Tuesday, January 16, 2018

Inversion

Definitions

Inversion can be defined as ”Something that is the opposite of what it was before” or as ”A reversal of position, order, form, or relationship”.

Inversion is a powerful problem-solving tool

When we are confronting a problem, we can many times get an easier answer by inverting the problem. For example, calculating probabilities of certain events are easier by calculating them not happening. Many times we save time too. There are also many other math problems that are easier to solve with inversion.

There are many other problems to take inversion into advantage. One of the best ways to use it is to ask ourselves, what we shouldn´t do? Many strategies focus on what to do and forget maybe even more important aspect of what not to do. Successful people should ask themselves ”What shouldn´t I do to stay successful?” instead of asking ”What I should do to stay successful?” They should also ask ”What I shouldn´t do the same way as before?” instead of asking ”What I should do the same way as before?” in order to become more successful. It is also easier to think about what not to do than what to do. Failures leave more clues. Success can be a consequence of some small change in our daily habits. Basically, we learn more by thinking about what went wrong, instead of thinking what we did right. It is even better to learn from other people´s mistakes.

Successful investing is more about avoiding catastrophical losses than getting this right. Avoiding all the insanities of other investors help us to get better investment returns. When we lose less, we have a possibility to gain more capital. Some of the craziest things investors do can destroy an investing career. Avoiding them is a requirement for investing success. We can also use inversion in investing, by trying to find as much disconfirming evidence as possible about our best investing ideas. By doing this, we will probably not invest too much money to them. And we can even gain an insight that the idea is as good as you think it is.

We should also ask ourselves, ”What we don´t know?” We get more into trouble about the things we don´t know than things we know. We should not focus on the things we don´t understand or we don´t have enough information about. One thing we usually forget is that we cannot predict the future. It is always the thing we don´t really know. We can make predictions, but we should understand that their success is always uncertain. Instead of predicting, we should think about the probabilities and accept the uncertainty.

Thinking about the worse case scenario instead of success

We should also think about what are the consequences of failing. If we are considering some big changes in our life, we should also think about the worst case scenarios for them. For example, trying to do something else than we have done before may not have many bad consequences. This is especially true, when our ordinary life is not very satisfactory. By figuring out what are the worst things that could happen, we may free ourselves from the agony of not taking an action. We can see that failing is not a very bad option, compared to not doing anything.

For example, learning a latticework of mental models with information from most of the biggest scientific disciplines by studying the works of the all time greatest practitioners don´have many bad consequences. It may cost us some money and time. There are always some opportunity costs. We get better understanding of the world and people by developing our latticework of mental models. The worst thing that can happen is learning the wrong things. And this is added to the loss of money and time. When we focus on finding the best sources for learning the mental models, the risk of wrong sources is low. In my opinion, the opportunity costs of learning the new things from other disciplines than our field of expertise are low.

Sources:



-TT

Tuesday, December 19, 2017

Willpower

Definitions

Willpower can be defined as ”A control of one´s impulses, actions and attention” or as ”A control exerted to do something or restrain impulses.”

Four uses of willpower

Willpower is used to control our thoughts, emotions, impulses, and attention. We have some predetermined thoughts that conserve willpower, because we are not seeking the best answer and we settle for them. Deliberate thinking uses lots of willpower and we should avoid it when it is not necessary. We control our emotions. This is called affect regulation. It means we are focused on our moods. We are trying to avoid bad unpleasant moods and trying to concentrate on good ones. Impulse control like resisting temptations is the most common way of thinking willpower. It is not the only one. We also need to concentrate our attention on good things to achieve high performance. Willpower is needed for getting things done, as much as resisting doing things. I did not understand this for a long time. Maybe some of the readers think so too.

