(B) Shark Tank’s Kevin Harrington on Building Your Dream Team

August 25, 2020 by Lace Gilger in Influence & Communication, Money & Finance, Career Development

In this episode, we explore the power of mentorship to transform your life with our guest Shark Tank’s Kevin Harrington.

Kevin Harrington is an entrepreneur, author, an original "shark" from the show Shark Tank, the creator of the infomercial, pioneer of the As Seen on TV brand, and co-founding board member of the Entrepreneur's Organization. His work behind the scenes of business ventures has produced more than $5 billion in global sales, the launch of more than 500 products, and the making of dozens of millionaires. He’s authored and co-authored several popular business books including the most recent Mentor to Millions: Secrets of Success in Business, Relationships, and Beyond.

How Kevin went from a kid sitting on his couch to one of the most successful direct to consumer entrepreneurs in the world.
How do you finance your business when no one will lend you or give you any money?
An easy place to find a mentor - start with asking your advisors, lawyers, bankers, and vendors to help you.
Bring in a retired banker as an advisor to help you raise money for your deals. (Kevin found a retired bank president)
Going from a college dropout with nothing to a $500mm company.
Leapfrogging your biggest challenges. Mentors can be an absolute game-changer.
2 big breakthrough moments in Kevin’s career
- Getting in the door at the local cable provider to create and shoot infomercials
- Finding a financial mentor to help him raise money
How to create the right “dream team” to help you achieve any goal.
A dream team is a shortcut to achieving your goals.
Begin with the end in mind.
Creating a billion-dollar asset in 90 days
Ask yourself: who can help you best in what you’re trying to do?
Strategy: Source from trade associations and look at thought leaders, industry providers, etc who may be able to be mentors or advisors for you.
Associations, publications, existing relationships, legal advisors, bankers, etc. Leverage your network. There is often huge untapped value sitting in your existing network, you have to tap it and unlock it.
What should you do to be a great mentee?
- Be the mentors BEST student
- Execute on the action items that your mentor tells you to execute on
- Be thankful and appreciative. Show them that you’re thinking of them and you’re thankful
“Don’t tell me you don’t have the time when you want some of my time"
Homework: Write down the date you would want your mentor by, and the qualifications you want in that mentor.
"Whatever you vividly imagine, ardently desire, vividly believe, and enthusiastically act upon must inevitably come to pass."

Thank you so much for listening!

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

Kevin’s Website and Wiki Page
Kevin’s LinkedIn, Facebook, and Twitter

Media

Article directory on Forbes, Medium, and Thrive Global
Green Market Report - “Shark Tank Original Kevin Harrington Talks About Joining Cannapreneur” by Debra Borchardt
Forbes - “The Original Shark From 'Shark Tank,' Kevin Harrington, Is Ready To Take Pitches Onto the Blockchain” by Andrew Rossow
Globe Newswire - Inventor of the Infomercial and Original Shark Tank Investor Kevin Harrington Joins Goldenseed Advisory Board
PR Newswire - Shark Tank's Kevin Harrington Partners with Recovery Drink The Plug
Crunchbase Profile - Kevin Harrington
Yahoo Finance - “Kevin Harrington Joins Cannapreneur Partners as Investor and Strategic Advisor”
[Podcast] Influential Person Brand Podcast - How To Produce A Winning Infomercial with Kevin Harrington
[Podcast] John Livesay - TSP 098: Shark Tank Pitch Secrets with Kevin Harrington
[Podcast] The Dan Lok Show - Kevin Harrington: Entrepreneur’s Journey
[Podcast] The Pitch Queen - Top 3 Tips About Financing A Venture from Kevin Harrington from Shark Tank | Episode 077

Videos

Books

Amazon Author page - Kevin Harrington
Mentor to Millions: Secrets of Success in Business, Relationships, and Beyond by Kevin Harrington and Mark Timm (Release on Sept 22, 2020)
Key Person of Influence: The Five-Step Method to become one of the most highly valued and highly paid people in your industry by Kevin Harrington and Daniel Priestley
Put a Shark in Your Tank by Kevin Harrington , Brian Harrington , Rob Kosberg , Kevin Hutto, and Brandon Adams
[Audiobook] Act Now by Kevin Harrington , Robert Pavlovich , Audible Studios
The 100 Best Spare-Time Business Opportunities Today by Kevin Harrington , Mark N. Cohen

Episode Transcript

[00:00:04.4] ANNOUNCER: Welcome to the Science of Success, the number one evidence-based growth podcast on the internet, bringing the world's top experts right to you. Introducing your hosts, Matt Bodnar and Austin Fabel.

[00:00:18] MB: Hey, it’s Matt. I’m here in the studio with Austin. We’re excited to bring you another business episode of the Science of Success. We just launched Season 2 of our business episodes. If you want to learn more about what these are and why we're doing them, be sure to check out the Season 2 teaser that we recently released. With that, Austin, tell us a little bit about how these episodes are different than our traditional Science of Success episode.

[00:00:42] AF: Yeah, it’s important to note that you're still going to get all the great contents you've come to know and love from the Science of Success every Thursday. These are bonus episodes with added value, specifically centered around business. We've interviewed some true titans of business and multiple industries from multiple walks of life and what we're going to focus on are the habits, routines and mindsets that made them successful titans that they are today.

That said, these are lessons, routines, stories, best practices that anyone can learn from and apply to their life. You don't have to be a business owner. You can be an employee. You can be a student, or you can, of course, be a business owner. Come check them out. You're going to come away with a ton of valuable takeaways, but we do have a bit of a business focus on these specific business episodes in Season 2.

[00:01:25] MB: With that, let's get into the episode.

[00:01:28] MB: Welcome to the Science of Success, the number one evidence-based growth podcast on the Internet with more than 5 million downloads and listeners in over a 100 countries.

In this episode, we explore the power of mentorship to transform your life with our guest, Shark Tank's Kevin Harrington.

Are you a fan of the show and have you been enjoying the content that we put together for you? If you have, I would love it if you signed up for our e-mail list. We have some amazing content on there, along with a really great free course that we put a ton of time into called How To Create Time for What Matters Most In Your Life. If that sounds exciting and interesting and you want a bunch of other free goodies and giveaways along with that, just go to successpodcast.com. You can sign up right on the homepage. That’s successpodcast.com. Or if you’re on your phone right now, all you have to do is text the word smarter, that’s S-M-A-R-T-E-R to the number 44-222.

In our previous episode, we brought on neuroscience expert, Rick Hanson, to share incredible insights about how your thoughts can change the physical structure of your brain and so much more.

Now, for our interview with Kevin.

[00:02:47] MB: Kevin Harrington is an entrepreneur, author, an original shark from the show Shark Tank, the creator of the Infomercial, pioneer of the As Seen On TV brand and Co-Founding board member of the Entrepreneur’s Organization. His work behind the scenes of business ventures has produced more than 5 billion dollars in global sales and the launch of more than 500 products. He's authored and co-authored several popular business books, including his most recent book, Mentor to Millions: The Secrets of Success in Business, Relationships and Beyond.

Kevin, welcome to the Science of Success.

[00:03:25] KH: Hey, Matt. Great to be here. Thanks for having me.

[00:03:27] MB: Well, I think you have the honor of being the first shark from Shark Tank that we've had on the show.

[00:03:31] KH: I love that. You mean, I beat Mr. Wonderful to the punch?

[00:03:35] MB: That's right.

[00:03:37] KH: He's a funny guy. I always joke, you know why he calls himself Mr. Wonderful? Because nobody else will.

[00:03:44] MB: That's a good one. I like that. Well, that's awesome. Well, we're obviously super excited to have you on. You're a tremendously successful entrepreneur and have done so much and built so many different companies. One of the things that I’m earlier in my career than you are and I think a lot about mentors and who are the mentors in my life? What does it take to find a mentor? How do you even define a mentor? I’m curious, in your journey in your career, have you had any mentors that were really impactful for you personally and helped you really shape your journey?

[00:04:16] KH: Great question. I’ll go back to the earlier days when I was an entrepreneur. It's crazy. When I was in high school, my dad said, start a business. I started a business in driveway ceiling in Cincinnati, Ohio. Then I started a heating and air conditioning company in college. The earned incomes, I had to pay for my own college and room and board and car and insurance. One day, I’m watching TV and I was watching Discovery Channel and it went dark for six hours. When I called the cable company to see what was wrong, they said, “Oh, Discovery's a new channel. It's just an 18-hour a day channel. They don't have a budget for 24 hours.”

That's when I started putting products on Discovery Channel and cutting a deal with them. All of a sudden, the world of infomercials and As Seen On TV was created and took off and boom, boom, boom. In the beginning of all of that, I was a very headstrong entrepreneur. Wanted to do it all myself. Thought I knew everything. We were having success and was a good salesman and all of that. What happened is we were getting all these orders for products. We had the Jack LaLanne Juicer, we had the FoodSaver, we had Ginsu Knives, Tony Little Fitness.

I was having to finance all the inventory. I was going to banks and I was going to investors and couldn't get money. I started thinking, well, what's the problem? I had a 50 million a year company making more than 5 million a year in profits. We were young in startups, so we were still spending money on first-time cost things. I mean, had a nice profitable business, young entrepreneur, doing good, but nobody would touch me for money.

I said to a few people, “I need some help.” I started reaching out. One of my connectors, I believe that we all have potential mentors and in the business I was in, I write checks to accountants, to lawyers, to phone services, to media companies. I said, who do I write checks to and I should be able to call them and ask for advice, because I’m paying them, right? My lawyer said, “You need to get a good fundraiser in there. Maybe somebody that worked in a bank at a high-level, and maybe a retired banker that could help you.”

I was at a Chamber of Commerce meeting back in my hometown and I’m out talking to people going, “Hey, I need to raise money.” Boom, here I am, sitting in front of a retired bank president. He looks at me and says – I give him the story and he said, “So, how much were you trying to raise?” I said, “I’ve been to five banks. I’ve talked to dozens of other investors. Can't get a dime. I’m trying to raise 3 to 5 million dollars.”

We sat and he looked at the business and he looked at it. He said, “I’ll tell you what, I got a deal for you.” He said, “I’m going to raise you the 3 to 5 million. Let's start with 3 maybe.” He said, “I think I can raise it from one of the people that's already turned you down.” He said, “I’m not going to charge you a dime for any of that. There's going to be 3 million dollars sitting in your account and you're going to then come to me and say, “Man, I need this guy to be part of my company.”

I said, “If you can do all of that, we're going to be sitting down and you're going to be part of my company.” Four months later, I had 3 million dollars in the bank. I made him COO of the company and we grew the company to 500 million dollars from there. This was a time for me that I had to seek a financial mentor, because I didn't graduate from college. I dropped out of college, not because I was stupid, okay. I had a 3.85 GPA, but I didn't like school and I was building a business. I had 25 employees my junior year and I said, “But I never had the skill set of business planning and raising capital and all of that.” Make a long story short, that was the first move. It was a great move and ever since, I’ve decided I need mentors in all the areas of my business that I don't have the skill set for.

[00:08:19] MB: Such an incredible story. There's a couple things I want to break down from that. I mean, even just the simplicity of that idea. It's incredible, find a retired banker, or in your case, it was genius to find a bank president, somebody who's already been immersed in that world, who knows people, who has the connections, who speaks the language. What a fantastic way to leapfrog what was one of your biggest challenges.

[00:08:41] KH: Yeah. I love it. That's in other areas of my life. I have probably, I’d say half a dozen mentors and coaches in my life and some of them are free. They don't charge others. I pay. Because at the end of the day, if you've got to get to the right person and they can do amazing things for your business or your life, it's worth cutting a deal to compensate them for the process. Because at the end of the day, I have an attitude of if something's for free when they're available and on their schedule and their game plan, whereas if I can actually cut a deal to have a contract for having somebody in my life and X amount, I mean, I’m a mentor to dozens of companies. I sign deals, in some cases, where I’m going to do X amount of weekly interactions, X amount of quarterly phone calls, personal meetings on an annual basis, etc., etc.

I can share some of the successes I’ve had with some of the companies I’ve mentored if you'd like at some point here, but the bottom line is I have more than finance mentors. I have them in legal and operations and personal finance, investments, etc., etc. Having a mentor can be a game changer. For me, put me into a very successful club of having quite a few business successes. I love it and it and I recommend everybody out there to explore it, if they're in a point in their life where they need it.

[00:10:18] MB: Great advice. I want to back up and get a little tidbit from this story, because it's such a fascinating journey to begin with. How old were you when you pitched Discovery Channel on, selling their empty ad space?

[00:10:29] KH: I was in my 20s. I don't remember the exact year. I’m 63 now, so it was close to 40 years ago. I think I was in my mid-20s.

[00:10:39] MB: Okay. You're in your mid-20s, you're sitting on the couch watching Discovery Channel, how do you one, get in the door, how do you have the credibility to present to them and how did you ultimately position yourself to close that sale?

[00:10:52] KH: Cable first launched back in the early 80s. I ordered their 30-channel package. I go through all 30 channels, CNN, news 24 hours a day. ESPN, sports 24 hours a day. MTV, music 24 hours a day. Discovery Channel was number 30, the 30th channel, nothing on six hours a day. I just called the local cable operator and said, “Hey, there's a problem. I’m not getting Discovery for six hours a day.” They're like, “Oh, it's only an 18-hour a day channel.” On the phone I said, “Well, if I had something to put in there, would you be interested?” They said, “Absolutely. Come on down.” It's just unsold media.

I went down and then I found out that the local cable company was Warner Cable in Cincinnati and this is back in the early 80s. They had a mandate when they signed the contract to provide cable service that they had to put one channel that was a local access channel, that provided access to the local entrepreneurs, restaurants, whoever it might be, to be able to put their – could be high schools who want to show sports. It was a local access rule.

When they're telling me this in the meeting, I’m like, “How does that work?” They said, “Well, we have a big incentive to deal with local entrepreneurs.” I said, “Well, I’m a local entrepreneur and I want to take some of your time.” He said, “You won't believe this deal that I got.” I said, “All right. I want to fill the time.” They said, “With what?” I said, “Let's do some commercials for some products and put them in there.” They said, “Okay. But look, you got six hours. Let's not do one-minute spots. Why don't we make these like TV shows?”

