their downside risk. Right, that's a win 319 00:18:00,724 --> 00:18:04,324 Speaker 2: win on a risk adjusted basis. But if there's not 320 00:18:04,364 --> 00:18:08,324 Speaker 2: reliable information you're not sure you can trust the insurer, 321 00:18:08,644 --> 00:18:10,844 Speaker 2: or if you're insured, you're not sure you can trust 322 00:18:10,844 --> 00:18:15,564 Speaker 2: the homeowner, then you have transactions not happening that would 323 00:18:15,564 --> 00:18:18,244 Speaker 2: create utility for both sides and for society. 324 00:18:19,164 --> 00:18:22,484 Speaker 1: Yeah, I think that something that I know about investing 325 00:18:23,364 --> 00:18:26,244 Speaker 1: is if you're trying to kind of look at an 326 00:18:26,284 --> 00:18:30,764 Speaker 1: opportunity and you're comparing upside and downside risk. Right, when 327 00:18:30,804 --> 00:18:35,164 Speaker 1: you have unlimited downside risk and your upside risk is 328 00:18:35,684 --> 00:18:38,644 Speaker 1: your upside is capped, that's not an investment you want 329 00:18:38,684 --> 00:18:41,004 Speaker 1: to be making, right. You want it to be asymmetric 330 00:18:41,044 --> 00:18:43,284 Speaker 1: the other way. You want your downside risk to be 331 00:18:43,364 --> 00:18:47,124 Speaker 1: capped and your upside to actually be able to go 332 00:18:47,324 --> 00:18:51,044 Speaker 1: up further, especially if you're leveraged. Right, If you're thinking 333 00:18:51,084 --> 00:18:52,764 Speaker 1: about it that way, and if you're thinking about the 334 00:18:52,804 --> 00:18:57,164 Speaker 1: fact that this is incredibly asymmetric risk, and this is 335 00:18:57,164 --> 00:18:59,124 Speaker 1: something that they've you know, this is something they've been 336 00:18:59,124 --> 00:19:02,324 Speaker 1: doing for years where it's been asymmetric in their favor, 337 00:19:02,644 --> 00:19:06,284 Speaker 1: where it has been basically a capped downside because these 338 00:19:06,364 --> 00:19:09,684 Speaker 1: kind of once in a lifetime events didn't happen, or 339 00:19:09,804 --> 00:19:12,724 Speaker 1: they did happen once in a lifetime, and so all 340 00:19:12,764 --> 00:19:15,924 Speaker 1: of your other years where you were making money paid 341 00:19:15,964 --> 00:19:18,484 Speaker 1: for it. But now if you're making less money, because 342 00:19:18,484 --> 00:19:21,124 Speaker 1: there's always something happening, right if you look at the 343 00:19:21,164 --> 00:19:25,804 Speaker 1: news every year, there's something happening. There's you know, home 344 00:19:25,844 --> 00:19:30,124 Speaker 1: destruction because of all sorts of different things, tornadoes, hurricanes, wildfires, 345 00:19:30,684 --> 00:19:32,524 Speaker 1: you know, you name it, you know, we got it. 346 00:19:32,964 --> 00:19:36,844 Speaker 1: And then if you have that, so in your up years, 347 00:19:37,084 --> 00:19:39,564 Speaker 1: up years, you're not nearly as up and then you 348 00:19:39,644 --> 00:19:42,204 Speaker 1: have these catastrophic events that are happening over and over 349 00:19:42,244 --> 00:19:44,844 Speaker 1: and over. Then to me, like, as if you're a 350 00:19:44,924 --> 00:19:47,404 Speaker 1: rational investors, it's a bad investment. So you end up 351 00:19:47,404 --> 00:19:48,084 Speaker 1: pulling out. 352 00:19:48,204 --> 00:19:53,004 Speaker 2: What's not neglect the role of dorm regulations. According to 353 00:19:53,044 --> 00:19:56,444 Speaker 2: the Washington Post, in California's case, insurance companies must use 354 00:19:56,484 --> 00:19:59,764 Speaker 2: historical data rather than forward looking models when they price 355 00:19:59,804 --> 00:20:04,484 Speaker 2: insurance plans that means is supporting them. Their policies may 356 00:20:04,524 --> 00:20:06,604 Speaker 2: not reflect the actual risk you're supposed to hedge against. 357 00:20:07,204 --> 00:20:11,764 Speaker 2: That's stupid. I mean, there's no serious put laws in California, 358 00:20:12,084 --> 00:20:14,884 Speaker 2: and like I happen to agree with that. Night if 359 00:20:14,924 --> 00:20:18,604 Speaker 2: you can't actually like adjust for changes in the climate, 360 00:20:18,644 --> 00:20:21,644 Speaker 2: which I think most people in California would care about, 361 00:20:21,684 --> 00:20:26,284 Speaker 2: then you're just making the market less efficient. You know, 362 00:20:26,364 --> 00:20:29,604 Speaker 2: how you optimize this function where on the one hand, 363 00:20:30,004 --> 00:20:34,364 Speaker 2: you probably don't want insurers to have literally unlimited liability 364 00:20:34,364 --> 00:20:37,204 Speaker 2: because they can't. No one has infinity infinity dollars, right, 365 00:20:37,244 --> 00:20:39,524 Speaker 2: they won't be able to pay it. On the other hand, 366 00:20:39,564 --> 00:20:41,564 Speaker 2: you know, you don't want insurance not to make people 367 00:20:41,604 --> 00:20:45,084 Speaker 2: relatively whole when there is a disaster. Otherwise what's the point. 368 00:20:46,004 --> 00:20:48,244 Speaker 2: But I would gather that one that like these state 369 00:20:48,284 --> 00:20:50,484 Speaker 2: regulations are not always that well designed. 