Modeling willpower as a muscle

The best way to think about willpower is considering it as a muscle. We can practice to gain more willpower. It atrophies, when we do not use it. We can also use it too much and it gets fatigued. We can have many ways of improving willpower. We can improve our physical conditions. We can practice by trying to achieve bigger willpower challenges. For example, we can try to push through a physical barrier after having a long run or we can push through even though we feel fatigued. We can also try cutting back on sweets or making a smaller budget for groceries, which is harder to manage. We should not start exercising by trying to get big results. Willpower should be exercised by taking small steps first. Then getting bigger ones later.

We make decisions all the time. Each decision consumes your willpower. When we use willpower, our self-control system of the brain becomes less active. Our brains use the energy reserved for willpower first, because it is one of the biggest drains of energy in our brains. Our impulsive shelves have more power after we have used all the willpower. We make more decisions based on our impulses and cannot think straight. All of this happens, because our brains are interested in getting more energy for survival, not to think properly. Like our muscles, willpower get stronger with having right nutrition. It also gets weaker with wrong nutrition. When willpower is down we give into temptations and our muscles do not function accordingly, if their energy level is low. Muscles also atrophy if we don´t use them. Same goes to willpower. We need to give it challenges like we have to move our muscles.

Willpower is psychological and physical

Prefrontal cortex controls our willpower. When we lose our control in this part of the brain, we lose our willpower. Every willpower challenge is a conflict for our decision making system. It´s impulsive and rational parts are fighting together. We can succeed in our willpower challenges by using our impulsive system into our advantage. We can program our impulsive system to overcome willpower challenges by using our rational system. This will take some time. During willpower challenges, our psychological state matters. Without getting into details, we need to slow down our internal state. One of the ways of acknowledging the amount of willpower we currently have is how strong our emotional states are. When we are having lower willpower, our emotional state is stronger. Higher willpower means less emotional state of mind.

Willpower is also a physical state. We can change our physiology into a state where willpower is the strongest. Our willpower is tied into our body´s natural cycles and the fluctuation of its energy supply. Controlling our brain´s glucoce level is the key. Our willpower is low, if our glucose level is not optimal. With low glucose level, our willpower cannot function properly. Then, our brain moves to the path of least resistance and starts giving in to our impulses. We should eat slow burning foods to keep it in the right level. Then we use our willpower when it matters the most.

Willpower´s friends and enemies

Willpower has many friends. I have mentioned that right nutrition is needed to keep our glucose levels stable through the day. In the short term, we can sometimes settle for the less effective solution. If there is a situation, in which we need willpower temporarily, like making a big decision, when we are tired, willpower can be acquired by eating something sweet. Exercise is one of the best ways to increase our willpower. Exercise has a short and long term effects. Strengthening willpower can happen through exercise that lasts only five minutes. Relaxing is also good for willpower. When we are in a state with physical and mental rest, our brain takes a rest from thinking about the future and analyzing the past.

When we see other people following their impulses, we give in to our temptations more easily. It is even worse when we identify ourselves as like them. This works fortunately both ways. It is easier for us to use our willpower, when we think these people accept the behavior. Resisting temptations become easier in the short term. All we need is about fifteen minutes of exercise and our willpower increases in the short term. Exercice also reduces one of the biggest enemies of willpower, stress, in the long term, stress in the long term. Remembering why we are doing something is a friend too. When we come into a situation, in which we need to make choice about giving into an impulse or resisting temptation, remembering why to resist can help us overcome our temptations.

Lack of sleep is one of the enemies of willpower. When we haven´t slept enough, our cells have trouble absorbing glucose from our bloodstream. Our brains and bodies become desperate for energy. And they start craving glucose and are ready to find it from anything. Sleeping one night well and long can restore our brain to work in an optimal level. During the day, even short naps may be enough. Chronic stress is bad for willpower. When we are stressed all the time, our body diverts energy from long-term needs to attacking short term emergencies. It reduces the energy our brain uses. Then, both of them are ready to fight stress and our willpower becomes low.