We're talking through this and yeah, I’ll interview people and have products. We'll demonstrate the products and then we'll sell them at the end. That's how it all started. I was the host. The very first deal, I said, “Okay. I want to shoot a 30-minute show.” They said, “Great.” I said, “And I want to run it.” They said, “Well, we have six hours a day. We'll come back to you with a proposal.” I get the proposal a couple days later for $800. They were producing, shooting, editing, producing in their studio, all-in, $800. I thought, “Wow, what a deal that is.” But wait, there's more. They're going to run it 30 times for the same $800, okay. They're going to shoot it and run it.

They're going to give me 900 minutes of air time and all the production for a 30-minute – we didn't call it an infomercial, because that word didn't exist. 30-minute advertising commercial to sell products. We sold for $800, $26,000 worth of goods. That's when my life changed, because I said, “I no longer want to be in the heating and air conditioning business, or whatever I’m doing. I’m now going to be putting things on cable television.” That was the beginning.

Then I went to Discovery National. This was just local in Cincinnati. After I had credibility, the local operator was like, “You have created a new industry here.” I said, “Can I talk to somebody at corporate, cut a deal with corporate?” They gave me six hours a day on Discovery, 365 days a year for a 1,000 bucks a day, $365,000 under a multi-year contract on Discovery Channel. That was doing 20 plus million dollars in annual sales, that block a time. Pretty good investment. Again, $365,000 investment for 20 million dollars in sales.

This was the game changer. This launched the infomercial industry. This was the early days and that's when we started going for all the Billy Mays, Tony Littles, Jack LaLannes, George Foremans, everybody that had a product, we were rocking and rolling. By the way, this was years before Amazon, nine years before Amazon went B2C, many years before QVC ever started. This was the pioneering days, the early days and had a lot of fun creating some great product successes.

[00:15:14] MB: That is insane, the amount – why were the production costs so cheap to film these infomercials and why were the stations, both the local station and Discovery Channel broadly willing to part with that media for such a low cost?

[00:15:27] KH: Because this got down to this push from their ordinance. They had a contract with the city of Cincinnati for an exclusive cable contract, but they had to provide local access on one channel to local entrepreneurs. To this day, this exists still in many of the cable contracts, by the way. I can go into 150 markets around the country and get 30-minute time blocks for a $100 to a $150 across the entire city on local cable access. They were incentivized and they needed good PR, because when cable first hit, there was a lot of bad stuff out in the market about cable and how this and that.

They needed to show the community that they were embracing local entrepreneurs and hey, for me, it was a great thing. I was there featured profiled entrepreneur that they were helping build some amazing stuff through local cable access. It wasn't about making money for them at that point. It was about being good to their agreement with the city to provide assistance to local entrepreneurs.

[00:16:38] MB: Totally makes sense. You had this tremendous opportunity, where you saw something and came across this unsold media that nobody was monetizing, nobody really even understood, and that's in some sense, why it was so cheap for you to then turn around, looking at Discovery Channel, for example, for you to then turn around and pay $300,000 a year and monetize it for 20 million worth of sales.

[00:17:01] KH: Exactly. Let's put it this way, Matt. I know we've been talking about mentors and why people need a mentor. If you get the new book that I have coming out called Mentor to Millions, it talks about how to get a mentor, what to look for in a mentor, also, how to be a good mentee. Because I’ve mentored some people that I did after a session or two, didn't want to have anything to do with them anymore, because they weren't following up on my advice and instructions and just wanting to do it their own way.

This is why I think a good resource guide for people that are in business, that are entrepreneurs, that are seeking some help would be to pick up a copy of Mentor to Millions, because there is where we pretty much lay it all out for you, the how to's of getting the right folks in your camp and being mentors to your business. Plenty of stories to tell along the way here, but it's obviously very powerful if you get – I call it creating the right dream team. If you can do that, which I’ve now been able to do successfully in many situations, it's a long way to success without a dream team.

With a dream team, it's a shortcut, because the people have been there. I’ll just give you one example also. The bank president guy that I brought in, he actually had some exit experience also. I always say, when you're launching a business, you always got a program with the end in mind. What's the end in mind? To have some an exit. In many cases, this is what a lot of people want. It's good to get somebody on your team that knows how to sell a business and knows how to make it happen. That's a powerful way to do it.

[00:18:49] MB: Absolutely. I want to dig into both some of the lessons for how to find mentors and also how you can be a better mentor and be a better mentee. Before we dig into some of those specifics, I’m curious, tell me a little bit about what was another either challenge that you personally faced, where a mentor was really valuable and helpful, or a company or someone that you were mentoring and how you helped them really leapfrog through whatever the major hurdle was that they were dealing with and overcome that problem?

[00:19:21] KH: Was this for one of my own companies, or for somebody else?

[00:19:23] MB: Either one. Whatever you think is going to be more interesting and impactful.

[00:19:27] KH: I’ll give another example of a big challenge we had. Then I’ve got examples of maybe we could do both, but let me start. I built – this business was very successful. We were north of a 100 million in sales. A 100 million in sales, we're doing 2 million a week in sales, 50 weeks a year. We didn't have a lot of cash sitting in the bank, but we had millions of dollars that would turn week-to-week to fund the media and the inventory and things like that.

One Monday morning, most of our sales came from the weekends, because that's when a lot of the unsold media was Friday, Saturday, Sunday. Monday was always a big day. We literally for the weekend, would be sitting on a couple million dollars in sales, generally. That money would hit our account on Monday. One Monday, the CFO came in to me and he's like, “Hey, we got a big problem. The bank did not send us the 2 million this Monday. They're holding it and they're not going to let it go. They're holding it for reserve against returns in our business.” I’m like, “What do you mean they're holding it?” He said, “Well, they cited a clause in our contract with them. We've had some higher returns happening and they're concerned as a bank that they have to give the returns to the people, because they've cashed the credit card and they want an extra 2 million.” They're just going to sit on our money until some future date that they may choose to give it back to us, okay.

Now imagine that. 2 million dollars swept out of your account almost is what it is really technically what happened, because it was sitting in our account. Instead of them sending it to us, they swept it to them. Now I’m sitting on the verge of closing the company down, because that's my operating capital. Now we ended up taking a look at what was happening and where the problem was. What it was, we had 12 products that we’re running on various levels. 95% of our business was solid, but we had one of those products that represented 5% of our company that we were having big defective issues, because the manufacturer had delivered us a bunch of product that had not been quality-assured properly.

Now these people were calling the bank, charging back, asking for their money back. On that particular product, our returns went from a normal 10% up to 30%. It was such a small part of our business, for us, it really didn't affect us, but the bank was getting this onslaught of nasty calls and chargebacks. That's why they instituted this policy. Boom, we're going to grab Kevin's 2 million bucks.

Now I got a mentor. We checked it out. What are we doing wrong? How do we solve this? I brought lawyers in, accountants in all around. Make a long story short, we presented to the bank the fact that just this one product was causing the problems, why put us out of business for this? This is our solution. We want a separate merchant account for every single product, so we can't lose our whole company when we have one apple to spoil the whole bunch. That's what we did. They bought into it. They released 1.6 million and we then gave them an extra 400 grand for reserve, but we were able to survive and live through all of this.

Make a long story short, this was another situation where we needed to come through this in as good of fashion as possible and we did. We survived. We didn't close the company down, but we were close. That was a pretty amazing story. Again, some great advice, some great mentors came in. When you think about it, Matt, I don't know if you've ever been in the product selling business, but you should have a separate merchant account for each product, because things can blow up. This is a high recommendation I have for any entrepreneur out there listening right now, separate in separate silos, so that you can't lose your whole company because of one issue.

[00:23:40] MB: Yeah, that's a great piece of advice. I's amazing. Any business success story, when you look back, there's always a series of moments where it seems like everything was on the line and you had to find a solution and it's never as easy as it looks from the outside.

[00:23:56] KH: Exactly. You said it best.

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[00:24:33] MB: I’d love to quickly hear as well a story of how you were able to with one of the companies that you were mentoring or advising, helped them overcome a big challenge as one of their mentors.

[00:24:43] KH: Okay. This was in the book, Mentor to Millions. It's about a company I got involved with a few years ago called Celsius. Have you ever heard of a company called Celsius? It's a healthy energy drink.

[00:24:56] MB: I have not.

[00:24:57] KH: Okay. Well, a few years ago, nobody had heard of it because it was a startup. I came in as a board member and energy drinks, Red Bull, Monster, etc., they're sold in retail stores. That's where you buy them. I got involved with this company and I said, “Retail. That's great. Yeah, you can go down that path. That's one way to sell.” I’m in the business of direct to the consumer. I said, it would be great if we could start putting direct to the consumer programs in place, influencers, micro-influencers, fitness influencers, celebrities.

I started down that path of creating additional revenue streams for the company. The company was a little public company that had a couple million-dollar value. I joined them at the startup mode, when they were pretty much just getting off the ground, a couple million bucks in assets. We're going retail, but we're also going to be direct to the consumer, which includes Amazon and direct sales.

Now let's fast forward. We built this company. It's taken off. It took off like crazy. Doing well. It grew to over a 100 million and then a 120 million. Then all of a sudden, we got into here we are, COVID hits. We're in May of this year and the stock was around $3 a share. The market value at $3 a share still built the company now to a couple 100 million dollars, okay. We went from literally zero to a couple hundred million by implementing a lot of the ideas that I was just talking about direct to the consumer, as well as retail, influencers. We brought in Flo Rida, Khloé Kardashian, all these little fitness influencers, etc.

Now during COVID, stores were closing and people said, “Wait, I can't get my Celsius.” But wait, there's more. Yes, I can. Because we've implemented all these direct to the consumer channels, we were crushing it on Amazon, etc., etc. The word got out that Celsius was on fire and the stock hit $14 today over a billion dollars in value, went from a couple hundred million to a billion in the last 90 days. I’m not familiar with any other company that's had any turn like that that's unbelievable.

Here I am, one of the co-founders of the early days of this company and of course, I made a few bucks along the way, because we created a billion-dollar asset. You just can't sit and wait. It's not always going to be the same way. You've got to go for it and figure out new ways, think outside the box as I say, direct to the consumer, fitness influencers we're crushing it. We've got a really solid business. It's called Celsius. The symbol is C-E-L-H. Amazing team. They have an amazing board, amazing CEO. John Fieldly had a great CEO that started that was involved with the company for many years. Jerry David.

Look, as I mentor, I’m on boards, I’m never going to sit here and take all the credit for anything. It's always a collaborative effort. A lot of folks had a lot to do with that. I will tell you, the direct-to-the-consumer strategy and that's the business I’ve been in for 40 years, that was the real hook that created a major juggernaut at Celsius.

[00:28:31] MB: That's amazing. That's a pretty rapid amount of value creation and especially during such a turbulent economic time. I want to come back to some of the practical ways to start implementing this. How did you think about and having been in business for so long and been so successful, how do you think about going about finding a mentor? What are the best strategies for finding one? Even maybe zooming out a little bit, what exactly is a mentor? I mean, as a mentor someone who you have coffee with once a week? Is it somebody who you speak to once a year? Is it somebody who gives you one piece of advice one time? How do you think about what a mentor is and then how do you really think about the best strategies for actually cultivating and finding and building relationships with them?

[00:29:12] KH: Great question. By the way, this is all discussed in our book, Mentor to Millions. Anyone that is listening can hear my response, but they also have a chance to go get the real detailed process in the book. Bottom line is this, it's all of the above, Matt. It might be a one-shot deal. It all depends on what you need and what the mentor is looking for.

I have a gentleman I’m mentoring right now, for example. His name is – I’ll think about in just a second here. Been mentoring him for about eight months now. An amazing guy. His name is Matt George. He runs Children's Place in Peoria, Illinois. It's a home for homeless children. They feed and house 1,800 children on a monthly basis that go through the doors there. They have a massive budget.

Matt George is an amazing guy who really cares about the kids and he's been successful raising money for children's home. Sometimes you hit a plateau. I said to Matt, “Look, this is going to be my give back for your group.” I’ve been working with him, helping him build some ideas, because at the end of the day, having a good visibility is important in a community. Matt has been out there, but I said, “You've done such amazing things, Matt. You should write a book. You should start putting a profile, raising your profile in the community, because you do so much for so many people that I think it's important you should start putting your own podcast together.”

I mean, the first question you ask, how do you get a mentor? Go to your chambers of commerce, go to all the associations you're involved with. I’m a co-founder of an organization called The Entrepreneur’s Organization. It's called EO. We have chapters in 50 countries, a 150 cities. When you join EO, we give you a board of mentors. It's called your forum. To get a board of advisors that are going to be your advisors going forward.

There's all kinds of ways to get mentors. One of the things I mentioned earlier, who do you write checks to? Ask them who might be able to help. I have five law firms I write checks to. I write checks to credit card processors, to fulfillment centers, to media companies, to TV networks. You reach out. Hey, you don't have to say, “I write you a check. I need some advice.” Just, “I’m one of your customers. I need some advice. Could you help me grow bigger? I need a guy in finance. I need someone here. Do you have any connections? Any ideas? Boom, boom, boom.”

Anyway, make a long story short, I got the finance mentor at my chamber of commerce meeting. I also belong to lots of organizations. Joe Polish has a group called Genius Network. and Roland Frasier has a group called War Room. These are mentoring groups that you can join. Board of Advisors is Mike Calhoun. You can join Board of Advisors and get great advice from the other members. These are all the different places you go. At the end of the day, it's a one-on-one discussion you have with the mentor.

Some mentors don't want to do anything more than say, monthly. Others don't mind weekly. Some want to meet you on a regular basis. Others want to do it via phone or Zoom. Now today, obviously with COVID it's a lot different. Everybody's staying away from other people, so it's a little bit tougher, but it's generally virtual in today's world. Lots of great places to get mentors and you can't do it sitting at home. You got to get out and start turning those rocks over to find the mentors.