370 00:20:51,044 --> 00:20:54,564 Speaker 1: Yeah, I think that that's absolutely right because and states 371 00:20:54,564 --> 00:20:56,164 Speaker 1: are trying to step in, by the way, not just 372 00:20:56,204 --> 00:20:59,924 Speaker 1: in California, right, because there are these gaps where they say, 373 00:21:00,044 --> 00:21:02,804 Speaker 1: oh shit, you know, what do we do if people 374 00:21:02,844 --> 00:21:06,204 Speaker 1: in our state can't buy houses because they can't get insurance, 375 00:21:06,244 --> 00:21:08,724 Speaker 1: Like this is actually a big, big issue, Nate. I 376 00:21:08,764 --> 00:21:11,044 Speaker 1: know that at some point point in the in the past, 377 00:21:11,804 --> 00:21:15,964 Speaker 1: you were considering buying a place in Miami. Is you know, 378 00:21:16,124 --> 00:21:18,484 Speaker 1: is that something where like, let's talk about this on 379 00:21:18,524 --> 00:21:21,004 Speaker 1: a personal level, Like, would you do that right now, 380 00:21:21,404 --> 00:21:24,284 Speaker 1: given what's happening with insurance, given what we know about 381 00:21:24,564 --> 00:21:27,084 Speaker 1: the risks there, given that you probably would not be 382 00:21:27,124 --> 00:21:29,804 Speaker 1: able to get insurance on the you know, on an 383 00:21:29,844 --> 00:21:31,164 Speaker 1: apartment that you wanted. 384 00:21:32,764 --> 00:21:37,564 Speaker 2: Honest answer, they probably wouldn't affect my decision that much 385 00:21:39,724 --> 00:21:45,284 Speaker 2: because look, home insurance is negative expective value on a 386 00:21:45,324 --> 00:21:49,084 Speaker 2: non risk adjusted basis, right, Otherwise it wouldn't be offered. 387 00:21:49,084 --> 00:21:51,644 Speaker 2: By definition, insurance means that someone who has more capital 388 00:21:51,924 --> 00:21:54,884 Speaker 2: and more risk tolerance than you makes money on average, 389 00:21:54,884 --> 00:21:57,884 Speaker 2: and homeowners lose money on average. I mean, it wouldn't 390 00:21:57,924 --> 00:22:01,404 Speaker 2: be great. I'll probably take the negative evy like safe bet. 391 00:22:03,004 --> 00:22:04,244 Speaker 2: I mean, I'm probably not going to buy a place 392 00:22:04,284 --> 00:22:09,724 Speaker 2: in Mimi for other reasons. But no, I mean, but 393 00:22:09,764 --> 00:22:13,484 Speaker 2: I'm also conscious about how much of my net worth 394 00:22:13,564 --> 00:22:16,444 Speaker 2: I'm tied it being real estate, right. I think it's 395 00:22:16,484 --> 00:22:19,844 Speaker 2: generally a mistake, for many reasons to have a great 396 00:22:19,844 --> 00:22:22,484 Speaker 2: deal of your net worth tied up in real estate 397 00:22:22,524 --> 00:22:24,564 Speaker 2: as opposed to a broader portfolio of stuff. So I 398 00:22:24,564 --> 00:22:27,004 Speaker 2: think I think I'm hedged enough in diverse fi it 399 00:22:27,124 --> 00:22:31,644 Speaker 2: enough that, like, although not ideal, I I you know, 400 00:22:31,684 --> 00:22:32,924 Speaker 2: it wouldn't be a deal breaker. 401 00:22:33,964 --> 00:22:37,484 Speaker 1: So you would basically write it off, right, Like, as 402 00:22:37,684 --> 00:22:39,684 Speaker 1: this is an investment that might go to zero, I 403 00:22:39,684 --> 00:22:41,644 Speaker 1: don't care that. I'm not going to get insurance on it, 404 00:22:42,004 --> 00:22:44,164 Speaker 1: and I understand that it might get destroyed, and I'm 405 00:22:44,164 --> 00:22:45,684 Speaker 1: okay with that. I'm just going to make it a 406 00:22:45,724 --> 00:22:48,364 Speaker 1: small enough investment that if it goes to zero, I'll 407 00:22:48,364 --> 00:22:48,804 Speaker 1: be okay. 408 00:22:50,044 --> 00:22:50,484 Speaker 2: That's right. 409 00:22:51,764 --> 00:22:54,644 Speaker 1: Yeah, So this, I think. So this actually kind of 410 00:22:54,684 --> 00:22:58,604 Speaker 1: illustrates that it's affecting different people differently. Where if you 411 00:22:58,684 --> 00:23:00,324 Speaker 1: are in a position where you can do that and 412 00:23:00,364 --> 00:23:01,924 Speaker 1: you can say I will buy this place and I'm 413 00:23:01,924 --> 00:23:04,284 Speaker 1: just going to write it off, then you can buy it. 414 00:23:04,404 --> 00:23:07,444 Speaker 1: But if you're someone who can't do that, then the 415 00:23:07,484 --> 00:23:08,364 Speaker 1: calculus changes. 416 00:23:08,604 --> 00:23:13,164 Speaker 2: Like with those things, people who are you know, better 417 00:23:13,204 --> 00:23:17,684 Speaker 2: off financially or who have more robust ways of looking 418 00:23:17,724 --> 00:23:20,004 Speaker 2: at risk benefit from it, and the people who are 419 00:23:20,484 --> 00:23:24,524 Speaker 2: disadvantaged are harmed by him more because yeah, I mean, look, 420 00:23:24,524 --> 00:23:29,764 Speaker 2: if you're like a multi billionaire in Silicon Valley or something, right, 421 00:23:30,884 --> 00:23:33,884 Speaker 2: and you lose your beautiful seven million dollar home in 422 00:23:33,964 --> 00:23:37,044 Speaker 2: a wildfire or an earthquake, you'll still be okay, Right, 423 00:23:38,404 --> 00:23:40,204 Speaker 2: if most of your net worth is tied up in 424 00:23:40,244 --> 00:23:41,524 Speaker 2: your home, then you won't be. 425 00:23:42,564 --> 00:23:44,924 Speaker 1: So it seems like when we're talking about this, we 426 00:23:45,004 --> 00:23:49,684 Speaker 1: basically have the absolute like shit show of factors, if 427 00:23:49,724 --> 00:23:53,204 Speaker 1: I may be, if I may use a psychological term here, 428 00:23:53,484 --> 00:23:58,804 Speaker 1: So we have huge correlations, right, we have no good 429 00:23:58,924 --> 00:24:03,004 Speaker 1: historic data, we have a lot of things changing, and 430 00:24:03,044 --> 00:24:06,244 Speaker 1: so it's incredibly difficult to model. And so it's basically like, 431 00:24:06,724 --> 00:24:09,764 Speaker 1: you know, this is your worst nightmare when you're trying 432 00:24:09,764 --> 00:24:12,924 Speaker 1: to build a model that predicts risks and tries to 433 00:24:12,924 --> 00:24:15,284 Speaker 1: figure out what in the world do we do? And 434 00:24:15,324 --> 00:24:17,324 Speaker 1: so I think that at least in the short term, 435 00:24:17,724 --> 00:24:20,404 Speaker 1: what I'm taking away from this is that a lot 436 00:24:20,444 --> 00:24:23,444 Speaker 1: of people, especially kind of the people who cannot afford 437 00:24:23,484 --> 00:24:25,804 Speaker 1: to just write off these these homes, are kind of 438 00:24:25,804 --> 00:24:28,604 Speaker 1: fucked and cannot buy homes, have to move out of 439 00:24:28,604 --> 00:24:31,324 Speaker 1: homes that they've owned where the insurers have stepped out, 440 00:24:31,684 --> 00:24:34,924 Speaker 1: and there's really no clear solution. And as you know, 441 00:24:35,084 --> 00:24:38,084 Speaker 1: as someone who is making these decisions on a personal level. 