We should have willpower in use, when it is most needed. We should plan our days and design our environments in ways we can optimize its use. Especially, when we know we have some important decisions to make, we should avoid all the unnecessary decisions. The other way is to plan naps or exercise before making the important decision.

Sources: 

Willpower:, Roy Baumeister
The Willpower Instinct, Kelly Mcgonical
The Marshmallow Test, Walter Mischel


I will have a christmas brake and get back in business in January,

Merry christmas and a happy new year!

-TT

Tuesday, December 12, 2017

Edge / Comparative Advantage

Definitions

I would define a personal edge as ”A possibility to achieve, produce or offer something with less amount of time and better than others.” Comparative advantage can be defined as ”A country should specialize in the goods or services it can produce at the lowest opportunity cost, and then trade with another country. We will concentrate on the personal edge.

Talent+Motivation+Deliberate Practice = Personal Edge

Personal edge is best achieved in the field of competitive expertise, when all the three components are combined. Depending on the competitive field, it is possible to have an edge with two of the three components in place. If we think about professional athletes in sports like tennis, basketball and golf, they need all of them. There are some exceptions, but they are extremely rare. In the less competitive fields of expertise, we can live without one component. It usually is talent or motivation. 

Our brains have almost hundred billion neurons. Each of them have from one thousand to ten thousand connections with other neurons. The amount of possible brain states exceeds the number of elementary particles in the universe. The idea that talent do not matter is insane. It is not the only thing that matters when we are trying to gain a personal edge. People relying only on their talent, will have a faster development, when they are young. When time goes by, the edge is gone without practicing enough. When people with talent do the same things as people without talent with the same amount of time, the people with talent get better. When we talk about highly competitive fields of expertise, margins with winners and losers can be small. In these situations, talent makes the difference. We should concentrate on the fields of expertise where we are talented. This may be the only way of competing against billions of people.

Motivation is the second component. To be honest, I am having a hard time to answer the question: ”Is motivation to practice hard a talent or a learned skill?” Some people say it is a form of talent, others say you can learn it. I still haven´t made any conclusions about it. I quess it is a combination of both. Being interested in some field of expertise helps us to gain an edge. All of us are not interested in the same things. Some people like sports, others music. In a highly competitive field of expertise, we need a desire to practice. Especially, deliberate practice is almost impossible without intrinsic motivation. The question is how to find a field of expertise, in which we have intrinsic motivation? One way of doing it is think about our childhood and what we liked to do then. All of us do not need intinsic motivation. Outer sources work for them better.

Some of us can have a bigger need to please others. They can get motivated by an authority figure like a coach or father. Sometimes we get impulses from around us which can increase or decrease our motivation towards something. The right kind of environment and people around us is important in motivating us. It is even better to have these external factors with intrinsic factors to have a motivation to get better at something. Everything is easier with better motivation. We will get back to it later in the blog.

Deliberate practice is a last component of the edge. It is probably the most important one. It can be also the most complicated one. In many areas of expertise, there are no established practices for getting an edge or being great at it. Developing skills have the same neurological effects in whatever we are practicing. Therefore, practice is the only obligatory components for gaining an edge. And deliberate practice is the best way of developing skills. We will not get into deliberate practice more deeply now. I have written about it before and will later continue to write about it.

You are in trouble in the information age without an edge

We live in a highly competitive world. Information age gives more equal opportunities for people around the world. This means that millions of people get better chances to show how good they are in something. Competition gest tougher every year. Especially, in intellectual and creative fields of expertise. Record companies had all the power to decide who will succeed before. Now every singer, for example, can download her performances to youtube. It is a platform in which millions of people compete against each other for viewers. The best singers can reach millions of people. This wasn´t possible about twenty years ago. At least, not in this scale. This doesn´t only mean tougher competition. It also means winners take it all effects. A few people get most of the profits and glory around the world.