[00:32:53] MB: Yeah, that makes total sense. I think the big takeaway from that is this idea that what a mentor is is something that's highly flexible. It changes. It could be there's a huge, really broad definition. You can find mentors across, whether it's an organized mentor group, which I’m a big fan of something like War Room. Roland Frasier's actually a previous guest on our show. Roland is the man. Whether it's something really structured like that, or whether it's finding somebody locally, it seems like what you're saying is that there's a tremendous amount of ways that you can find a mentor, what you really have to do.

Obviously, it's a little harder in some ways with COVID, but it may be easier in other ways, because you don't ever have to leave your house. Is you have to get out there. You have to start turning the rocks over. You have to start connecting with people. You have to put yourself out there and be willing to ask for help and call up the other people that you're already doing business with and see who they know that might be able to help you in some way.

[00:33:44] KH: Yes, exactly. Perfect. It's a process. I’m going to say this at one time, you're the only one as the entrepreneur running the company that can do it. You can't go to somebody and ask them to go get you a mentor necessarily.

One quick last story, a guy that was needing some help. He was in the business of selling products to the military. I live in Tampa, Florida. He's like, “Can you give me some help?” I’m like, “Yeah, I can.” I said, “Part of my help is bringing a dream team to your company.” I said, “I know MacDill Air Force Base is right here in Tampa and they have all these retired generals.” I said, “What is a retired general? What's his business model? He wants to consult companies, get paid some fees and use the credibility he has to be a former general inside the US military.”

MacDill Air Force Base is central command for the United States. I said, “Let's go out to MacDill and see if we can meet some ex-generals.” We did. We got Chip Diehl. General Chip Diehl had just retired. He was looking for some relationships. He joined our board of advisors, opened up amazing doors inside the military down at [inaudible 00:34:57] down in Dallas.

Again, if you're in the business selling to the military, who can help you best? Somebody high up in the military, is no longer in the military. Because if they're in the military, they can't consult you or advise you. That might be a conflict. You just got to think outside the box. I could tell any person really how to go get a mentor for their own particular business. Again, my book Mentor to Millions, we teach you all of that in there. I think anyone out there listening should go get a copy for sure.

[00:35:32] MB: Yeah. That's in many ways, that actually shares a lot of commonalities with your own – one of your first big mentors, the retired bank president that you found. Seems like maybe a really rich vein to mind when you're searching for a mentor is to figure out who used to be really prominent, really successful in that industry, or that particular niche and they've since retired and go try to seek those people out and get in front of them. It seems like they have a really potent mix of powerful rolodex and also, they're in the stage in their life, in their career where they're not as busy. Maybe they're looking to give back a little bit more. They're looking to help and teach people and pass on what they've learned and what they know.

[00:36:08] KH: Exactly. Yeah, you hit it. Thank you.

[00:36:10] MB: Is there any way, or any strategy in particular, I mean, you've mentioned things like local chamber of commerce, just networking through the people you know, etc., but to find – If I said today, “Hey, I need to find the retired, let's just say, bank president to help me scale my business to the next level,” how would you go about finding that person?

[00:36:29] KH: Well, let's take the industry that I’ve been, was part of for 35, 40 years, the As Seen In TV industry. There's a trade association in As Seen In TV that was started. I was one of the co-founders. It's called the Electronic Retailing Association. Now that existed for about 30 years, very successful. It ended up morphing into something else now recently. The bottom line is that there was hundreds and hundreds, maybe thousands of members of what was called ERA, Electronic Retailing Association.

If you were Procter & Gamble and you wanted to get a mentor in the world of As Seen In TV and electronic retailing of which Amazon was a member in eBay and QVC and HSN, there's a board of directors of ERA. Then there's a listing of suppliers and service providers. A lot of people would call ERA, “Hey, I’m Procter & Gamble. I got a shampoo that I want to do an infomercial for. I need some advisors, mentors. Who do you have?” “Oh, well we have these lawyers, we have these producers, we have these, this.”

I mean, associations are one of the great places to start. I do a ton of business in the world of housewares and hardware. I go to the house for a show, the hardware show and I network with the International Houseware Association. One other place that's really good, there's a publication called HomeWorld Magazine, that is the publication that exists for the world of anything housewares. There's a guy named Peter Giachetti that's the publisher and editor and chairman of HomeWorld Magazine. I’ve known him for 35 years. If I need anything done in the world of housewares, I call him. “Hey, I need a good manufacturer for toasters. Who should we be talking to?” Get an answer right back.

Bottom line, associations, publications, your existing relationships in legal and accounting, all kinds of great ways. You'll never run out of them. I always say, just you got to keep going until you get the right ones. Once you find the right ones, it's going to blow you away. It's really powerful.

[00:38:46] MB: Yeah, that's great advice. There's often so much untapped potential in your network that if you're not asking, if you're not putting yourself out there, if you're not trying to uncover who do they know that might be really helpful for me, you're really leaving a lot of value on the table.

[00:39:01] KH: Absolutely. Yeah. You know it. Absolutely.

[00:39:04] MB: Really quickly, what are some of the key things that you need to do to be a great mentee?

[00:39:09] KH: That's a great question. The first thing I say is you should be the mentor's best student, okay. Because when you think about it, I think I mentioned earlier that it's not exciting for a mentor to – I’ll give some advice and I’ll say, okay. Here's four action plan items before we talk next. Now, the first thing I do when we start the next conversation is let's go over the four action items and how did you do with those. “Oh, well. Got the two of them. I didn't get the other two. Sorry.”

It's like, well, what's wrong with this picture here? That's not a good mentee. I want a good student. I want somebody that's really eager. I don't mind a challenge, or why is what you're saying the right way to go, you're certainly allowed to do that. Don't tell me you just didn't have the time, but you want more of my time. It's important that you communicate well, that you thank mentors, you're appreciative, send them nice notes, maybe a little inexpensive gift every now and then. It could be a Starbucks card for 20 bucks value or something.

Just that you're thinking about them and things like that, or a donation to their charity. I had a grueling three-day event that I did in Vegas and 80 meetings over three days. I keynoted two of the days. I was scrambling to get through the airport, to get home on a late-night flight. I’m sitting in the airport eating a quick bite before I jump on the plane and a young kid comes up to me, handed me a $100 bill. He said, “Mr. Harrington.” He said, “I was at the event. I watched you the whole time. I tried to get to you a dozen times. I never could. I’m just a young entrepreneur starting out. I need some help. I’m not looking for anything for free. I’m going to give you a 100 bucks, because I’ve got a couple questions I’d like to ask you. I don't even need your time right now, because you look busy, you're eating. Take my 100. Can I call you some time and ask you a question?”

I was blown away by that. Number one. Secondly, handed him his 100 back and said, “Look, you approached me the right way. I’m going to give you the answers to your question and I’m not going to charge you a dime and I really appreciate what you did and God bless you.” I mean, those are the things for a 100 bucks, you got to deal with a shark, okay. That was a very smart young entrepreneur, I’ll tell you that right now.

[00:41:41] MB: Kevin, I know we're wrapping up here, but where is one place that listeners can go to find the book, to find you, to find your work online and what is one action step that you would give them to begin implementing some of the things we've talked about today?

[00:41:54] KH: Okay. Great question, Matt. Go to kevinmentor.com and that's got all the information about the book. You can pre-order it. We got copies are just coming out soon. Book will be out in no time. We actually have eBook versions also. Lots of great stuff there. Kevinmentor.com. Also, my website is kevinharrington.tv. Tt's another place they can get some great information also. Kevinmentor.com is a really good place to start.

This is what I’d like to challenge everybody out there right now to make a step. This is for the people that don't have a mentor. I want you to write down a date that you'd like to have a mentor by, and I’d like for you to list the qualifications that you would like in that mentor. Now, I have a saying I wake up every morning to this. Whatever you vividly imagine, ardently desire, sincerely believe and enthusiastically act upon must inevitably come to pass.

That was a saying by an old mentor of mine way back. It's just powerful and I just have to say that believe in yourself, believe in your idea and the steps that I mentioned, vividly imagining, that's easy. People can imagine themselves getting a mentor. Ardently desire, you desire it. You vividly imagine it. You ardently desire it. You sincerely believe that you need a mentor, that you want a mentor, but you don't enthusiastically act upon it. This is where most people fall down.

Now, put a plan of action together and with my book and a plan of action, you're going to have great success. You'll get your mentor and you're going to turn things around in your business. On that note, Matt, I want to thank you for having me. Been a great event here to share some of the ups and downs that I’ve had over the years. I shared a couple stories that sometimes I don't like to share about how tough it was for me. but I really appreciate you having me today and I hope anyone out there can go to kevinmentor.com to get some information about getting a mentor in their life.

[00:44:08] MB: Kevin, thank you so much for coming on the show, for digging into some of your incredible backstory and sharing all of these lessons about how we can find mentors.

[00:44:16] KH: Thank you, buddy. Talk soon.

[00:44:18] MB: Thank you so much for listening to the Science of Success. We created this show to help you our listeners, master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is matt@successpodcast.com. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener e-mail.

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(B) Zero to $25mm of Revenue in 18 Months with Oliver Schmalholz

August 11, 2020 by Lace Gilger in Career Development, Money & Finance

In this episode, we get a behind the scenes peek at what it truly takes to rapidly scale a massive company - learning the inside lessons that enabled our guest to build his telecom startup from zero to twenty-five million dollars in recurring revenue in 18 months, with our guest Oliver Schmalholz.

Oliver Schmalholz is the co-founder and CEO of News Quantified. News Quantified provides powerful analytics to generate insights from market-moving news, earnings, and other corporate events. For the past 15 years, Oliver successfully built four start-up companies, raised over $50m in venture capital, AND grew a US equities trading firm to over $1b trading volume in three years. When the European Telecom market de-regulated, he signed the first interconnection agreement in Austria leading to an acquisition by a Fortune Global 100 company.

Lessons from scaling multiple startups (some good, some not so good!)
Choosing the market to focus on when opportunity strikes
How to use comparative analysis to find really powerful market opportunities that others might miss
How to scale a company from $0 to $25mm in ARR in 18 months
Key lessons of rapidly scaling any companies revenue
- Recurring revenue businesses are essential
- Manage and keep your churn rate low
- Leverage a sales and marketing strategy focused on having low fixed expenses.
- No advertising expense, having a “no-cap” commission plan, leveraging variably compensated
- Leverage third party distribution deals.
“SDR” - Sales Development Reps - being fed prequalified leads and set up appointments.
Have a performance-based, uncapped sales team that works the leads generated by the SDRs.
Leveraged a “partner” strategy to partner with big telephone producers and gain access to their customer base, in exchange for giving them an ongoing residual.
The pitch to big providers was "You make one intro to our sales team and you get an ongoing commission going forward."
The importance of having a fearless approach to sales and business development.
How to generate huge value from your sales team using these strategies.
Pay your salespeople a higher upfront commission, front-load it, and also offer them endless, uncapped residuals on the back end, with a right to buy them out at the end of the contract with 12-24 months worth of commissions.
Lead generator / SDR Role"
- Basic quota: 3-4 meetings/day (part of your fixed comp) ($2500-$3000/month)… you can double it with great performance.
- Any production beyond that, you get $10-$50 per appointment set.
- Make sure appointment sticks, a canceled appointment gets pulled back out of their bonus.
The 3 keys to rapidly scaling a business:
- Recurring Revenue
- Efficient Distribution (leveraging variable compensation & performance-based metrics)
- Operational Excellence
How do you think about positioning yourself into the industries that have the biggest potential for substantial growth and scale?
Pay attention to platforms and multi-sided marketplaces.
Homework: Pay attention to recurring revenue opportunities and see if you can turn your opportunity into one that has recurring revenue?
Homework: Call up 100 potential customers and pick their brains before getting into their space. Be fearless with your business development approach.

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

Oliver’s Website
Oliver’s LinkedIn and Facebook

Media

Crunchbase Profile - Oliver Schmalholz
- News Quantified
Finance & Markets - Product Review: How to Trade the News with News Quantified by marketsfinance
[Podcast] Cashflow Hacking Podcast with Casey Stubbs - Special Report: Oliver Schmalholz Interview by Finance & Markets

Videos

Oliver’s Guest Appearances on Timing Research Youtube Channel
Dana Derricks - Oliver Schmalholz Review Dream 100 Course
Stephen Bigalow - Public Stock Chat August 16th, 2018 with Guest Speaker Oliver Schmalholz Trade Thirsty - Oliver Schmalholz Sept 2018 Toast to Traders

Would You Bet Your House On The Turn of A Card? High Stakes Lessons with Alec Torelli

November 21, 2019 by Lace Gilger in Decision Making, Money & Finance

In this episode, we share lessons from the world of high stakes poker. What’s it like to bet millions on the turn of a card? What can we learn about making better decisions and dealing with tough emotions under these extreme circumstances? We share a powerful strategy for managing your emotions in a crisis, show you how to make tough decisions like a professional poker star, and much more with our guest Alec Torelli.

Alec Torelli is an entrepreneur, motivational speaker, and professional poker player. As a poker player, Alec has won millions playing live cash games and some of the biggest tournaments live and online. As a coach and digital entrepreneur, he shares his knowledge and insight to help others achieve their life goals. Alec has been featured on ESPN, CBS Sports, Travel Channel, Fox Sports, Poker News and many more.