442 00:24:38,124 --> 00:24:40,644 Speaker 1: Where do I move, you know, where where do I 443 00:24:40,644 --> 00:24:42,604 Speaker 1: buy a house, Where do I rent? Where do I 444 00:24:42,644 --> 00:24:45,204 Speaker 1: look at real estate? Where do I build a community. 445 00:24:45,244 --> 00:24:47,404 Speaker 1: I think these are all things that people need to 446 00:24:47,484 --> 00:24:51,004 Speaker 1: keep in mind as they're thinking about the future. And 447 00:24:52,044 --> 00:24:54,524 Speaker 1: sometimes that sucks because sometimes you know, you really want 448 00:24:54,564 --> 00:25:01,804 Speaker 1: to move to beautiful wildfire wildfire California or lovely coastal Florida, 449 00:25:02,244 --> 00:25:06,004 Speaker 1: and that's just kind of the emotional elements of that 450 00:25:06,404 --> 00:25:08,484 Speaker 1: are not going to be worth it for you in 451 00:25:08,524 --> 00:25:13,924 Speaker 1: the long term. We'll be right back after the break. 452 00:25:24,324 --> 00:25:26,644 Speaker 2: All right, Maria, Let's talk about our top three ways 453 00:25:26,644 --> 00:25:28,044 Speaker 2: and people get risk wrong. 454 00:25:29,924 --> 00:25:31,924 Speaker 1: So on the show we often talk about kind of 455 00:25:31,924 --> 00:25:37,124 Speaker 1: these meta risk concepts, you know, elections and those types 456 00:25:37,164 --> 00:25:40,004 Speaker 1: of big questions. But right now I'd love to talk 457 00:25:40,204 --> 00:25:43,684 Speaker 1: bring it back to kind of individual psychology and talk 458 00:25:43,724 --> 00:25:48,444 Speaker 1: about how people, how individuals get risk assessments wrong, the 459 00:25:48,484 --> 00:25:51,684 Speaker 1: biggest problems that they have when they're thinking about it 460 00:25:52,004 --> 00:25:54,004 Speaker 1: on an individual level. And I think you and I 461 00:25:54,084 --> 00:25:56,044 Speaker 1: both have some thoughts as to what the most important 462 00:25:56,084 --> 00:26:00,284 Speaker 1: ones are. I can lead us off if you'd like. 463 00:26:00,884 --> 00:26:04,484 Speaker 2: I think that one of the biggest a draft of 464 00:26:04,604 --> 00:26:05,924 Speaker 2: like cognitive biases. 465 00:26:05,924 --> 00:26:09,924 Speaker 1: Yeah, draft of cognitive biases, but specifically. 466 00:26:09,404 --> 00:26:11,604 Speaker 2: The amplast fallacy. You're looking pretty good and picking them 467 00:26:11,604 --> 00:26:12,164 Speaker 2: at two. 468 00:26:13,764 --> 00:26:15,004 Speaker 1: Exactly exactly. 469 00:26:15,084 --> 00:26:16,924 Speaker 2: It's rookie out of Providence College. 470 00:26:19,004 --> 00:26:20,604 Speaker 1: You and I. You and I can rate each other 471 00:26:20,684 --> 00:26:23,604 Speaker 1: on our on our propensity to uh to exhibit some 472 00:26:23,684 --> 00:26:26,924 Speaker 1: of these risky tendencies. But uh, but but it's on 473 00:26:26,964 --> 00:26:30,124 Speaker 1: a serious note. I think that the one of the 474 00:26:30,124 --> 00:26:33,044 Speaker 1: things that people get wrong, and I'm not going to 475 00:26:33,084 --> 00:26:35,284 Speaker 1: give it a name or not. It's part of a 476 00:26:35,324 --> 00:26:40,804 Speaker 1: lot of different fallacies, but incorrectly waiting small percentages, both 477 00:26:40,924 --> 00:26:44,964 Speaker 1: overweighting them and underwaiting them depending on their personal experience 478 00:26:45,124 --> 00:26:48,564 Speaker 1: and their situation. By small percentages, I mean like you know, 479 00:26:48,644 --> 00:26:51,324 Speaker 1: one percent risk, two percent risk, less than one percent risk. 480 00:26:52,284 --> 00:26:56,044 Speaker 1: I think that people are really really horrible at those 481 00:26:56,164 --> 00:26:58,924 Speaker 1: at those tiny percents. Is this one that you actually 482 00:26:58,924 --> 00:27:03,564 Speaker 1: had in your in your top mistakes as well or no? 483 00:27:03,564 --> 00:27:05,364 Speaker 2: No, but I have something related And by the way, 484 00:27:05,364 --> 00:27:08,124 Speaker 2: I'm not sure somebody these kind of like the risk 485 00:27:08,324 --> 00:27:11,444 Speaker 2: to oh one mistakes, right is are not things like 486 00:27:11,484 --> 00:27:13,484 Speaker 2: the Gambler's fallacy. I mean people think that if you 487 00:27:13,524 --> 00:27:15,564 Speaker 2: get you know, if you get the coin heads four 488 00:27:15,564 --> 00:27:17,444 Speaker 2: times in a row, therefore you must get tails next time. 489 00:27:17,444 --> 00:27:20,964 Speaker 2: That's not true if the coin's fair and independent. There's 490 00:27:20,964 --> 00:27:22,444 Speaker 2: a little bit more advanced. No, what I do on 491 00:27:22,564 --> 00:27:27,124 Speaker 2: my list is not understanding the notion of calibration or forecast. 492 00:27:27,124 --> 00:27:29,724 Speaker 2: Maybe it's kind of like related to the gambler's fallacy. Yeah, 493 00:27:29,884 --> 00:27:33,324 Speaker 2: I think if you have and if you have a forecast. 