Having an edge is necessary in a modern world. We should ask ourselves ”When competition gets tougher, what can I do to have an edge? We have to remember that edges are always relative. We compare ourselves with others. We do not have to compete with millions of people. We have to remember it is easier to be the best in a niche. Being the best singer using, for example, Dutch is lot easier than being the best singer using English. Being the best Dutch Jazz singer is easier than being the best Dutch R&B singer. We can also have a combination of micro skills to have an edge. When we have a combination of skills which is unique, we do not need to be best at anything. We cannot forget a need for demand. If there is not enough people or companies to pay for the edge, it is not useful.

I am not saying we should all leave our current jobs to get an edge in other. But we should definitely try to get one before it is too late. Without an edge we may get into trouble. My advice to all the younger people is to start developing and edge and think about in which field of expertise they have intrinsic motivation and talent. Then find out what are the characteristics of deliberate practice and design own ways of doing it if necessary.

Sources:

Poor Charlie´s Almanack, Peter Kaufman, Charles T. Munger
Peak, Anders Ericsson
Drive, Daniel H. Pink


-TT

Monday, November 27, 2017

Laptop broken, this blog is on the break

I have broken my laptop. I am currently waiting for a new one.


I am sorry for the inconvenience.


-TT

Tuesday, November 14, 2017

Decision making systems

Definitions

We can define decision-making systems as ”A set of principles or procedures for the action or process of making a resolution or conclusion.” We can also define them as ”A set of principles or procedures for the thought process of selecting a logical choice from the available options.”

Human decision making systems

I will only concentrate on the individual´s point of view in human decision making systems in this text. There is no reason why we shouldn´t use any other tools than our brains while making the decisions. For making things easier, we should separate our own decision making systems into two parts: Intuitive and Rational systems. These systems really work together and both of them are always on, but it is easier to think them as separate systems. Intuitive system works faster and rational system slower.

Examples

We see a flying object getting closer to us and we decide to dodge it or we see a beautiful lady watching us and decide to talk to her. Our intuitive systems is working. We are thinking about bying a car and we first look for the information about different cars and then make a decision to buy one of them. Now our rational systems is working.

Intuitive system

This system is based on emotion and impulse. It represents our wants, impulses and gut instincts. It is always on, but our rational system sometimes overrides it. Intuitive system makes the decisions when we are tired and unable to think rationally. It works fast and most of the time we don´t even notice it. Fast response was thousands of years ago a requirement for survival. This system also saves lots of energy. Without it, we couldn´t get many things done. Most of the decisions are made by this system. It influences how we see the world around us: recognizing objects, deciding where we keep our attention, helping us avoid losses, and decides how to react in dangerous situations.

It also has some learned associations and biases. It sees some clues from the environment and makes predictable errors because of them. For example, when choosing a restaurant to eat, we tend to follow the crowd without noticing and choose the place to eat with the longest queues. When this system cannot decide, it asks rational system to take control. When the rational system is busy or exhausted, it has more power in our behaviour.

Rational system

Rational system is normally in the background while intuitive system is working. This system thinks it is the decision maker, but most of the time, it is just monitoring our actions. We need this system to make decisions in complex situations or making complex calculations like deciding whether we should change a job or not or think about how much we should pay for an apartment. This system is always monitoring us. And it is working only when needed. It normally has the last word, but this system gets exhausted. It normally controls our willpower, but when it is exhausted, our intuitive system takes control and we cannot think and make decisions rationally. This normally happens when we have made many decisions during the day or we haven´t slept enough. Sleeping enough and keeping our blood glucose level stable helps us making rational decisions.

Systems working together

These systems work together. Most of the time our intuitive system makes the decisions. It also creates impressions and feelings for the rational system. They are the main sources for the explicit beliefs and deliberate choices of the rational system. Only the rational system can change how our intuitive system works. We need to rewire our brains to make changes by programming the automatic and intuitive functions of attention and memory. This cannot be achieved without the rational system. We need to have a lot of conscious effort to change ourselves. Changing our habits, improving our skills, and many other things cannot be done without lots of repetition. Our conscious system is in power until we have repeated the action hundreds or thousands of times. We need our rational system teach our intuitive system work better. We all have our paths of least resistance. Which is normally the intuitive system. We get better results and better skills, when our intuitive systems works better. This is the result of our rational system working better.