How a lanky 16-year-old become one of the highest stakes poker professionals in the world
Making the decision to drop out of college - how do you justify it?
How you can make tough life decisions by logically evaluating the downside
Talking to yourself in the third person helps you pull out of the emotions of a tough moment and get a more objective perspective?
Why you shouldn’t let the fear of other people’s opinions hold you back
Logic vs Intuition? How do you use each of them to make decisions? Which is more important.
You don’t have to choose between logic and intuition - the best decisions merge the two of them together. They should work in harmony.
Intuition is not the same as emotion. They are very different.
Reframing into the third person is a powerful strategy to take yourself out of tough situations and make much better decisions under pressure.
Ask yourself: “What should Alec do here?” If you’re watching Alec play poker, what advice would you give him in this spot?
Emotions often arise when you latch onto something and you want it to be different than it is - you want something to be a way other than it actually is - you become frozen in what was.
Meditation and mindfulness and powerful strategies for peak performance at high stakes
Self-forgiveness and self-compassion are cornerstones of improvement and growth at the highest levels
Evaluating your decisions on the merit of the decision-making not the merit of the outcome.
The biggest decision making lessons from poker.
Most people operate under the illusion that good decisions to lead to good outcomes, but the real world is much messier than that - there is a huge amount of variance and noise between a decision and an outcome.
Don’t get caught up in “n of 1” fallacies when making decisions - just because something worked for someone doesn’t mean it’s a good decision.
Outcomes in life aren’t binary - when you only view things are 0 or 100 you are missing a huge amount of perspective when weighing your decisions. Most things in life aren’t black and white - think about the probabilities of outcomes.
The reality is that luck plays a huge roll in everyone's’ life. Being dealt a winning hand is a pre-requisite to succeeding in a lot of ways.
Look for bigger sample sizes when making decisions - don’t overweight short and small sample sizes.
How do you prioritize what’s important in your life?
Before you do anything - figure out what you’re trying to accomplish?
- Before making a bet in poker
- Before spending your time on something
Homework: Talk to yourself in the third person when making a tough decision.
Homework: Take up a meditation practice.
Homework: Get really clear about your personal goals. Track your spending - what get’s measured get’s managed. And align your spending with your goals.
- Starting small, and re-aligning your resources with your goals - GREAT suggestion.

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

Alec’s Website and Wiki Page
Alec’s LinkedIn, Twitter, and Facebook
Conscious Poker Website
- Conscious Poker Membership
- Intro to Hand Reading Course

Media

[Profile] The Hendon Mob - Player Profile: Alec Torelli
Poker Listings - Alec Torelli: "It’s Not Just About the Game and Money" By Dirk Oetzmann
[Article Directory] Poker News - Alec Torelli
- “ALL IN with Evan Jarvis: Interview with Alec Torelli” by Sarah Herring
[Podcast] Rec Poker: Ep 085 - Alec Torelli
[Podcast] What Got You There with Sean DeLaney - #152 Alec Torelli- Million Dollar Decision Making (Aug 23, 2019)
[Podcast] Postflop Poker Podcast - Episode 92 - Hand Reading ft Alec Torelli
[Podcast] The Open Mic Podcast With Brett Allan - Ep. 132 | Alec Torelli Professional Poker Player and Entrepreneur, Helps You Find Your North Star In Life

Videos

Conscious Poker YouTube Channel

ThisisPoker- Great Poker Hand Daniel Negreanu vs Alec Torelli
Poker Player Podcast - Alec Torelli on the Poker Player Podcast with Andreas Froehli
[Video Directory] 9 to 5 Poker - Alec Torelli

Misc

[SoS Self-Compassion Episode] Uncover the Root of Your Pain, How to Smash Perfectionism, Love Yourself, and Live a Richer Life with Megan Bruneau
[SoS Self-Compassion Episode] Discover Your Hidden Emotional Insights & What’s Truly Valuable To You with Dr. Susan David

Episode Transcript

[00:00:04.4] ANNOUNCER: Welcome to The Science of Success. Introducing your host, Matt Bodnar.

[0:00:11.8] MB: Welcome to the Science of Success; the number one evidence-based growth podcast on the Internet with more than four million downloads and listeners in over a hundred countries.

In this episode, we share lessons from the world of high-stakes poker, what’s it like to bet millions on the turn of a card, what can we learn about making better decisions and dealing with tough emotions under these extreme circumstances. We share a powerful strategy for managing your emotions in a crisis, show you how to make tough decisions like a professional poker player and much more with our guest, Alec Torelli.

If that sounds exciting and interesting and you want a bunch of other free goodies and giveaways along with that, just go to successpodcast.com. You can sign up right on the homepage. That’s successpodcast.com. Or if you’re on your phone right now, all you have to do is text the word “smarter”, that’s S-M-A-R-T-E-R to the number 44-222.

In our previous episode, we unlocked the power of asking. When you ask for what you need, miracles can happen, but so many of us are too afraid to really ask, or we feel like we don't know how, or what we should be asking for.

How do you get better at asking? How can you tap the tremendous power and potential of the social capital within your network by using the power of asking? We asked and answered all of these questions and much more with our previous guest, Dr. Wayne Baker. If you want to finally ask for what you really want in life, listen to our previous interview.

Now for our interview with Alec. Please note, this episode contains profanity.

[0:02:13.8] MB: Today, we have another exciting guest on the show, Alec Torelli. Alec is an entrepreneur, motivational speaker and professional poker player. As a poker player, Alec has won millions playing live cash games in some of the biggest tournaments live and online. As a coach and digital entrepreneur, he shares his knowledge and insights to help others achieve their life goals. He's been featured on ESPN, CBS Sports, The Travel Channel and many more media outlets. Alec, welcome to the Science of Success.

[0:02:39.9] AT: Hey, Matt. It's an honor. Thanks for having me. I appreciate it.

[0:02:42.3] MB: Well, we're super excited to have you on the show today. As many longtime listeners know, I'm an avid fan of poker and I think there's so many lessons that can come out of poker to teach us to be better decision-makers and live better lives. I'd love to start the conversation out and explore a little bit how does your poker journey begin and how did you become someone who played at some of the highest stakes imaginable?

[0:03:05.7] AT: Good question. Yeah, it was a journey. I started playing at 16. I got invited to a friend's house and I won $12 or so my first time playing. They say, the worst thing that could happen to someone that is betting or gambling is they win their first time, because then they're hooked. I was extremely hooked. I loved it. I loved the fact that it was – there's a psychological component that I could beat my friends, that I can make money. I seem to have a knack for it. It was probably almost completely due to beginner's luck winning the first time, but of course it went to my head I thought I was some hotshot.

That just propelled me to keep playing the game and just get as good as I can and play as often as possible. In high school, I really got serious about poker. I was playing after school every day that I could find the game. I was reading what limited books there were and talking with friends. It became apparent that I was one of the better players in the home games that I would play in and I would consistently win money.

Later in high school, I started playing online poker. I had some good results early on. I remember one day after school I went to a friend's house and I won a tournament. There was 500 people that entered. I got first place and won over 2 grand, which in high school is infinite money. I was going to retire.

These early successes allowed me to really remain enthusiastic about poker and keep pursuing it as much as possible. When I was 18, I was at SMU in Dallas, Texas and I was making a decent amount of money playing online poker. I'd saved up probably between 20 and 30 grand, which was a lot for an 18-year-old at the time and in college. I realized that I was slacking behind in university, because I was dedicating so much time to poker. I was playing tournaments late at night on Sundays, staying up till 4:00 or 5:00 in the morning and then missing my economics class.

I realized I'm at this crossroads where I could not become better at poker and move to the next level and achieve my goals of traveling around the world and playing in some of the biggest tournaments and cash games if I'm still in university. Even athletes, not to compare myself, but I have the same dilemma. Should I stay in school, or go to the pros? You just can't do both if you want to compete at the highest levels, right? Especially if you want to get a degree and focus and all these things.

I evaluated my worst case scenario and I realized, you know what, the worst thing that happens is I'm 19-years-old. I’d give myself a year. I lose the 20 or 30 grand I saved and I'm basically back in the same place as everybody else, except I'm one year older, which is not really that bad of a worst-case scenario. I just lose a year of time, but I have this incredible experience and I get to test what it's like to live out my dream.

The best-case scenario is that I make it somehow and I reach this goal and I'm traveling the world and I'm playing on the level that I see these people that I look up to on television playing in. That was a pivotal moment for me and I really went all-in at that time. I had some good results after that, some ups and downs along the way. I mean, this was 15 years ago, so obviously it wasn't – the rest wasn't all history. It was making that choice that gave me the at-bat to get the successes that later came.

Shortly after that, things went really well for me. I moved to Australia, because I couldn't play poker in the US and I wanted to compete in the biggest tournaments. While I was there, I got up early one day to play an online tournament. Actually, it was the biggest tournament in history at the time. I ended up winning. I won over a quarter million in a day and I was 18 or 19 at the time. That year, I continued to play a lot of online poker and I became one of the biggest winners in online poker on the biggest website at the time, called Full Tilt.

In cash games alone, I made over a million dollars that year. I feel weird saying numbers, but unfortunately that's the only way we have of keeping score. I can't tell you how many points I scored. I could just tell you how many dollars I won, so I don't want this to come across the wrong way, but that's our metric, or it's our currency. That really put me on the map and gave me those early successes that allowed me to continue throughout my poker journey.

[0:07:10.1] MB: That's fascinating. The Full Tilt reference. I was a Full Tilt player back in the day and I remember it didn't have nearly the pallets that you had on there, but I remember having all my funds frozen and everything when the site got shut down.

[0:07:21.7] AT: Yeah, me too.

[0:07:22.2] MB: Which I'm sure was much more problematic for you. Even the subtle mental model that you just shared just now is really interesting, which is this notion of evaluating the downside and making a decision which seems really controversial, something like dropping out of college.

Yet, you looked at it in a very rational way and realized that instead of carte-blanche ruling it out, or catastrophizing and thinking that, “Oh, I can't do that. My life will be over.” You looked at it in a really rational perspective and I think that's something that's missing in a lot of people's lives is this idea of looking at tough decisions and figuring out and actually logically mapping out what's really going to happen if I take this seemingly crazy risk?

[0:08:04.8] AT: Yeah. I have my parents to help thank for this instilling me this this process. My dad is very analytical, logical. My mom gave me extreme amounts of confidence to believe in myself. I could confidently say at the time, this was before poker was really on the map 15 years ago, zero people that I talked to thought that dropping out to play poker was a good idea. It really took a little bit of conviction there. I got that confidence from my mom’s side. Then from my dad's side it's really about the practical side of things and thinking things through and being rational and logical about decision-making.

I really feel that skill set was amplified in poker, because what you're taught is to separate the facts from the noise and not let emotions cloud judgment when making decisions and not let fear cloud judgment. A lot of times in poker, you're in a big hand, right? Especially, as I moved up in stakes and started playing bigger and bigger games. When one single bet could be 10, 50, a $100,000 in a single bet, right? Not even a single hand. Just a single bet within a hand. In theory, you can look at it like this is the correct play, but it's another thing to be able to actually make the play.

What poker teaches you to do is really focus on the process of making the right decision, independent of how you're feeling in the moment. Independent of the fact that you may have just lost a big hand, or what are other people going to think if you make a bonehead play and they see you turn over a bluff, or how are you going to be critiqued, or how are you going to be looked at on television by the rail, or the people watching? That really served me well in these times when I needed to make big life decisions and separate those facts from the noise and really evaluate what is the merit of this decision.

I focused on something I tell myself still to this day at the tables. I talked to myself in third-person. It sounds ridiculous to do this, I understand, but I feel a lot of times when you're in the first-person and you're involved in a situation emotionally, that's when it clouds our judgement. By creating space between yourself and the situation, it's easier to see things objectively. Let me give you an example, if your friend asks you for advice about what he should do in a relationship or a personal situation, you usually have a clear answer and pretty confident. Why is it so true that it's so hard for us to see our own situations objectively? That's because we're involved in them.

When you create that space between yourself and say Alec, what is the best decision here? What are the benefits of path A and what are the risks? Then to get those things down on paper concretely and evaluate them separately and then attribute a score to them, or an importance to them, right? Or to attribute a significance to each one of these factors really helped me analyze the situation and see clearly that really the only thing – there really was not that big of a downside. Really what was holding me back was the fear of the opinion of other people. That would have been the only reason why I didn't go through with this. When you get to that place, it's nonsense not to do it. I think that poker really helped amplify this process for me.

[0:11:04.6] MB: That's another critical perspective shift that is missing in so many people, or that I think is such a critical skill set to really separating yourself from the pack, to being at your risk takers, this idea of not letting other people's opinions hold you back or get in your way.

[0:11:22.7] AT: Yeah. I think the idea is to be in a place where you can listen to the opinion of others and respect and take it into account, but always keep in mind that everybody's looking at the world from their vantage point. You can't really ultimately make a decision based on someone else's opinion, because they're attributing their values to your situation. Ultimately, only you know in your heart what is right. It's that guiding intuition that everybody has, where it's the best decisions I feel we make are ones where we just know instinctually what the right direction is.

For example, I talked about this in the keynote I gave where in poker you sometimes use logic versus intuition to make decisions. Sometimes you use intuition to read other people, sometimes you use logic to analyze the math, the numbers and their betting patterns. When you think about your life decisions, the biggest ones we make, I feel most of the time you can you could weigh in to pros and cons.

Even when I was doing this going to college, debating whether or not I should leave university, it was you can get everything down on paper, but then ultimately, that process might help you come to a realization or give you confidence, but ultimately, if you close your eyes in the stillness of your own silence, I feel most people know what the right answer is for something.

It's about listening to that, as opposed to separating the voice of fear. For example, I was together with my wife or my girlfriend at the time and I was – I remember asking a friend like, “How do you know if she's the right person?” Because I was debating, I wanted to propose to her. I was like, “Well, how do I know? There's no guidebook for this and you're not taught this.” Definitely making a huge decision like this, I don't want to get it wrong.

He's like, “Well, you pick three things in a partner and if they have those things that are the most important to you, you know it's the right decision.” I'm like, “Well, okay. On brown paper has these three things. She has many more and not a lot of things I don't like, but am I really going to you use this logical approach to make a decision?” I'm like, “No. This doesn't even make sense, right? I'm not going to make a decision about whether or not to get married, because someone checks my list of boxes.”

I closed my eyes and I just asked myself, “Alec, you have 3 seconds to decide should you marry?" A renowned yes. I just knew that this was the right decision. I didn't overthink it. I didn't analyze it any further or whatever. I just bought a ring the next day and proposed. We've been married six, seven years and things are great. I feel in those situations, people know intuitively what the right decision is, but the key is trusting themselves.

[0:14:02.7] MB: That's really interesting. There's a couple things I want to break down from that. Let's start with this notion of logic versus intuition. Tell me more about how each of those factors into decision-making, both in a crucible, like poker where you're in these incredibly tough decision points and you're in some cases, betting the amount of money that might be a car or a house on the turn of a card. How do you think about weighing those two things and which do you think is more important?