494 00:27:33,764 --> 00:27:36,884 Speaker 2: We talked about the forecast model this week. Right, if 495 00:27:36,884 --> 00:27:39,444 Speaker 2: Biden has whatever, like a thirty five percent chance, he's 496 00:27:39,484 --> 00:27:41,604 Speaker 2: actually supposed to win the election thirty five percent of 497 00:27:41,684 --> 00:27:44,644 Speaker 2: the time. If the model is right, you are supposed 498 00:27:44,684 --> 00:27:48,244 Speaker 2: to lose your flushtraw hands and poker thirty five you know, 499 00:27:48,284 --> 00:27:50,244 Speaker 2: against a flush straw thirty five percent of the time, 500 00:27:50,844 --> 00:27:52,644 Speaker 2: or the deck is rigged, or you're like the luckiest 501 00:27:52,964 --> 00:27:57,404 Speaker 2: sun runner on Earth. I asked chat Shept. This question 502 00:27:57,444 --> 00:27:59,964 Speaker 2: is a way I used to like test large language models. 503 00:28:00,004 --> 00:28:03,124 Speaker 2: Maybe version four or something has gotten it right. But 504 00:28:03,164 --> 00:28:05,124 Speaker 2: you say, yeah, I know a forecast, are supposed to 505 00:28:05,204 --> 00:28:08,004 Speaker 2: every forecast right, it's not who for a probabilistic forecast. 506 00:28:08,004 --> 00:28:12,124 Speaker 2: And it's a long stand, long standing pet peeve of mine, 507 00:28:12,324 --> 00:28:14,524 Speaker 2: I think is yeah. 508 00:28:14,404 --> 00:28:16,564 Speaker 1: Well I actually have that on my list too. So 509 00:28:16,644 --> 00:28:18,124 Speaker 1: I have this as two separate things. I have the 510 00:28:18,164 --> 00:28:20,924 Speaker 1: small percentages, which I think we can talk about separately, 511 00:28:21,124 --> 00:28:23,524 Speaker 1: but then what I have is rounding to absolutes, right 512 00:28:23,604 --> 00:28:25,844 Speaker 1: zero on one hundred, And I think that that's kind 513 00:28:25,844 --> 00:28:29,364 Speaker 1: of what this is on a fundamental level, where if 514 00:28:29,524 --> 00:28:34,044 Speaker 1: where if anything is like above seventy percent, or you're like, Okay, 515 00:28:34,084 --> 00:28:36,724 Speaker 1: this is going to happen, and if it's like, you know, 516 00:28:36,844 --> 00:28:40,124 Speaker 1: below below twenty percent, you're like, this ain't going to happen, 517 00:28:40,324 --> 00:28:42,564 Speaker 1: or you know that that's a little bit of a 518 00:28:42,644 --> 00:28:44,964 Speaker 1: rough estimate. But I think that that's often how human 519 00:28:45,044 --> 00:28:48,924 Speaker 1: minds work, right. We gravitate toward absolutes because we gravitate 520 00:28:48,964 --> 00:28:52,844 Speaker 1: towards certainty and away from uncertainty. And so if you're 521 00:28:52,844 --> 00:28:55,004 Speaker 1: talking about you know, you just mentioned the weather, if 522 00:28:55,004 --> 00:28:58,164 Speaker 1: you're talking about weather forecasters, this is like the quintessential 523 00:28:58,284 --> 00:29:01,724 Speaker 1: example of when people get it wrong. When you say, 524 00:29:02,004 --> 00:29:04,724 Speaker 1: you know, seventy five percent chance of rain, you bring 525 00:29:04,764 --> 00:29:06,964 Speaker 1: your umbrella and it doesn't rain, You're like, fuck, you know, 526 00:29:06,964 --> 00:29:09,524 Speaker 1: I've been lugging this umbrella around all day, liked it 527 00:29:10,084 --> 00:29:13,124 Speaker 1: or like ninety percent chance of sun and it starts raining. 528 00:29:13,164 --> 00:29:15,204 Speaker 1: When you get to the beach, You're like, what the hell, 529 00:29:15,244 --> 00:29:17,964 Speaker 1: Like it wasn't supposed to rain. Ten percent is really 530 00:29:18,004 --> 00:29:20,684 Speaker 1: not zero, But your brain just like goes to the 531 00:29:20,684 --> 00:29:24,044 Speaker 1: absolutes and the weather is something we've all experienced, and 532 00:29:24,124 --> 00:29:27,404 Speaker 1: yet we still, you know, we still have that notion. 533 00:29:27,684 --> 00:29:30,244 Speaker 1: So I do think that this rounding thing is incredibly, 534 00:29:30,284 --> 00:29:33,324 Speaker 1: incredibly important. But I think that we should talk separately 535 00:29:33,364 --> 00:29:36,924 Speaker 1: about the small percentages because that's also very important, and 536 00:29:36,964 --> 00:29:40,084 Speaker 1: I think that's a slightly different issue, especially when we're 537 00:29:40,124 --> 00:29:44,244 Speaker 1: talking about risks that are incredibly important, and we've talked 538 00:29:44,244 --> 00:29:46,804 Speaker 1: about some of them, Like we talked about p doom, right, 539 00:29:47,604 --> 00:29:50,524 Speaker 1: the risk of destruction in the past. We've talked about 540 00:29:50,644 --> 00:29:53,844 Speaker 1: the risks of one off storms events when it comes 541 00:29:53,844 --> 00:29:55,884 Speaker 1: to climate change. I mean, we have to deal with 542 00:29:55,924 --> 00:29:59,684 Speaker 1: small percentages all the time, and the brain just breaks down. 543 00:30:00,764 --> 00:30:05,124 Speaker 2: Yeah. I was narrating the Silicon Valley chapter in my 544 00:30:05,164 --> 00:30:08,124 Speaker 2: book just last week, so was rethinking about some of 545 00:30:08,124 --> 00:30:13,124 Speaker 2: the stuff. You know, Silicon Valley understands the importance of 546 00:30:13,284 --> 00:30:17,564 Speaker 2: large payoffs. They live in fear of a Marcus Zuckerberg 547 00:30:17,964 --> 00:30:22,084 Speaker 2: or Elon Musk or whatever exiting their office on sand 548 00:30:22,124 --> 00:30:25,604 Speaker 2: Hill Road, turning down their offer or not having been 549 00:30:25,964 --> 00:30:28,404 Speaker 2: given an offer right when they could result in the 550 00:30:28,564 --> 00:30:31,044 Speaker 2: one hundred X or one thousand X or ten thousand 551 00:30:31,204 --> 00:30:35,764 Speaker 2: X payoff. They understand that there's a