We need to use both of our systems to achieve a skill level of an expert. Without enough repetitive conscious thoughts or actions we cannot achieve a level where we can use our intuitive system to react whatever the impulses it receives from the environment. For example, a chess master has thought about some positions on the board in advance or played similar games to find a best possible next move. Then he can intuitively make a decision without using any time to think. Thus, it saves a limited time to complete the game. In most of the physical actions, the speed is one thing that separates an expert from a novice. The other is the quality of the actions. We cannot have better quality of actions without having better mental models learned through rational thinking. When we combine the fast speed and the quality high quality of physical actions we get real expertise.

Sources:

Thinking Fast and Slow, Daniel Kahneman
Peak, Anders Ericsson
Predictably Irrational, Dan Ariely


Until next week,

-TT

Tuesday, November 7, 2017

Systems

Definitions

System is defined as: ”A set of things working together as parts of a mechanism or an interconnecting network; a complex whole or ”A set of principles or procedures according to which something is done; an organized scheme or method.

Examples

Universe is a system. Our bodies, habits and skills are systems. Most of the things we do are systems. Some systems are consisted on smaller subsystems like our bodies have skin, organs, etc. Latticework of mental models is an example of a thinking system.

Self-reinforcing and self-stabilizing systems and delays

Universe is always expanding. The interest on interest compounds the debt. In self-reinforcing systems, the previous outputs of the systems change the inputs coming into the systems and amplify the outputs coming out of the system. What happens is that eventually self-reinforcing system gets to the point where the amplifying destroys the whole system. The other possibility is that the limit of growth comes to the point where the growth stops, slows, diverts or reverses. When this happens, the system becomes self-stabilizing.

In self-stabilizing systems the previous outputs of the systems changes the inputs by stopping, slowing, diverting or reversing the growth of the outputs. This self-correction keeps the system working without exploding. Every natural system has an optimal growth rate. We should use them into our advantage. Our skin keeps the temperature of our body from overheating by sweating if we are in an environment in which the temperature is too high or we are exercising. It can be hard to notice these balancing processes, even though they are mostly necessary. We should keep the self-reinforcing and self-stabilizing systems and their interaction in balance. We should always limit the effect of self-stabilizing processes on self-reinforcing processes in balance.

All the systems have delays. People have a natural tendency in concentrating on the consequences we see right after we have done something. The second and third order consequences may come after a long delay. In complex systems, consequences can come after years. We may concentrate on the symptoms, rather than the solutions because of delays. Some system structures have unrecognized delays and they can lead wrong solutions. We should have better awareness about the delays. And we should also remember that causes and effects are not always close in time. When we notice a delay, we should try to shorten it as much as possible.

Small changes in systems can create big results

This happens in individual circumstances as well as in systems. Well-focused small actions aimed for changing the system can create surprisingly big results. Solving a difficult problem can be a matter of finding the system structure in which the small change deliver the big and lasting results. Most of the times, finding these structures is hard. We need to understand the system and how its parts interact with each other. Otherwise we will never find the right structures for these high leverage improvements. We cannot do this without understanding the system as a whole.

Reacting to the change in the system is a lot easier than truly understanding its cause-effect relationships and ways to improve it with small changes. Reacting to the change can be a bad thing. It may cause small changes to the system structure creating bigger problems through self-reinforcing processes. Changing a system structure can have different consequences in the short run and in the long run. Different parts of the systems can also have different consequences caused by the small changes. We also have to think about interactions of the parts before changing anything in one part of the system.