[0:14:30.8] AT: Good question. In one of the biggest hands I played, it was televised hand and I got dealt a monster. I had three nines and the book says to go all-in. I bet out 1,100, or bet into this pot. My opponent raises me. I immediately got a feeling like he had a strong hand. It was just an intuitive read I got. Maybe it's because he looked down at his chips. It's hard to quantify these things. I could try and explain it later and I have a YouTube video explaining my thoughts on this hand, but it's hard to quantify why your intuition gives you a read about something, right?

It's like when you meet someone for the first time, your intuition tells you right away if you like that person or not. It's hard to put into words. It's not because they have a black shirt, or their shoes, or the color of their hair. It's just you get a feeling about them. That's what I'm looking for in poker and also in life as well. I'm listening first to the intuitive read I get about a scenario, a person, a business deal, whatever it may be.

Then I'm using logic to back up what my intuition says, to see if it makes sense and if it checks out. Then I go through the hand I was playing against Chad, for example. I said, “Okay, what types of hands is he going to raise me here? What types of hands is he going to bluff me here with? Is he really capable of bluffing on television? Is he really going to risk this much money in this spot with a bad hand?”

As I walked myself through the logical side of things, I then realized that those things were unlikely. It was likely he had a very strong hand and I folded. It turns out he had a straight. I would have lost the hand if I continued. It's about first and foremost understanding the relationship, but then also understanding that these two things actually work together. I feel in poker, as well as in life, people sometimes identify themselves or feel they have to choose between one or the other.

I think when you look at the best decisions, like in the case of dropping at a university, or marrying my wife, the big decisions as well, these two things should actually work in harmony. There should be a marriage between these two things. When in doubt, I always find that when I'm at the poker table for example, there are times where they're in conflict.

There are times when I feel like for example, I know my opponent has a really good hand and I should fold, but then my rational mind starts talking and I tell myself things like, “Well, I can't fold this hand. My hand is too strong, or the pot is too big. I can't fold. I'm committed.” I start to override my intuition with the voice in my head. I start to override my intuition with logic. Those are the situations where I pay the biggest price.

If you look at your life, I feel these are things as well. It’s when you know you shouldn't get involved with that relationship, but you do anyway because you talked yourself into it, because you say these certain things to yourself and then you get involved and then you get in trouble, or your intuition tells you you shouldn't get involved with this person. It's probably not the right business deal, or you're too busy to take on another task, or another project, but there's this opportunity and it's going to be so important and there's all these logical reasons why you should do it, so to speak, and then talk yourself into it and then it turns out you should have trusted yourself the whole time.

I feel when they're in conflict, I try and let my intuition be my guidepost in decision-making. A really important caveat to this is that intuition is not emotion, right? Emotion is something like, “I'm frustrated. I'm losing at poker. I want to get my money back. I'm going to play really aggressive to try and win this next hand.” That's not your intuition talking. That is your emotion. That's your ego.

I feel having that space, that's why I'm always trying to create that space between the first-person and third-person to help myself emotion from the decision-making process, because emotional decisions unlike illogical or intuition ones, intuitive ones are actually the worst decisions that we can make and those are the ones that cost people a lot of money at the poker table.

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[0:19:45.1] MB: Give me a sense of exactly how you talk to yourself. What does that actually sound like?

[0:19:51.3] AT: It depends on where I am in the hand. My process starts actually in the beginning. I actually teach this to clients that I work with. If you think about a tennis player and how they approach a point of tennis, you can see that they have a very specific routine, right? They go through the process of dribbling the ball a certain amount of times, calling for the towel and then getting ready for the point and then throwing the ball up and serving. I created the same thing in poker. I call it a power routine.

Between every hand, before the cards are even dealt, I'm trying to pry myself to focus on playing the next hand the best way possible. While the hand is being dealt, I'll close my eyes for half a second, take a deep breath and say my focus is to play this next hand the best way possible. That allows the emotion, or charge, whether it's positive or negative from the last hand to step aside and me come back to the present moment and focus on my only objective right now, the only thing that I can control, the only thing that can make me win more money, or earn more chips, or whatever it is is playing this next hand the best way possible.

That might be a trivial decision like folding two terrible cards. That might be all I can do. That is all I can do. I think that helps me eliminate the emotional side of things from the get-go by having a clear focus. Then a lot of times, I'll be in the middle of a hand and sometimes I'll be facing a big decision. Let's say my opponent bets out a large amount of money, or I know that it's the right situation to bluff with a large amount of money, but I'm scared. I'm scared because it's a large amount of money, or I'm on television. What are people going to think if I make a mistake, or he calls me, or I'm wrong? All these thoughts that are going through my head, all this ego going through my head.

I will literally talk to myself in the third-person. I'll say, “What should Alec do here?” I'll pretend that I'm my friend giving me advice, because it's so much easier for the friend to give advice. It's so much easier to tell someone else what to do. Instead of me being in the first person sitting at the table, facing a $100,000 bet, I'll pretend that I'm watching Alec play poker. I'm just the friend sitting over his shoulder telling him, “Hey, look. You should fold. The guy has a strong hand. Or you should bet, the guy has nothing. It's clear this is the best play. Make it.”

Then when I'm giving advice to Alec, then I could step back into the driver's seat equipped with the right information and my focus on making the best decision possible and leave fear and emotion by the wayside. Then I could execute on that play that it is required, that fearless aggression that really separates the good players and the great ones. I try and do that. I fall short many times, but at least I have this system. I feel the system really helps me execute in real-time when the stakes are the highest.

[0:22:30.9] MB: That's super helpful, even that phrase of what should Alec do here? What should Matt do here? Pulling yourself out of that and imagining that you're giving advice to your friend who's playing is such a great tool that you could easily implement in many different tough and high-stakes situations.

[0:22:48.8] AT: I mean, I do this all the time, like even in trivial situations. For example, I manage my own data, but everybody does to some extent manage their own time schedule. Sometimes I'll have free time. Before this interview, I had 30 minutes. I said, “Okay, what should Alec do?” I try and pretend that I'm sitting on the couch looking at this person and thinking like, “Okay, what day has he had? Is he stressed? Does he need to finish something? Does he need to relax? Does he need to read? Does he need to eat?”

It's easier to understand what you should do. Or is Alec hungry, or is he thirsty, or he stressed? What emotions are you actually feeling at this time? Or all these sorts of situations that I face on a daily basis. Because emotion is tough and it often leads us to do things that we think we want in the moment, but that we don't actually want long-term.

For example, what you really want is to be in good shape and feel great and know that you're nourishing your body by exercising and eating healthy, but you don't want emotionally in the moment to have – you want to have sugar and simple carbs and you want to sit and watch Netflix. What you would want if you were thinking about it logically, or long-term is to make a healthier choice and to exercise.

If you let emotion get [inaudible 0:24:08.6] make those decisions a lot of times. Because I mean, a lot of days I get up and I emotionally don't want to exercise. If I think about what is the best decision for Alec to make, it should be to get his ass on the bike and do is 30 minutes of hit training.

I let that be my guide. Then afterwards, I'm always grateful, because you're always happy that you did the thing that you know was best and you reap the benefits of it. In the moments, emotions sometimes speak loudly. If you give in to them, that's when I feel you make mistakes in the macro and in the micro.

[0:24:40.3] MB: That's obviously a very powerful strategy for dealing with emotions in some of these really tough situations. Are there any other tools that you use when you are sitting across the table with hundreds of thousands of dollars on the line making these really difficult decisions?

[0:24:57.2] AT: Like to separate emotion out of the situation?

[0:24:59.5] MB: Yeah, dealing with the emotions in that situation.

[0:25:03.4] AT: Well, one thing that's really helped is just staying present and staying concentrated on the specific hand. Because emotions are only really – usually when you latch on to a thought about the way you want something to be, that it isn't currently right now. For example, you are frustrated that you lost that last hand, because you feel you got unlucky and you’re entitled to win that pot.

Then holding on to that – I mean, that's just a thought, right? That's something that comes. If you give it energy, it will stay in the consciousness of your mind and you'll be thinking about that, but then it's the latching on to the thought that exacerbates the emotion. It's not the thought itself. A lot of times, I don't even know if we can control the thoughts that appear, but we can control whether or not we give attention to them. I feel meditation has really helped in mindfulness, just staying present and observing the thoughts, or to come by, but then not necessarily giving attention to the ones that are going to create an emotional state, a charged emotional state.

For example, I feel all the same things. I'm human. Let's say I get all my money and I'm 90% to win, this happened in the World Series main event. I was all in with aces and someone else had ace, king. I'm 94% to win and I lose. It happens all the time. Obviously, I feel all the same pain that other people feel. I feel frustrated. I feel annoyed. Am I cursed with my luck? Why did that happen to me? Those are thoughts that come. I feel like what I try to do and again, I fall short often, but what I try to do is to come back to the present moment. Ask myself what I can focus on and then pay attention to a more empowering thought.

It's not focusing, or giving attention to the thoughts that could lead to me being in a perpetual negative emotional state. That's a big one. I think that happens and it serves me well in my life too, when something stressful happens to me, or doesn't necessarily happen to me. I want to say it that way. Just I'm encountering a moment of potential stress in my day for something goes wrong in the business, or who knows? A million different things. Having a system to let that go and to focus on a new thought, a new energy pattern is really – has really helped me. I feel like meditation I got to credit a lot from that, and that's been a practice I've been working on for four years.

[0:27:31.0] MB: You mentioned a couple times this notion of falling short, whether it's your mindfulness goals or using the right emotional management strategies in some of these tough situations. The lesson behind that is another key takeaway in performance at its highest levels. That's this notion that it's not about being perfect every single time and collapsing and giving up and beating yourself up when you don't do it perfectly. It's having these routines and strategies. Even if you adhere to them 30% of the time, or 50% of the time or whatever, you create a huge edge over a long enough time sample just by having that little difference and not getting so frustrated that you don't do it every single time.

[0:28:12.5] AT: Yeah, self-love, or whatever you want to call it. Self-forgiveness is something that's difficult. I think we all struggle with it. What I try to remind myself is Roger Federer hits balls in the net and I'm never going to live up to his level in poker, probably anything in terms of his prowess in sport. Of course, I'm going to make mistakes at the poker table. I feel like worst enemy in my own toughest critic. I feel we have to have that if we want to improve. You have to hold yourself to very, very high standards.

In fact, it's arguably the standards you hold yourself to that determine how far you'll get, right? You have to have those standards. At the same time, especially after losing days, I'm very critical about how I played. Even on winning days, I'm very critical about all the hands I play. I write them all down. I come back. I run them in the lab. I run them by my friends who give me brutally honest feedback. Then at the same time, I try and congratulate myself along the way for little milestones, even after a hand where I'm like, “Alec, I think it's okay.”

This is something I only started doing recently. Again, this is something I've struggled with is this self-love thing. I say and I'll allow myself to say to myself without feeling like I'm praising myself for no reason, but to allow myself to say something like, “Alec, you played that hand really well.” Give yourself a little bit of reward, or congratulations on the way, instead of just always beating yourself down when you make a mistake. I think that's fine. You also have to give yourself that praise and reward and accomplishment, the feeling of accomplishment that you're doing well along the way.

Even little things like after a workout now, I'll pat myself on the back figuratively, so to speak, or reinforce something positive in my thoughts mentally about myself that I'm proud, that I actually did this, as opposed to just only holding yourself to that expectation and then every day you don't have a workout, you feel guilty and you're like, “Oh, I'm useless. Or, I forgot.” Or every time you derail from your diet or whatever, you're a failure, you make a mistake. It's also about encouraging yourself the times that you do well.

I think, I'm not little above my paygrade, but I think the science on this is conclusive too, that people respond better to positive reinforcements than they do to negative ones. I've tried to implement that in my own life and my professional life and my personal life as well. It's gone a long way. It's something I wish I did sooner.

[0:30:30.4] MB: Yeah. The research uses a lot of times the term self-compassion for all of that encompassing perspective on self-forgiveness and not beating yourself up. We have some really good episodes that go deeper in that that we'll throw into the show notes for the listeners. I want to change directions a little bit and talk about the decision-making process that comes out of poker. It's okay to use some examples from poker situations, but there's so many powerful lessons that you can learn about making decisions in uncertain conditions, where there's a lot of risk, where there's a lot of things at stake from poker that apply to such broad areas of life.

I know personally, it's been an incredible learning tool for me. I want to hear your perspective on some of the decision-making strategies and lessons that you've taken from poker that you have applied more broadly.

[0:31:23.5] AT: Big question and a good one. One of the things I think poker teaches you to do is to evaluate things based on the merit of the play and not the outcome. You can make the right decision and still lose the hand. That's something that's often hard for people to grasp, because I think we're taught that the efficacy of our decisions relates directly to the outcome. You move your pieces well on a chessboard, you win the game. You answer correctly on a test, you score very high.

This is not necessarily true in all areas of life, because there's randomness, there's luck, there's variance. You can make a poor decision like drinking and driving and get home safe, or you can make a great decision, like leaving a party early because you have to get up early the next day to study, or to spend your time doing something that you value more. That would be a good decision. You could also get into an accident on the way home.

I feel the response that people generally have is like, “Oh, I shouldn’t have left that party early, I never would have gotten in that accident.” Well, you didn't make a wrong decision for leaving the party, you just got unlucky, so to speak, that you maybe got on an accident, assuming you weren't drinking and driving and it wasn't your fault. That's a variance. That's randomness. This happens a lot too with things like – I think poker teaches you to think about the expectation of your decisions as well.

For example, also evaluating decisions based on their merit. For example, you hear people say all the time something like, “Oh, we all know smoking is bad.” Let's say on average, if you have a sample size – depending on how often and when they start. Let's just say on average, it takes 10 years off your life, right? I don't know the exact number, but let's just say it's 10 years. The decision to smoke has the expected value, the expectation of negative 10 years of life. Therefore, it's a bad decision.

Then you'll hear people using an N1 sample saying something like, “Well, my grandma smoked and lived to 90.” That doesn't make smoking a good decision, right? There's always these outlier examples that maybe she would have lived to 105. I don't know, but maybe it just doesn't affect everyone the same way. The point remains that the decision still has an expectation. Because you can't know the future, you don't know what's going to happen. You have to evaluate decisions based on their expectation. You do this in poker all the time.