whole culture around 552 00:30:35,844 --> 00:30:38,004 Speaker 2: Silicon Valley that leads them to be very strange in 553 00:30:38,004 --> 00:30:40,364 Speaker 2: certain ways to encourage that type of risk taking because 554 00:30:40,364 --> 00:30:43,964 Speaker 2: it's like not normal for people. There is a second 555 00:30:44,244 --> 00:30:45,804 Speaker 2: I guess this is my number two, which is also 556 00:30:45,804 --> 00:30:50,204 Speaker 2: inspired by Silicon Valley though, which is understanding the value 557 00:30:50,244 --> 00:30:53,884 Speaker 2: of a portfolio of risks that if you have a 558 00:30:53,884 --> 00:30:58,404 Speaker 2: lot of these high upside, high risk bets, magically, if 559 00:30:58,404 --> 00:31:00,564 Speaker 2: you have enough of them, then your risk can be 560 00:31:00,604 --> 00:31:05,164 Speaker 2: actually quite low. The top decile Silicon Valley firms actually 561 00:31:05,804 --> 00:31:08,124 Speaker 2: are almost guaranteed a profit based on the research I've 562 00:31:08,164 --> 00:31:10,364 Speaker 2: done for my book, because they first of all, they 563 00:31:10,404 --> 00:31:12,284 Speaker 2: have like selection of xs, they get the best talent 564 00:31:12,284 --> 00:31:15,764 Speaker 2: in the door. But like you know, if you're making 565 00:31:16,444 --> 00:31:19,044 Speaker 2: a new fund every year and the fund has twenty 566 00:31:19,084 --> 00:31:24,924 Speaker 2: five companies, then you're hedging a lot. You might have 567 00:31:24,964 --> 00:31:27,284 Speaker 2: two hundred investments. If you have several years worth of 568 00:31:27,284 --> 00:31:30,444 Speaker 2: funds at any given time. Right, So so all of 569 00:31:30,484 --> 00:31:33,444 Speaker 2: a sudden, what seems risky is not if you can 570 00:31:33,484 --> 00:31:37,844 Speaker 2: aggregate a portfolio, which is the different options. And there 571 00:31:37,844 --> 00:31:40,164 Speaker 2: are issues about correlation, like we talked about in the 572 00:31:40,204 --> 00:31:43,844 Speaker 2: last segment. If you're only invested in crypto or AI 573 00:31:43,884 --> 00:31:48,004 Speaker 2: companies for example, those companies are gonna be correlated in 574 00:31:48,044 --> 00:31:51,164 Speaker 2: how well they do. But still it's a pretty good 575 00:31:51,204 --> 00:31:54,284 Speaker 2: business to be able to take enough high upside bets that, like, 576 00:31:54,724 --> 00:31:58,764 Speaker 2: you know, if you could enter Maria, for example, if 577 00:31:58,884 --> 00:32:02,524 Speaker 2: ten thousand copies of yourself could enter the World Series 578 00:32:02,524 --> 00:32:06,204 Speaker 2: of Poker main event, which is a profitable tournament, so 579 00:32:06,324 --> 00:32:08,284 Speaker 2: half the fucking players are clones of you. I mean 580 00:32:08,284 --> 00:32:10,844 Speaker 2: that we get a little weird, right, But yeah, but 581 00:32:10,884 --> 00:32:12,804 Speaker 2: you do it, you know, if you have the capital 582 00:32:12,884 --> 00:32:13,164 Speaker 2: for it. 583 00:32:13,484 --> 00:32:17,644 Speaker 1: Yeah, oh absolutely, I would for sure. No, I think 584 00:32:17,644 --> 00:32:19,724 Speaker 1: that that's actually that's a great point. And I think 585 00:32:19,724 --> 00:32:22,564 Speaker 1: that diversification is something that we really do not think 586 00:32:22,564 --> 00:32:25,764 Speaker 1: about enough. And it's so funny because I'm just as 587 00:32:25,764 --> 00:32:28,284 Speaker 1: you're talking, I'm like, we have so many cliches in 588 00:32:28,364 --> 00:32:30,524 Speaker 1: like popular culture about this, like don't put all your 589 00:32:30,564 --> 00:32:32,884 Speaker 1: eggs in one basket, and what do we do over 590 00:32:32,924 --> 00:32:34,684 Speaker 1: and over and over. We take all our fucking eggs 591 00:32:34,724 --> 00:32:36,524 Speaker 1: and we put them in one basket, and we're like, 592 00:32:36,924 --> 00:32:39,004 Speaker 1: I'm just gonna go all out. I'm gonna go both 593 00:32:39,044 --> 00:32:40,604 Speaker 1: to the wall. I'm gonna like go all out on 594 00:32:40,644 --> 00:32:44,644 Speaker 1: this bet. That's not the correct way of taking risk. 595 00:32:45,284 --> 00:32:49,124 Speaker 2: And we should take popular cliches and parables and idiom 596 00:32:49,204 --> 00:32:51,044 Speaker 2: to like rate them. We're like, oh, that's pretty smart, 597 00:32:51,124 --> 00:32:54,924 Speaker 2: right for sure, familiar eggs in one baskets of top 598 00:32:54,964 --> 00:32:58,444 Speaker 2: fucking five idiom. It absolutely difference. 599 00:32:59,244 --> 00:33:03,484 Speaker 1: I mean it's saying yeah, I don't know, yeah, but 600 00:33:03,484 --> 00:33:07,324 Speaker 1: but what you know, I was just thinking about what 601 00:33:07,404 --> 00:33:09,404 Speaker 1: we talked about a few weeks ago about roaring kids, 602 00:33:10,044 --> 00:33:13,444 Speaker 1: like that that is the opposite of diversification as far 603 00:33:13,484 --> 00:33:15,964 Speaker 1: as we know, right, Like, that's just like putting all 604 00:33:16,044 --> 00:33:18,404 Speaker 1: of your bets onto this one thing, and like if 605 00:33:18,404 --> 00:33:22,044 Speaker 1: it ends up going south, like your millions disappear, right like, 606 00:33:22,284 --> 00:33:25,924 Speaker 1: you're fucked. And I think that that's really really difficult 607 00:33:25,924 --> 00:33:29,404 Speaker 1: for people to understand, especially when things are going well. 608 00:33:29,604 --> 00:33:32,524 Speaker 1: So I think that's psychologically it's really important to distinguish 609 00:33:32,764 --> 00:33:34,884 Speaker 1: moments when things are going well and moments when things 610 00:33:34,884 --> 00:33:37,684 Speaker 