Most of the results in your life depend on the quality of your systems

We are mostly focusing on the different parts of our systems in a particular moment without thinking about the system as a whole or any long-term consequences. Our systems can deliver results that exceed the sums of their parts by a large margin. They can also deliver results that are not even close to the sums of their parts. People using the same systems tend to produce similar results. When we do not change our systems we cannot expect different results. Most of the time, the results we get are not caused by other people, some particular conditions, bad luck or some other explanations. The reason for bad results are the systems or their implementation or our understanding of them. We should think a lot more about the quality of our systems or their subsystems. Then we can get better results. We cannot really improve ourselves without improving our systems.


-TT

Tuesday, October 31, 2017

Compound effect

Definitions

Compounding effects mean little things that repeatedly multiply themselves. They will give big results after lots of repetitions. After a small amount of repetitions, the compounding effect do not have much influence. In the long run, it means everything. When we talk about compounding we talk about exponential growth or decline.

Examples

Universe´s expansion is accelerating all the time due to the compound effect. Repeating an action again and again will create a reverse compound effect by saving energy out brain needs for executing it. If we have a debt, its amount is compounding as fast as its interest on interest. Inflation has a reverse compound effect on the value of cash. After twenty years of 3% inflation, cash has lost about 45 per cent of its value.

Repetition, repetition, repetition

We all have a preference to look for immediate and most obvious reactions in whatever we are doing or seeing. This is a problem in achieving something great. We cannot achieve any big wins quickly. We need to make hundreds or thousands of repetitions to achieve greatness. These repetitions creates the compound effect. We quit too early and miss the compounding effect. This is a sure way to fail. There are no short-cuts even though some companies or people are willing to offer them. In a highly competitive field of expertise, we need to practice thousands of hours. These means that the amount of repetitions is huge.

We have to be patient. We need to trust the process. Consistency is the key. For example, in order to lose 10 kilograms, we can make big changes to our diet for a short period of time like couple months and hope we have enough willpower to survive it or we can make a small change of eating hundred calories less every day for two to three years. The second way will probably be more sustainable and its results will be better. The results will take time, but fast fixes normally lead to fast setbacks. Bigger payoffs just smaller changes, more time and more repetitions. The best way to get the magic of the compound effect is repeating things long enough. Depending on things, the best results are achieved through years or even decades of compound effect.

Compound effect is always working

Compound effects are everywhere. We go through them every day. Most of the times, their effects are so small that we are not noticing. We need to focus on them and choose which kind of effect on us they have. We should always aim for more positive than negative effects. For example, our diets are responsible for many compound effects. Their effects are not only on our weights. Good diet will let us make better decisions, feeling more refreshed, more focused, etc. Bad diets will lead us to bad decisions, tiredness, or maybe become even depressed.

Our habits are the most important thing about compounding effect. Our good and bad habits and the sum of their effects make all the difference in our lives. The older they are the more difficult it is to change them. Repetitions make them stronger and easier all the time. We also need less effort to maintain them after every repetition. A daily routine built on good habits makes a difference in our success. We all have good and bad habits and the the sum of their effects is the sum of most of what we are accomplishing.

Our environment and the people we are with are important in getting the right compound effects. We are constantly bombarded with desirable and undesirable impulses through our environment and from our friends. We need to think the inputs our brains get every day. We get most of the impulses without noticing. The sum of these impulses compound over time. Therefore, we need to control our environment and avoid all the unnecessary negative impulses like advertising, other people complaining, negative feedback without critical thinking, etc. We also should get as much positive impulses as possible, like constructive criticism, hanging around with more positive people, etc. We are the sum of the people we most often are with. We do not notice these things, because these things happen so slowly. And people also think they are not influenced by these things, because we think we are always rational. We should increase our awareness and start thinking about our environment, our friends, and their effects on us. Then we can increase the positive effects of compounding.

Most of the readers have probably noticed that I haven´t mentioned much about money and compounding. It is true that compounding money is one of the most important things about this mental model. The reason I have left it out of this text, is that it needs more space than I can offer in this text. I will get back to it after I have introduced all the mental models.


-TT