You're at the table. You don't know which cards are going to come. You just calculate the probabilities and say, “Okay. Well, I'm expected to hit my flush 30% of the time. Therefore, I'm going to play the hand this way.” You could hit it four times in a row, but that doesn't change the fact that on the fifth time, the odds are still the same.

I think about life very much in the same way, even when it's evaluating things like, whether or not to run an ad campaign. You think, okay, what is the cost? What is the sale price and what is the expectation that you're going to gain per ad that you promote and all these sorts of things. I feel it really has helped me think about the way I see the world and the way I really strategize about making life decisions as well.

[0:34:41.0] MB: You brought up so many good points there that I want to dig into. The notion, there's even a subtle mental model that you shared with the example of the grandma, which is perfect. I want to unpack this idea of making decisions, or the fallacy of making decisions with an N of 1 and using these illusory examples.

The other piece of that which is so interesting that you mentioned, which is that you don't see the other outcome with something like that, right? You see somebody who's grandma smoked and lived to 90, but that might be masking the fact that she could have lived longer if she hadn't smoked. There's all of these hidden probabilities and outcomes that you don't necessarily see when you're only evaluating these really small, or individual sample sizes.

[0:35:24.3] AT: Yeah, it's so true. That's a great point. Another one that I've thought about too is that outcomes aren't binary, right? I was talking about this the other day to someone, where it was like, well you evaluate a situation and the expectation is that it's either going to happen, or not going to happen. For example, you are deciding whether or not to go to school and get a traditional job. That is considered a safe route, right? That's like okay, that's safe. Whereas, investing or being an entrepreneur and opening a startup is risky.

I think where people go wrong is they don't properly attribute the probability of each one of these outcomes and they just look at it like binary. One is safe, therefore, my risk is zero. The other one is risky, therefore my risk is a 100. We know that's not true. There are plenty of people that go to school and that can't get good jobs, or there's risks involved. There's college debt and there's – maybe they get fired from the job, maybe the company goes under, right?

I'm not saying that you should not go to school, do a startup. I'm just saying it's important that we attribute the proper risks and percentage, so to speak to each option that we have. It's not like these things are binary. There's some inherent risk in every decision we make. Nothing is a 100 or zero. It's not guaranteed that you're going to fail. A startup obviously, but so – your chance of success in one route may be 10%, the other out maybe 50%, but it's not zero and a 100. I think thinking in terms of the probability of an outcome is the best way to attribute an accurate answer to it.

I think poker really teaches you to do this, right? It's not I went all-in. I'm a 100% to win, or 0% to win. You win based on your probability. You're going to win the hand, let's say 70% of the time. 30% of the time, you're still going to lose, so you need to be prepared mentally, or financially, or whatever it is for that outcome. Then also, being more aware of the probabilities of decisions lets you better plan for them. If you know that you're to succeed in a certain path that you're going or a campaign, or whatever it is, only 70% to succeed, you could properly evaluate whether or not you want to take that risk. 70 is not a 100 and there's a huge, huge difference there. I think poker really helps people see that.

[0:37:57.1] MB: That's a great perspective. I like to think of it in terms of black and white, right? Most things in life are not black and white. There's all these shades of gray. Even if you're looking at something as a yes or a no, even if you just add in a maybe that it might happen, you've increased the amount of options by 50%.

Even if you expand to a field of there's a one out of 10 scale, right? You've essentially 5X the amount of decision-making clarity that you have and evaluating the outcomes of that perspective. The deeper and more granular you get in evaluating probabilities, the more effective and the better your decision-making gets.

[0:38:35.2] AT: Totally. That's a great one.

[0:38:39.8] MB: The most epic and life-changing thing that we've ever done at the Science of Success is about to happen. We're launching a live, in-person intensive just for you. This will be an intimate two-day deep dive in-person with me, where we will go over all the biggest lessons and greatest life-changing insights that I've personally pulled from years of interviewing the world's top experts on the Science of Success, and show you exactly how to specifically apply them towards exponentially achieving the goals that you have for your own life and business.

You'll learn how to influence anyone, 10X your productivity, overcome procrastination and overwhelm and so much more. Bring your own unique challenges, goals and desires and get highly specific, tailored feedback and a playbook for exactly what you need to do to achieve your biggest goals.

Here's the thing, we're only going to have 15 spots available for this intensive. That's 1-5, 15 spots. If we sell out super-fast, we might do a second intensive, but this is priced so that I can spend intimate one-on-one time with every single person who attends. This event is going to be here in Nashville on January 27th and 28th.

Get more details and reserve your seat before we sell out at successpodcast.com/live. That's successpodcast.com/live. I can't wait to see you here in Nashville.

[0:40:18.4] MB: Well, the other thing that you mentioned earlier that I think is so important is that most people operate under the illusion that good decisions lead to good outcomes, but the real world is much messier than that. In business and life and investing, there's a huge amount of variance of noise, of sometimes opposite results that separate decision and outcome and it's really hard to get space and actually evaluate whether you made the right decision when you're letting the outcome cloud the evaluation of the decision process.

[0:40:53.8] AT: Yeah. I think people, typically radically in poker and I've noticed this in poker, which has made me reflect on this about life as well, but radically underestimate the role that luck plays. We like to think we're definitely responsible for all of our – everything that all of our successes and those sort of things. I think one thing that poker made me realize is just how lucky we are to even have that. That's something that I think most people just take for granted automatically. It's just like being dealt a winning hand is a prerequisite to succeeding in a lot of ways.

Some people beat the odds and aren't dealt as good of hands as other people. Arguably, they're all winning hands. The way I like to think about it is half the world was dealt a hand where they live on 250 a day or less, right? It’s just not something that anybody chose, that's just your starting two cards. That reality is very hard to rise up out of. Of course, there's some people that do it, but the odds are extremely stacked against you. If you are not part of that 50%, you're dealt a winning hand, you're born in the first-world and you do prosper to start a company and those sorts of things.

The luck preceded that, it gave you the at-bat. Of course, you have to make right decisions along the way and I think playing your hand well is ultimately going to manifest over time. I think we should be more grateful, and I include myself in this, but just be grateful for the incredible luck that has been bestowed on probably everyone listening. Just the fact that you're listening means you've already won.

Then I think people typically evaluate things in a short sample size. I think we typically are impatient, all of us to a large extent are impatient and we want to win in poker. We want to win during our next session. We lose one session, two sessions, three sessions in a row. We're like, “Uh, this sucks. I want to win now.” If you look, you zoom out and you look at things over a large enough sample, if you play your hands well and you make enough good decisions, the better players always win over time.

The thing is that people are evaluating their results in the short-term, in a short time window and in a short time period, anything could happen. Bad players can win. Good players can lose. Even events that happen in our lives can seem bad, if we label them that way when they happened in a short timeframe. Like you for example, get fired from a job. If you evaluate that in a timeframe of a week, you can place the label bad on that event that happened. If you zoom out and you don't know what's going to happen in the future, so it's very hard to label something as bad even if you do zoom out. If you look at your past, certain things that happen that you labeled as bad in the moment, like for example a breakup, probably ended up being good. It will be it painful and at the time, because it might have led you to find your current partner, or your wife and that you now have kids with or whatever, right?

I think we label things too often in the short-term, but ending out and looking at the big picture really helps create some space there and not make those events as painful to deal with. I think those are two other things that poker has made me reflect on really the role of luck and in life as well and that's really just made me a more grateful person.

Part of that was traveling to Southeast Asia when I lived in Macau, I was playing the biggest poker games in the world. We’re in Macau, and so I was living there playing. Traveling to Southeast Asia really made me realize firsthand about the former thing about being dealt a winning hand and just how many people worked. That's really helped me in poker when I feel down on my luck, I try and think about that. That no matter what happens to me at the poker table, I'm still running pretty good.

[0:44:37.2] MB: That's great perspective and a really powerful mental model that you can pull from poker and think about the world at large.

[0:44:47.0] AT: Yeah. I don't want to sound like some saint here. I have shitty days too. I have times when I'm frustrated, or stressed, or just complain about stupid things all the time. I try and again, at least have these systems that I can fall back on, or these theories that I know are true to help me in those tough times, because emotion like we talked about is a powerful force. I try.

[0:45:14.8] MB: Tell me a little bit about your strategy for prioritizing what's important in life.

[0:45:21.6] AT: Well, that's another big question. I have what I call a North Star. I've definitely didn't coined this term, but it's this guiding principle that I think are what is fundamentally important in my life. What are the things that I am going to use to base all my decisions on? What is the currency that I'm really trying to optimize for? For me, it's mainly about freedom, but also excitement and choices. When I think about whether or not I'm going to take on a new project, it could be easy without these defining principles to perhaps say yes for the wrong reasons. Most notably if it takes up an extreme amount of my time for a financial gain, I might be tempted to do it. If I look at what it's going to do in the construct of maybe locking me to a place for four years, I might think twice about it, because I realized that that won't fit into the lifestyle that I ultimately want to live and the things that I value.

I feel this helps in the macro with the big decisions that I make, but also in the micro. Even things like my spending priorities, for example. It's easy to I feel spend in areas that don't serve our highest needs. When I think about where I'm trying to channel a lot of my resources, it's mainly towards things that will give me more freedom. I know that if I am conservative and save, I can buy back my time and I can allocate more money towards things, like travel, which is fills a lot of the freedom element, but also the excitement element in my life.

I try and be cognizant of where things are going to better channel my resources, my time, money towards my highest priority items in life. That's some of the big-picture decision-making process that I go through.

[0:47:16.8] MB: In many ways, the lessons from poker, the decision-making strategies that we've been talking about have helped shape that perspective. It's so easy to get caught up in the minutiae of life and pulled in many different directions and reacting to everything that happens and all of the things that are going on, but it's so critical to come back to the center, to figure out what actually matters, what are your goals, what are your priorities, what's really important to you and not stray too far off that path, because most of us and I include myself in this, can easily get pulled in a million different directions.

If you don't figure out what really matters to you and walk a path towards it and put yourself back on that path every time you fall off, it's really, really easy to get off course.

[0:48:03.9] AT: Yeah. I've tried to like in poker, I always tell my clients and students, like before you make any bets, think about why you're making the bet and what you're trying to accomplish. I've really taken that to the bank when it comes to things that I'm trying to do in my life as well. Before I decide, like I'm writing a poker book for example. I’m in the process of doing it. I'll be done in [inaudible 0:48:27.7]. I really try to think about, like this is a big decision, right? It's going to lock a period of time and I'm going to have to put other projects on the side. I really try to think about how is this going to help me achieve my business goals, or my personal goals and where does this fit into the big picture plan.

I think without that process, it's easy to just let schedule, or time, or your attention be filled up with these almost arbitrary, miscellaneous things, right? It's almost whatever comes at you. You need a process for making these decisions. I think defining what people really want and what their North Star is an important process of it. Then it's about mapping really your actions and ambitions towards that, right? Making sure that the decisions you're making are getting you closer, not drawing you further away.

I see this quite often, where people aren't really matching these two things. For example, I had a lot of friends that say that their North Star is something like traveling often. Then they will do something that completely inhibits that, like spending a lot on a car, or on rent, or buying a dog, or all these things that seemingly make that aim a lot more difficult. They just do it getting caught up in peer pressure, or society, or emotion, or whatever it is. I feel just identifying what it is that's really important and then mapping all of those actions towards that big picture of is this going to help me get more of that, or less of that and is it worth that cost, or that sacrifice is a good starting point.

[0:50:06.9] MB: Great advice. For listeners who have been listening to this conversation, who want to concretely take action or implement something that we've talked about today, to be about prioritization, decision-making, emotions, whatever, what would be one piece of homework, or one action item that you would give them to start concretely taking action on something that we've discussed today?

[0:50:31.2] AT: Oh, man. I guess it just depends on what topic was the most exciting to them and where they found the most – what they’ve resonated the most with. I mean, it could be something as simple as taking up a meditation practice. It's something I would wish I could have told myself two decades ago. Or it could be something like just thinking about making logical decisions, instead of emotional ones, like asking yourself in the third-person what should Alec do in this moment. Should Alec eat this piece of cheesecake, or not? Maybe the answer is yes. It's not like you shouldn't ever do those things, but it's just understand, use that self-awareness to understand is this the right decision and why? Sometimes I do it. Why not?

Another thing could be getting clear about your personal goals. I find that the anchor of this whole thing is finance, right? Money is really a tool that gives you options. I think the best place to start is tracking your spending. One exercise that was extremely eye-opening that I did and I've done this in various countries that I’ve lived in different times of my life is just tracking every single dollar I spend. There's a great quote, I think it's by Peter Drucker, what gets measured gets managed. Actually, might not be by Peter Drucker. [Inaudible 0:51:47.0].

Anyway, that's definitely the quote. It might not be by the person. What gets measured, gets managed. It was really through tabulating every single dollar I spent and then categorizing that spending that I got clear on where every dollar was going. Just the process of doing it makes one more accountable and they'll find that they probably naturally spend less just by being accountable with their spending by writing it down and being forced to look at the spreadsheet at the end of the month, or whatever it is, whatever system you use. That really can help people channel their resources towards things that are more important to them. I think that's a great place to start.

I have worksheets that are free on AlecTorelli.com about how I do this and how I set goals and create an action plan and then map my spending and my daily steps and actions towards achieving those goals. That could be a resource for people that are looking to do that. Yeah, those are some good places to start.

[0:52:41.9] MB: I love that suggestion. Something so small and this idea of just starting with your budget, realigning your resources with what your actual goals are is a great concrete action step to beginning to align your life with what you want it to be.

[0:52:57.1] AT: Yeah. I find that it's going to be people almost in having clients, or people that have given me feedback and myself included when I've done this, there's almost always 20% or so of one's budget that's going towards things that aren't their highest priorities. They could usually cut that out and reallocate that and that could make a huge difference, if that whatever, $2,000 $3,000 a year is going towards, instead of a new iPhone, it's going towards a trip to Asia.