1: aren't going well because our ability to make good. Risky 611 00:33:37,684 --> 00:33:41,164 Speaker 1: decisions are really affected both ways. Right, So like if 612 00:33:41,164 --> 00:33:43,284 Speaker 1: you made this huge bet and it's going up, you're like, 613 00:33:43,484 --> 00:33:47,324 Speaker 1: I am a genius, right, Like I'm brilliant. This is amazing, 614 00:33:48,044 --> 00:33:51,004 Speaker 1: And even though you should probably exit at some point, 615 00:33:51,124 --> 00:33:54,684 Speaker 1: then you're not going to. And if things are going poorly, 616 00:33:55,164 --> 00:33:57,884 Speaker 1: then sometimes you actually end up doubling down. You don't 617 00:33:57,884 --> 00:34:01,124 Speaker 1: sell when you should because kind of you're emotionally invested, 618 00:34:01,684 --> 00:34:04,964 Speaker 1: and so you end up compounding your losses and not 619 00:34:05,004 --> 00:34:08,804 Speaker 1: thinking clearly once again. And so this is just such 620 00:34:08,844 --> 00:34:14,644 Speaker 1: a you know, such a broken way of human thinking 621 00:34:15,044 --> 00:34:19,164 Speaker 1: that then kind of compounds your mistakes. And this happens, 622 00:34:19,164 --> 00:34:21,924 Speaker 1: by the way to professional traders as well. This isn't 623 00:34:22,044 --> 00:34:26,284 Speaker 1: just you're You're just like someone sitting down on your couch. 624 00:34:27,964 --> 00:34:29,724 Speaker 1: So what's your what's your number three? Or do you 625 00:34:29,764 --> 00:34:31,084 Speaker 1: want me to do my number three? 626 00:34:32,084 --> 00:34:34,524 Speaker 2: I can go all right. I'm trying to figure out 627 00:34:34,564 --> 00:34:36,524 Speaker 2: like a cute way to frame this. We need like 628 00:34:36,564 --> 00:34:42,164 Speaker 2: some something's law or something. I think people kind of 629 00:34:42,204 --> 00:34:50,924 Speaker 2: conflate risky decision making and ill informed decision making. I 630 00:34:50,924 --> 00:34:55,164 Speaker 2: don't think people understand that, like, oftentimes having more information 631 00:34:55,964 --> 00:35:01,484 Speaker 2: enables you to take more risk or more intelligent risks. Right. 632 00:35:01,524 --> 00:35:04,724 Speaker 2: So I was at dinner last night with my partner 633 00:35:05,964 --> 00:35:07,964 Speaker 2: some Italian place in the West Village which we had 634 00:35:07,964 --> 00:35:12,404 Speaker 2: not been to before, and he caught me looking at 635 00:35:12,484 --> 00:35:14,884 Speaker 2: Yelp to decide what I wanted to order. He's like, 636 00:35:15,404 --> 00:35:18,844 Speaker 2: why do you care about Carmen and dubukee Iowa? We 637 00:35:18,884 --> 00:35:22,364 Speaker 2: always make this woman from Iowa? What does she know 638 00:35:22,444 --> 00:35:24,044 Speaker 2: about dining in New York City? 639 00:35:25,044 --> 00:35:27,804 Speaker 1: That's not what your person sounds like. It's a really 640 00:35:27,804 --> 00:35:28,604 Speaker 1: bad impression. 641 00:35:30,684 --> 00:35:32,684 Speaker 2: I only could do an impression without him being self 642 00:35:32,684 --> 00:35:36,484 Speaker 2: conscious about it. He no, I'm not gonna I'm not gonna. Yeah, 643 00:35:36,524 --> 00:35:39,524 Speaker 2: I'm not gonna do it. But anyway, but he's like, 644 00:35:39,524 --> 00:35:41,764 Speaker 2: if you're such a risk taker, Nate, how can you 645 00:35:41,924 --> 00:35:44,484 Speaker 2: won't even order if fucking played a pasta without looking 646 00:35:44,484 --> 00:35:46,524 Speaker 2: at yelp reviews? And I'm like, I'm not a big 647 00:35:46,564 --> 00:35:51,844 Speaker 2: fan of octopus, don't love, don't hate, but you usually 648 00:35:51,844 --> 00:35:54,084 Speaker 2: wouldn't order an a menu with fifteen items or something. 649 00:35:54,164 --> 00:35:58,524 Speaker 2: Right if the review says this is the best octopus 650 00:35:58,724 --> 00:36:01,724 Speaker 2: you've ever tried, even if you're not an octopus like her, 651 00:36:01,804 --> 00:36:04,404 Speaker 2: you gotta try this octopus right then, I might get 652 00:36:04,444 --> 00:36:06,964 Speaker 2: the octopus. It can enable you to like to deviate 653 00:36:06,964 --> 00:36:08,844 Speaker 2: from your own plans. I mean, I think oftentimes on 654 00:36:08,924 --> 00:36:14,804 Speaker 2: restaurant used by Tyler Cowan, the economist on this, oftentimes 655 00:36:14,844 --> 00:36:18,884 Speaker 2: the least appetizing item on a menu is the thing 656 00:36:18,884 --> 00:36:21,444 Speaker 2: you should actually order, right, but it's only there because 657 00:36:21,564 --> 00:36:24,124 Speaker 2: like it must be good if it seems unappealing. Is 658 00:36:24,164 --> 00:36:26,524 Speaker 2: kind of the kind of Tyler's an economist, it's kind 659 00:36:26,524 --> 00:36:29,964 Speaker 2: of his theory. But yeah, the idea that like, uh, 660 00:36:31,444 --> 00:36:34,884 Speaker 2: you know, I know, the idea that like you should 661 00:36:34,884 --> 00:36:37,044 Speaker 2: just fly blind and it's like a smart risk to 662 00:36:37,084 --> 00:36:38,484 Speaker 2: take to just kind of wing it. I think that's 663 00:36:38,484 --> 00:36:42,604 Speaker 2: the opposite you know, preparation. If you talk to mountain 664 00:36:42,644 --> 00:36:45,404 Speaker 2: climbers I literally talk to in my book, they prepare 665 00:36:45,924 --> 00:36:48,324 Speaker 2: very extensively. It does not mean that every risk you 666 00:36:48,324 --> 00:36:51,244 Speaker 2: take it twenty nine thousand feet can be mitigated to zero, 667 00:36:52,164 --> 00:36:54,244 Speaker 2: but like, but they are the most prepared people in 668 00:36:54,284 --> 00:36:55,764 Speaker 2: the world pretty much now. 669 00:36:55,644 --> 00:36:57,644 Speaker 1: I think when it comes to risk, like we do 670 00:36:57,844 --> 00:37:00,244 Speaker 1: want to be prepared and we do want to do 671 00:37:00,244 --> 00:37:02,564 Speaker 1: our homework. Like you're not going to just randomly fly 672 00:37:02,644 --> 00:37:04,684 Speaker 1: on an airline that you've never heard of before, Like 673 00:37:04,924 --> 00:37:07,204 Speaker 1: at least I'm not like I'm going to do some research. 