I mean, it could be as simple as that. Just don't upgrade you and your girlfriend's iPhone. Save $2,000 and wait an extra year and go to Asia. It could just be so simple. I mean, it could be more complicated. I mean, there's so many things that I feel are easy wins in the finance category. I would really implore everyone to try that out and there's going to be some eye-opening results there for people.

[0:53:43.3] MB: Alec, for listeners who want to find more of you, your work, your advice, etc., online, where can they do that?

[0:53:50.2] AT: I'm very active on social media, @AlecTorelli everywhere. I have a YouTube that has a lot of poker strategy and some lifestyle content as well. Conscious Poker YouTube, or Alec Torelli. Then AlecTorelli.com for my personal content.

If you want to learn poker strategy, Conscious Poker is my poker training site. You can go to ConsciousPoker.com and there's tons of resources to help people reach that next level in poker. That's a little bit of how to stay in touch. I probably Instagram, I'm pretty active on. Shoot me a DM, say hi and let me know you saw me on Matt's podcast. I'd love to say, hey, I'm very active on there.

[0:54:28.3] MB: Awesome. Well Alec, thank you so much for coming on the show, for sharing all this wisdom. I always enjoy digging into some high stakes poker.

[0:54:35.6] AT: Thanks, Matt. This was awesome. Appreciate you having me.

[0:54:37.8] MB: Thank you so much for listening to the Science of Success. We created this show to help you our listeners, master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is matt@successpodcast.com. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener e-mail.

I'm going to give you three reasons why you should sign up for our e-mail list today by going to successpodcast.com, signing up right on the homepage. There are some incredible stuff that’s only available to those on the e-mail list, so be sure to sign up, including an exclusive curated weekly e-mail from us called Mindset Monday, which is short, simple, filled with articles, stories, things that we found interesting and fascinating in the world of evidence-based growth in the last week.

Thanks again, and we'll see you on the next episode of the Science of Success.

Jay Abraham: Growing A Business With No Money Or Customers

November 12, 2019 by Lace Gilger in Career Development, Money & Finance

In this interview we show you how to grow a business with no capital, no product and no service. You will discover how to train yourself to spot outrageous business opportunities surrounding you in everyday life and we give you the strategies for building trust with your ideal clients and business partners. We ask what does it take to become GREAT? In your career, job, business, partnering, relationships we look at exactly how you can achieve greatness in the key areas of your life. All of this and much more with our guest the legendary Jay Abraham.

Jay Abraham is founder and CEO of The Abraham Group, Inc., and is recognized as one of the world’s most successful marketing strategists, business innovators, entrepreneurial advisors, and masters of revenue acceleration. He has spent the last 30+ years solving problems and significantly increasing the bottom lines of over 10,000 clients in more than 400 industries worldwide.

How do you grow a company with no capital, product, or service?
What does it mean to mine, monetize and maximize relational capital?
Whatever your resource impediment or impairment is, someone else has that and you just have to figure out how to ethically leverage it
How Jay created 1.5mm in less than 6 months by finding arbitrage between products, services, and audiences
Find “strategic investors” - who else benefits from your growth? Complementary or related products, companies that benefit and naturally grow when you grow - and demonstrate to them that your growth is beneficial for them too - and then get them to help you.
How do you build trust in a business relationship? How do you get someone to introduce you to all of their clients?
- Trust - integrate trust building into your behavior
- Prove your product / service and it’s performance
- Denominate what that performance should look like, and how it’s measurably superior to what’s out there
- Show that your performance has an economic value / profit enhancement for the person you’re pitching
- Find 2-3 companies that are willing to be your guinea pigs / beta testers - do a pilot with them first (potentially funded by an investor)… (then leverage this case study to sell more people)… and give them an extra incentive / bonus for making the introduction
- The best way to get someone behind your product, service, business proposition etc is to PROVE to them that it performs - PROVEN PERFORMANCE is huge.
Before you expend a ton of capital and time on a project - try to get some validation. The only validation that counts is dollars spent, not what a focus group thinks.
How to easily validate your business ideas without taking risk on the front end.
There’s a huge amount of IP that’s available to license from places like the Navy, the government, etc
Find “parallel universes” that aren’t competitive and plug those opportunities in.
Never put anything at risk until you’ve de-risked and validated your product, service, or business model
What happens when a typical business is STUCK? Figure out what you’re stuck with.
- In ANY category of expertise that are people who are super expensive on the top end, but there are many many people who are not at full capacity who are still
- Make a list of 15 potential consults, and give them all the same pitch
- I have this challenge, if we can quantify the result of the improvement, and turn the fixed expense into a performance based expense - you can achieve and fund any change in your business
How can you unlock an “unlimited business checkbook” to fund ANY problem within your business?
How someone got paid $1mm and a free Porsche to buy a Porsche dealership with creative deal making
Jay’s skillset comes from 2 key things
- Tons of diverse experiences - so he can see so many different combinations, permutations and options
- Bringing to an industry the approaches that no one else can see from other industries - the one eyed man in the land of the blind
Spend time traveling outside whatever you do and whatever you’re interested in. Study other businesses, study how other products and services market, how they sell, study topics that are outside your domain of knowledge.
How to train yourself to spot outrageous business opportunities lying around you in everyday life.
How you can make the “money connection” - you don’t need to be brilliant, but you have to have the right “sensors” turned on - and they only turn on when you broaden your understanding of what’s possible
What is Greatness? And why do so many people fall short of it?
Everyone has the ability to be great - and everyone wants to be great.
98% of people are mediocre - yet they want to be great - WHY?
What does it take to become GREAT? In your career, job, business, partnering, relationships - how you can achieve greatness in the key areas of your life.
There are 4 keys to achieving greatness:
- #1 - Get a context of what greatness ACTUALLY looks and feels like. Take the time to understand what greatness looks like and feels like. In your brain, in your experiences, in your life.
- #2 - Reconcile yourself to where you actually ARE today on the continuum / spectrum of greatness today. You have to know the GAP from where you are to where you want to be.
- #3 - Figure out the different strategies and options to get you from where you are to where you want to be - figure out the pros, cons, nuances, etc of each different strategy and find the best one for you. A one size fits all dress doesn’t fit most people well.
- #4 - “The Log Jam” Theory - Usually one category is gonna have more ultimate impact in opening up the positive flow in all the areas - focus on fixing that log jam first.
- #5 - Understand that it's a process and it takes time. You need support and compassion, coaching, mentors etc. It’s like a kid trying to walk or talk for the first time, it takes TONS of time to gain proficiency in ANYTHING. You need someone to believe in you, be there for you, and hold you responsible.
- The first time you try to do ANYTHING - you’re gonna screw it up. Your success chances are almost zero.
With every improvement in greatness there is an exponential increase in quality and outcome - not a linear increase.
Most breakthroughs don’t come from WITHIN an industry - they come from OUTSIDE it.
Homework: Be curious, ask people questions, dig into how other businesses and industries do business.

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

Jay’s Website
Jay’s Wiki Page
Jay’s LinkedIn, Twitter, Facebook

Media

Kamloops This Week - “Kamloops man has award-winning experience with documentary” by Todd Sullivan

Stephan Spencer - “Billion Dollar Marketing Tips From the Legend: Jay Abraham” By Stephan Spencer
- [Podcast] Get Yourself Optimized: EPISODE 163 | OCTOBER 4, 2018 BY STEPHAN SPENCER
INC. - “Billionaire Mentor Jay Abraham on How to Be the Ultimate Entrepreneur” by Tracy Leigh Hazzard
Entrepreneur - “3 Ways You Can Increase Sales Without 'Selling'” by Chris Jarvis
- “3 Strategies for Growing Your Online Business Fast” by R.L. Adams
- “7 Time-Tested Rules for Marketing and Growing Your Business” by Deep Patel
Forbes - “The Single Secret To Preeminence, According To Jay Abraham: Think Differently” by Cheryl Conner
- “Executive Coach Jay Abraham Discusses Turning Other People's Challenges Into Your Own Opportunities” by Daymond John
I will Teach You To Be Rich - “Meet my mentor, Jay Abraham” by Ramit Sethi
[Podcast] The Soulfully Optimized Life w/ Adam Siddiq: A Q&A WITH JAY ABRAHAM: STRATEGIES FROM CREATING $21.7 BILLION IN GROWTH
[Podcast] Lewis Howes - 10X YOUR BUSINESS WITH MARKETING MASTER JAY ABRAHAM
[Podcast] The Copywriter Club Podcast - TCC PODCAST #100: Establishing Preeminence with Jay Abraham
[Podcast] The Danlok - Impacting Businesses With Marketing Makeovers and Innovative Solutions with Jay Abraham
[Podcast] FROM THE VAULT: TONY ROBBINS & JAY ABRAHAM (Parts 1 & 2)

Videos

Jay’s YouTube Channel

Josh Felber - The Need for Funnel Vision with Guest Jay Abraham: MakingBank S1E54
Grant Cardone - Grant Cardone & Jay Abraham Exclusive Business Coaching
Evan Carmichael - The Preeminent ENTREPRENEURIAL and MARKETING Expert ft. @realjayabraham
The Wolf of Wall Street - Words of Wisdom with Marketing God Jay Abraham - Jordan Belfort Wolf’s Den

Books

Getting Everything You Can Out of All You've Got: 21 Ways You Can Out-Think, Out-Perform, and Out-Earn the Competition by Jay Abraham

93 Extraordinary Referral Systems: Jay Abraham's Money-Making Strategy Clusters by Jay Abraham
The Sticking Point Solution: 9 Ways to Move Your Business from Stagnation to Stunning Growth by Jay Abraham
The MasterMind Marketing System by Jay Abraham
Your Secret Wealth: Hidden Assets & Opportunities That Can Change Your Life by Jay Abraham
Learn from the $4 Billion Man by Jay Abraham
How To Get From Where You Are To Where You Want To Be A Six-Week program With Jay Abraham by Jay Abraham

Episode Transcript

[00:00:04.4] ANNOUNCER: Welcome to The Science of Success. Introducing your host, Matt Bodnar.

[0:00:11.8] MB: Welcome to the Science of Success; the number one evidence-based growth podcast on the Internet with more than four million downloads and listeners in over a hundred countries.

In this interview, we show you how to grow a business with no capital, no product and no service. You will discover how to train yourself to spot outrageous business opportunities that are surrounding you in everyday life. We’ll give you the strategies for building trust with your ideal clients and business partners. We ask what does it take to become great in your career, job, business, parenting, relationships and more. We look at exactly how you can achieve greatness in all of the key areas of your life. We discuss this and much more with our guest, the legendary Jay Abraham.

I was recently closing a big software deal and I was thinking about how the lessons and themes from the Science of Success have been so valuable to me as an investor and business owner. I realized that I'm leaving a lot of value that I could be creating for you, the listeners on the table. I believe that many of the things that we teach on the Science of Success are some of the biggest and most important business success factors today.

To that end, we're launching a new Science of Success segment focused on business. These episodes will air every other Tuesday and will not interrupt your regularly scheduled Science of Success programming. Everything we teach on the show can be applied to achieving success in your business life. Now we're going to show you how to do that, along with some interviews of the world's top business experts. With that, I hope you enjoy this business-focused episode of the Science of Success.

Are you a fan of the show and have you been enjoying the content that we put together for you? If you have, I would love it if you signed up for our e-mail list. We have some amazing content on there, along with a really great free course that we put a ton of time into called How To Create Time for What Matters Most In Your Life. If that sounds exciting and interesting and you want a bunch of other free goodies and giveaways along with that, just go to successpodcast.com. You can sign up right on the homepage. That’s successpodcast.com. Or if you’re on your phone right now, all you have to do is text the word “smarter", that’s S-M-A-R-T-E-R to the number 44-222.

In our previous episode, we had one of the absolute living legends of psychology on the show. We discussed the greatest unanswered questions in psychology, the biggest thing people miss understand about flow, what advice young people can take away from our previous guest’s incredible career and what he thinks the absolute biggest takeaways from his own research about flow. All of this and much more with our previous guest, Mihaly Csikszentmihalyi. If you want to learn about flow from the researcher who pioneered the entire field, listen to our previous episode.

Now for our interview with Jay. Please note, this episode contains profanity.

[0:03:19.0] MB: Today, we have another legendary guest on the show, Jay Abraham. Jay is the Founder and CEO of the Abraham Group and is recognized as one of the world's most successful marketing strategists, business innovators, entrepreneurial advisors and masters of revenue acceleration. He spent the last 30 plus years solving problems and significantly increasing the bottom line of over 10,000 clients and more than 400 industries worldwide. Jay, welcome to the Science of Success.

[0:03:45.7] JA: Thank you, Matt. I appreciate it. My pleasure.

[0:03:48.5] MB: Well, we're super excited to have you on the show today. I'm a huge fan of you and your work and I can't wait to dig into some of the key themes and ideas from your massive body of work and success.

[0:04:00.1] JA: Okay. Let's go at it then.

[0:04:01.7] MB: One of the most fascinating things to me about you is your ability to think laterally and approach problems from a completely different perspective than most people. I want to start with a big question, but it's a question that in many ways your work has addressed in many different ways, which is this idea of how does somebody grow a business if they don't have any money, or they don't have any resources, or they don't have any customers and they feel stuck, or they feel they can't get to the next level because of a lack of X?

[0:04:34.8] JA: It's a great question. It's certainly a broad one. I'll give you a spectrum of answers, okay? There's going to be three scenarios. What you want to do, but you don't really have product service or capital, the way to do it is through strategies that the macro we call is just mining, monetizing, maximizing, managing other people's relational capital. What it means is if you are very, very pragmatic, you can identify that whatever your problem is, whatever your resource impediments as someone else in some other business, or in the same intended business, has what you want and you can basically identify that your ability to achieve that could actually be the fulfillment of a problem, or an opportunity that other person doesn't have.

For example, you might say I've got a product, but I have no distribution and I want to reach heads of IT departments and doesn't matter the industry. Pick an industry. You can find people who have already sold products or services to that decision-maker who have nothing else to sell, but spend an enormous amount of time building goodwill, trust the relationship. If you showed them that they have a sunk cost in that relationship and then you are able to demonstrate proof to them, the value, the qualitativeness, the performance capability of your product or service, you go to them and you ask them to either introduce or outright sell that product to you.