674 00:37:07,284 --> 00:37:08,964 Speaker 1: I'm going to look at some reviews. I'm going to 675 00:37:09,044 --> 00:37:10,764 Speaker 1: see what safety record is. I'm going to see what 676 00:37:10,844 --> 00:37:14,524 Speaker 1: kind of planes safely And I think preparation is really 677 00:37:14,604 --> 00:37:18,444 Speaker 1: important in a lot of different moments. So so I'm 678 00:37:18,444 --> 00:37:21,364 Speaker 1: with you on this one, and I think that you know, 679 00:37:21,444 --> 00:37:23,524 Speaker 1: this is as I always say, and as as I 680 00:37:23,524 --> 00:37:25,244 Speaker 1: say when it comes to poker, when it comes to 681 00:37:25,284 --> 00:37:27,604 Speaker 1: all decision making, information is power, right, you want to 682 00:37:27,644 --> 00:37:30,684 Speaker 1: have the information advantage. And so that's that's a really 683 00:37:30,684 --> 00:37:33,404 Speaker 1: good way of looking at it. Now for my final thing, 684 00:37:33,724 --> 00:37:36,004 Speaker 1: I'm going to bring us more back to kind of 685 00:37:36,044 --> 00:37:39,844 Speaker 1: the economics realm and the realm of delay discounting, because 686 00:37:39,844 --> 00:37:42,684 Speaker 1: I think that that's something that we haven't talked about 687 00:37:42,724 --> 00:37:47,844 Speaker 1: and something that people have problems with. So delay discounting 688 00:37:47,964 --> 00:37:52,604 Speaker 1: is kind of your humans inability to kind of correctly 689 00:37:52,644 --> 00:37:57,084 Speaker 1: decide between smaller sooner rewards and larger later rewards. Right, 690 00:37:57,164 --> 00:38:01,124 Speaker 1: So kind of thinking about future and trying to figure out, Okay, 691 00:38:01,444 --> 00:38:03,964 Speaker 1: you know, what do I want now versus if I 692 00:38:04,004 --> 00:38:08,004 Speaker 1: can delay and take that risk and kind of get 693 00:38:08,004 --> 00:38:11,804 Speaker 1: this later, how do I want to think about it, 694 00:38:11,924 --> 00:38:14,484 Speaker 1: and I think fundamentally one of the reasons that people 695 00:38:14,524 --> 00:38:17,684 Speaker 1: are bad at it is we're really really horrible at 696 00:38:17,724 --> 00:38:20,964 Speaker 1: picturing ourselves in the future and knowing what our future 697 00:38:21,004 --> 00:38:23,244 Speaker 1: self is going to be like and what our future 698 00:38:23,244 --> 00:38:26,004 Speaker 1: self is going to want. And so this leads to 699 00:38:26,084 --> 00:38:29,564 Speaker 1: a lot of issues where like we just project our 700 00:38:29,604 --> 00:38:32,084 Speaker 1: current self right, like the Maria of today, and we 701 00:38:32,204 --> 00:38:34,404 Speaker 1: just imagine that the Maria in ten years from now 702 00:38:34,444 --> 00:38:37,204 Speaker 1: is going to be identical. And that's not the way 703 00:38:37,244 --> 00:38:39,084 Speaker 1: that we should be thinking about things. That's not the 704 00:38:39,084 --> 00:38:41,044 Speaker 1: way we should be thinking about risk. That's not the 705 00:38:41,044 --> 00:38:43,004 Speaker 1: way we should be planning for a risk, that's not 706 00:38:43,044 --> 00:38:45,404 Speaker 1: the way we should be just thinking about these things 707 00:38:45,404 --> 00:38:49,044 Speaker 1: in general. And that's kind of that's a big issue. 708 00:38:49,084 --> 00:38:52,524 Speaker 1: And one of the reasons why it's so difficult to 709 00:38:52,564 --> 00:38:56,844 Speaker 1: fix it is because it's not always irrational, because life 710 00:38:56,884 --> 00:38:59,764 Speaker 1: is unpredictable, and you know, there are some people who 711 00:38:59,764 --> 00:39:02,564 Speaker 1: would argue, like, take the reward right now, because you 712 00:39:02,644 --> 00:39:04,964 Speaker 1: might be dead in ten years, and I think that's 713 00:39:05,044 --> 00:39:06,524 Speaker 1: something that we also have to consider. 714 00:39:08,564 --> 00:39:11,404 Speaker 2: If the AI doom for gusts or correct. 715 00:39:11,164 --> 00:39:13,924 Speaker 1: Yeah, p do is correct, then take the reward now. 716 00:39:14,804 --> 00:39:20,164 Speaker 2: I think for every ten people who err on that side, right, 717 00:39:21,164 --> 00:39:22,844 Speaker 2: for every ten people who err on the side of 718 00:39:24,804 --> 00:39:28,604 Speaker 2: being too impulsive in the moment or not necessarily impulse 719 00:39:28,724 --> 00:39:31,644 Speaker 2: or something wrong with impulse per se. But like, yeah, 720 00:39:31,684 --> 00:39:37,364 Speaker 2: applying to steep a discount to maximize their overall expected happiness. 721 00:39:37,404 --> 00:39:41,084 Speaker 2: To put it in a very clinical sounding way, there 722 00:39:41,084 --> 00:39:43,444 Speaker 2: have to be ten people who do that versus everyone 723 00:39:43,444 --> 00:39:45,724 Speaker 2: who does the opposite. And by the way, it's also 724 00:39:45,844 --> 00:39:49,644 Speaker 2: like the triad. Along with understanding expected value and understanding 725 00:39:50,444 --> 00:39:53,804 Speaker 2: portfolio theory, the thirteen silicon valley does well is they 726 00:39:53,804 --> 00:39:58,124 Speaker 2: have long time horizons. You know, even the best investments 727 00:39:58,164 --> 00:40:01,444 Speaker 2: often aren't profitable for ten thirteen years something like that. 728 00:40:02,084 --> 00:40:05,044 Speaker 2: It's just a huge advantage. I mean, even just investing 729 00:40:05,044 --> 00:40:06,964 Speaker 2: in the stock market, if you're in your twenty thirty 730 00:40:07,004 --> 00:40:10,164 Speaker 2: to forties, if your fifties early right us returns are 731 00:40:10,204 --> 00:40:12,804 Speaker 2: so much higher over the long run, there are enough 732 00:40:12,844 --> 00:40:15,284 Speaker 2: time for business cycles and there will be crashes eventually 733 00:40:15,324 --> 00:40:20,644 Speaker 2: to even out long time horizons are are are you know? 734 00:40:20,804 --> 00:40:24,084 Speaker 2: Evolutionarily you're probably not wired to do that, right, I mean, 735 00:40:23,804 --> 00:40:28,084 Speaker 2: you used to live shorter lives, Humans used to live 736 00:40:28,084 --> 00:40:30,564 Speaker 2: closer for this subsistence level, meaning that we didn't really 737 00:40:30,644 --> 00:40:33,364 Speaker 2: have any time of access at all. You protect what 738 00:40:33,444 --> 00:40:37,244 Speaker 2: you have, right, But you know a bird in the 739 00:40:37,284 --> 00:40:38,644 Speaker 2: hand is worth two in the bush? Is that like 740 00:40:38,684 --> 00:40:42,044 Speaker 2: another what's name mean? Yeah? Yeah, I love it? 741 00:40:42,164 --> 00:40:46,724 Speaker 1: Yes, I got though, right it is. Yeah, it is 742 00:40:46,764 --> 00:40:48,444 Speaker 1: a bad one. It is a bad one. So we 743 00:40:48,724 --> 00:40:52,004 Speaker 1: have one good one. So so as our running ranking 744 00:40:52,724 --> 00:40:56,124 Speaker 1: of idioms of sayings, we we like that don't put 745 00:40:56,124 --> 00:40:58,324 Speaker 1: all your eggs in one basket. We don't like the 746 00:40:58,404 --> 00:41:00,204 Speaker 1: bird in the hand nearly as much. 747 00:41:00,084 --> 00:41:02,644 Speaker 2: But it's it's a scarcity mindset to write. Like, Actually, 748 00:41:02,684 --> 00:41:05,044 Speaker 2: one thing I'll get annoyed by you've heard of, like 749 00:41:05,084 --> 00:41:07,404 Speaker 2: the marshmallow experiment, where like, of. 750 00:41:07,324 --> 00:41:10,964 Speaker 1: Course Nate was my thesis advisor. I was this final 751 00:41:11,044 --> 00:41:11,644 Speaker 1: bad student. 752 00:41:12,244 --> 00:41:15,044 Speaker 2: Well, I don't like the marshmallow experiment because I think 753 00:41:15,044 --> 00:41:17,364 Speaker 2: it kind of reads some privilege, where like if some 754 00:41:17,404 --> 00:41:19,164 Speaker 2: weird fucking graduate student was like, I'll give you two 755 00:41:19,164 --> 00:41:20,724 Speaker 2: marshmallows and I was like a poor kid, I'd be like, 756 00:41:20,764 --> 00:41:21,764 Speaker 2: I don't fucking trust you, right. 757 00:41:21,764 --> 00:41:24,524 Speaker 1: No, no, See that's a very very silly criticism. We're not 758 00:41:24,524 --> 00:41:29,684 Speaker 1: going to get into it. But all this was controlled for. 759 00:41:26,844 --> 00:41:32,164 Speaker 2: All segment coming up on the marshmallow problem. Tune in 760 00:41:32,244 --> 00:41:32,724 Speaker 2: next week. 761 00:41:33,284 --> 00:41:36,564 Speaker 1: Yes, seriously, I will, I will come in. I know 762 00:41:36,644 --> 00:41:41,524 Speaker 1: this literature better better than probably better than most people alive, 763 00:41:41,564 --> 00:41:44,404 Speaker 1: and today so I will, I will, I will come 764 00:41:44,404 --> 00:41:47,564 Speaker 1: out guns of blazing. It's a very good study and 765 00:41:47,644 --> 00:41:51,004 Speaker 1: it was absolutely controlled for with the poor kids. That's 766 00:41:51,044 --> 00:41:56,044 Speaker 1: actually how it originated in in uh Island communities of 767 00:41:56,604 --> 00:42:01,444 Speaker 1: kids who had no money. So so quick recap my 768 00:42:01,564 --> 00:42:05,804 Speaker 1: top three incorrectly waiting small percentages both over and underwaiting 769 00:42:05,844 --> 00:42:09,724 Speaker 1: them rounding two absolutes to zero or one hundred, and 770 00:42:09,964 --> 00:42:14,164 Speaker 1: problems with delayed discounting so preferring smaller sooner two larger 771 00:42:14,244 --> 00:42:17,324 Speaker 1: later rewards, and how that might not always be irrational. 772 00:42:19,124 --> 00:42:21,364 Speaker 2: And three. The first is the failure to understand the 773 00:42:21,444 --> 00:42:24,484 Speaker 2: nature of probabilistic forecasts. I will admit that's a pet 774 00:42:24,524 --> 00:42:26,804 Speaker 2: peeve number steen with three I think can be more 775 00:42:26,844 --> 00:42:29,724 Speaker 2: useful in your everyday life. Two is the failure to 776 00:42:29,804 --> 00:42:33,884 Speaker 2: understand the value of portfolio theory and diversification. And three 777 00:42:34,004 --> 00:42:36,564 Speaker 2: is the failure to understand that more information can actually 778 00:42:36,564 --> 00:42:39,284 Speaker 2: make you more risk taking and smarter atrist taking. 779 00:42:50,044 --> 00:42:53,204 Speaker 1: Risky Business is hosted by me Maria Kanakova and me 780 00:42:53,444 --> 00:42:56,404 Speaker 1: Mate Silver. The show is a co production of Pushkin 781 00:42:56,484 --> 00:43:01,004 Speaker 1: Industries and iHeartMedia. This episode was produced by Isabel Carter. 782 00:43:01,404 --> 00:43:05,244 Speaker 1: Our associate producer is Gabriel Hunter Chang. Our executive producer 783 00:43:05,324 --> 00:43:06,204 Speaker 1: is Jacob Goldstein. 784 00:43:06,524 --> 00:43:08,884 Speaker 2: And if you want to listen to an add free version, 785 00:43:08,924 --> 00:43:11,524 Speaker 2: sign up for Puchkin Plus. For six thirty nine a month, 786 00:43:11,804 --> 00:43:14,804 Speaker 2: you get access to ad free listening. Thanks for tuning in.