If you needed an office that you didn't have in a city and you had no money, you find somebody else that sells to a similar target audience who has underutilized capacity and you make a deal to sub-office with them. We've done this with tradeshow booths, we've done this with skill sets, we've done this with people who had advertising capability. We've done this with platforms, we've done this with media. That is one way to do it.

Another way to do it which I did one time and we made someone a million and a half dollars in six months as you go to some of the more popular categoric areas of search, you don't go to the first page, you go to the second or third and down and you start finding what I call arbitrage. You find somebody who's got a book that he or she doesn't have a seminar. You find somebody who has a seminar, but doesn't have a book. You can find somebody who has a book and/or a seminar, but doesn't have coaching. You tie all that up, you put it altogether, you take a piece of that. That's another way.

Other ways, you find somebody very successful in a category that does not have the desire to expand nationally or internationally and you set an arrangement, where they let you use basically their IT for either a royalty, or for a percentage. I mean, I can go on and on and on and on. We have a whole book that is called How to Get the Money for Your Great Idea or Startup and What to Do If You Can't. It goes through all the alternatives to capital. Capital impairment is not a reason you shouldn't grow.

There's always going to be somebody. Also, you can go to people that have a business and they have a product or service line, but they do not have certain products, or services that are natural purchases by that same target audience before, during or after that person buys from them. Go to them and say, “I want to create that kind of a business addition and I will operate it through your business. You will market it, because you've already got the clientele and we will split whatever way you want.” I can go on and on and on, but there's a multitude of ways you can do it.

If you have a product or a service and it has been validated, but you want to grow more, first thing that you do is identify what I call strategic investors, people who would benefit more by you being more successful than even you. It could be a product service that would be purchased right after, during. Or it could be a company that if you got large enough, they would like to absorb you. You then figure out how to demonstrate to them predictable, expanded demand. We do that sometimes.

I had a consult, an accidental consult the other day. A gentleman has got a technology using very complex LiDAR technology to identify snow in the mountains and extrapolate what that will mean in the spring and summer to water, to the water management companies. He's trying to raise six million dollars, but he doesn't know how. I explained to him that the easiest way to raise money is to go to a 100 or 200 water management, I guess directors. Show them what you can do, show them what it could mean, demonstrate and correlate the value, either savings time, predictability, budgetary advantage and get them to give you what is called a contingent purchase order. Meaning that if you can do this by such-and-such a time at such-and-such a price and it will prove it can do such-and-such an outcome, we will buy it. If you have 50 or a 100 of those, it's a lot easier to get invest your money. I can go on and on, but there's a couple.

[0:10:09.8] MB: Those are great. I want to drill down on the first example, or one of the most basic examples of this idea of relational capital. Let’s go with what you said. Let's say I have a product or service, I'm selling it to IT managers. I go and approach people who are selling to IT managers already, but selling something that's a complimentary, related product to mine. How do I go about building trust with those people, convincing them, “Hey, you should introduce my product to your client and insert me into your client relationship.”

[0:10:42.6] JA: Well, trust is created many ways. First of all from a clinical standpoint and I'll be happy to provide you with some of this if you want to share it with your audience. There are experts in soft skills. Stephen M.R. Covey, the son of Stephen R. Covey is the preeminent leader and the master at business trust building. There's 13 characteristics that if you can incorporate those into your being, they give you something like 300% more probability at success.

The first thing I'd say is integrate all the characteristics of trust building authentically into your being; that's one. Number two is proof demonstration and pre-emptive overcoming of predictable concerns is the second way. You've got to prove first of all that your product or service performs. Second, you've got to be able to nominate what that performance should look like and how that performance is measured, either tangibly, or intangibly superior to what's out there. Third, you've got to show that that performance has some either economic value in profit enhancement, productive value in either more effectiveness, or more savings, reduced personnel, more reliability. You've got to be able to do that first.

Second, nobody wants to be the first in. You've got to find two or three companies that are willing, or organizations depending on the product or service, willing to basically be your experimental guinea pigs. You've got to basically invest in them. Usually if you can get an investor and ask him or her just to fund the pilot applications, what I normally do is get the guinea pig beta testers some kind of a participatory bonus. If it works and they are authentic and not inaccurate, as long as they're not manipulative and scamming. If it works and they will be our validators, our testimonials, we give them either – and it's fully disclosed, we give them either a percentage of the revenue equity, some consideration or services for three years grant. Something that is worthwhile to them, but not covert. That's another way to do it.

I mean, I always believe that the best way to get somebody passionately and what's the word I want to use? Unhedgingly strongly behind your product, your service, your business proposition, is to prove to them it performs. Many people don't really grasp that. Daymond John who I've done stuff with, wrote a book. It was called The Power of Broke. He was talking about how when people come to him trying to talk about garments they want to put to market, he says, “Take it to a flea market. Open your trunk in a shopping center mall parking lot, see if people will buy it just as it is. If they won't buy it there, they're not going to buy it anywhere.” Prove to yourself first of all.

A lot of people don't understand. They get all excited about a concept that the market isn't excited about. I always recommend before you expand an enormous amount of energy, time, opportunity cost, your own or other’s capital, try to get some true validation. Validation is of two kinds, if you ask people, it's the idea of a – what do they call it when you go and you query a group? My brain is at a gap right now.

[0:14:31.8] MB: Market testing, or market surveys.

[0:14:33.6] JA: I think it was the word for it. When they tell you they like it or don't like it, that isn't necessarily a truism, because they aren't being asked to vote with their credit cards, or their checkbooks, or their purchase orders. The only vote that counts is if somebody is willing to commit. The only truth that counts is if the product or service is able to perform. Performance is a very relative concept. To some people, performance is a great feeling. To some people, it's how they look. To some people, it's just the knowledge that you've got the top of the line, even if it doesn't have.

I'm not sure that a Mercedes at 50 grand outperforms a different car that's not as prestigious at 50 grand, but there's certain value. If you have to know and you have to validate before you make a huge commitment that you can't take back. Because if you blow the commitment, you blow your trust with investors, you blow your trust with industry, you blow your own self-esteem, unless you have a very, very, very strong character and belief.

I always believe in proving before you try to expand. It's a little slower. The power of having documented evidence, the power of having contingent commitments, the power of having a partner who's willing to try it if another investor will at least fund the beta version, the ability to quantify what its performance or benefit, or savings or attributes are gives you a lot stronger advantage than just the radical excitement about the product or service. I don't know if that helps or not.

[0:16:19.9] MB: Yeah, I think that's really helpful. I want to dig down a little bit more about this concept of validation. What are some of the ways that you validate, or experiment, or test ideas and how do you do that without spending a huge amount of time, energy or money?

[0:16:36.4] JA: Well, legalities you have to check out, because they've changed. It used to be you could dry test. I think you still can do a variation of it, where you can literally go to a market with some offering. It can be online, offline, and just describe what it is, describe what it does, describe how it does it, describe the implication, describe when it'll be ready and ask for expressions of interest. That's first stage.

If you don't get any, that's probably a tell, don't you think? If you get them, then you have to explain to them and you can incorporate into your first stage communication the pricing and performance, or you can wait. Then you basically explain and then you try to go from that to a contingent commitment, to either purchase it when it's available, to test it for you and apply it as a pilot, if it's available. Or to even if that's really that promising to co-fund it for you for them with an understanding that they will get a share of future sales outside, if that's applicable. That's one way to do it.

By the way, people don't realize this; I do work with one of the big contracting companies to the Navy War College. There are an enormous amount of technological IP that's available for licensing that's out there. I'm sure every category of government – Jet Propulsion Laboratories have it. Somebody we know from Livermore Laboratory licensed something. I mean, there's so much out there.

Also, you could model anything anybody does and say, “Okay, is there a parallel universe that would apply to that's not competitive?” If the answer is yes, you can go to that company and say, “I would like to take everything you do and translate it to X industry.” It's not competitive at all, but I think I could create a meaningful business or cash flow from it and I will share with you on X type of it.

I mean, when people are stymied, the reason they're stymied is not their fault. I have a very wonderful privilege. I've been involved in over a thousand industries and an incalculable number net of scenarios, strategies, business models, business challenges, competitive advantage creation, value added, ancillary business, repurposing, lead generating, sourcing, positioning advantage, ancillary income. When you have the a broader swath of comprehension of maybe not all, but of let's say quantum times more of what's possible, the idea of being frustrated, or seemingly impaired, or not being able to do something, or thinking I don't have an idea, or I don't have a product, or I don't have the skill, or I don’t have the money, the other thing is there's always out there the relative skillsets that you need.

We did years ago a training program on how to be a contingent marketing consultant. We identified the three or four categories. One are the people who are able to sell the concept to the entrepreneur business, to owner of professional media organization. The other is the ability to basically deliver it. The other is the ability to just manage it. We said there are those types everywhere. There are sales people out there who would love to own an equity and a business but they don't A, have the capital, nor do they have the mental construct.

There are people who are really good operators who would never be able to sell anything and they'd love to be in business, but they can't sell. If you find these people and you put them together and you start hard so that you don't jeopardize anybody's security. I always believe that the first thing you do is never put anything and anyone at risk until you validate it. Some people jump right in and I think that's admirable, but I think it's very wise to try to at least get some validation of assumptions. I'm just saying it's infinite. There's just so many things you can do.

[0:21:00.3] MB: Tell me a little bit more about this idea of [inaudible 0:21:02.8], power partnering, etc., for a skill set or capacity and maybe some examples of people who've done that in the past.

[0:21:10.8] JA: Well, let's take a look at a typical business that is operating, but not opted stuck, okay? They could be stuck with lack of knowledge. They don't know how to market well. They don't know online. They don't have good technology. They don't have systems. They don't have maybe good production. They don't have good channel management. They don't have good distribution control. All of those are skill sets that people sell, right?

Consultants, experts, advisers, most of them sell it by either the hour or the monthly fee, or project. What people don't realize is that in any category of expertise, there are people like myself and I'm very expensive and there are people that are let's say, ordinary, general experts and they're fairly priced, but it's very rare that everyone is fully utilized, that everyone has every hour of their time consumed. If you identify not one, but maybe 15 and you go to them down the line and say, “I have this challenge. If we can quantify what your contribution can mean to it, either an increased revenue, savings, productivity, any denomination that can be converted to me paying you, I will pay you X for Y amount of time in exchange for you investing your expertise.” Now you've turned a fixed expense to a variable, right?

[0:22:37.7] MB: Yeah, that's great.

[0:22:39.0] JA: We do it all the time. We have a concept that I call the unlimited business checkbook. The concept is within about 90% of the categories of impairment, resource impairment, economic impairment, IP impairment, capital, and there's many derivatives of capital; human, relational, intellectual impairment, you can overcome almost all that with a strategic alliance with the power of partnering, with the relational capital move or maneuver.

Then there's a whole other side of it. It's control. It's getting access – having access to people's assets. In other words, you might find that you get access to somebody's buyers and then you can do it with lots of those somebodies in the same field all over and you can have a back-end or a front-end. Just an example that's fascinating and it's very simple one, in the home improvement business, people don't realize it. You have a home, right? You have a house?

[0:23:39.6] MB: I do.

[0:23:40.6] JA: Have you done any improvement to it?

[0:23:42.1] MB: I have.

[0:23:42.9] JA: Okay. Typically not always, but there's a very high statistical probability, Matt. If you are going to improve a function or factor in your home, normally the first one is a kitchen, because that's a focal. If you're going to do a kitchen, once that kitchen is transformed and looks majestic, you start contrasting that to the rest of the house and you go, “Oh, crap. I got to fix the bathrooms, then I got to fix the paint, then I got to replace the carpets or the floors, then I got to maybe replace the doors, or the windows, then maybe the roof, maybe the garage door, maybe the landscaping, many all crap. Maybe I should do some stonework and put either a fireplace or a really nice patio, or a pool.”

There's a progression and it doesn't go that expansive, but almost anybody I've ever looked at there's one or two gradients. If you can strike an arrangement with any ethical home improvement company that does one vertical thing and they will share with you not just their buyers, but their non-buyers, the statistical probability of that group of prospective sources being worth a fortune to you is very high. Does that makes sense?

[0:25:05.2] MB: Yeah, that totally makes sense.

[0:25:07.0] JA: I mean, there’s tons. I mean, I've been very blessed to see correlations, implications, anomalies. I've been able to extrapolate to see all these things. I'll tell you some fun stories and these are derivatives of this, but they're very cool. Probably the most interesting thing that I ever heard of, highlight was very cool. There was a man about 20 years ago who loved Porsche automobiles, but he couldn't afford to even buy one, but he loved them.

He found out that a small Porsche dealer was becoming available for purchase in Northern California. Out of curiosity, he applied. He get the paperwork and review it. Upon reviewing, he saw that there was a stipulation in the dealer agreement that a dealer could make a brand-new Porsche available for trial use for up to, I think it was three months and 3,000 miles and it could still be licensed as new. It was a demo. You know what a demo is, right?

[0:26:09.0] MB: Yup.

[0:26:10.0] JA: With that piece of information, he got a wild idea and he ran ads all over Northern California that said, “Drive a brand new Porsche every year for life for a one-time $75,000 investment.” He got about – it cost, I think it was a million dollars he needed for the dealership, but he got 2 million plus from people who came in, because he was able to make these Porsches available to them. Two things happened, they became his greatest referral sources. Half of them didn't really exchange Porsches. They just bought theirs from him at a discount. He created a dealership and he ended up with a with a million dollar plus capital. He had that one point of interest and he had out one point of equity he gave out for doing it, that's a pretty cool concept.

[0:26:56.4] MB: It's incredible. I love those kinds of stories. There's so many from the archives and the war stories that you have. I'd love to hear if another one comes to mind, another example of that really innovative lateral connecting the dots and thinking in a different way.

[0:27:11.7] JA: Yeah. I had a friend, I don't think he's dead. I just don't have contact with him anymore. I was pretty cool. I'll take a couple cool ones that are all true. Years and years ago, he realized that the Rose Bowl, the big stadium that they play the Rose Bowl in that UCLA plays in was not being used, something like three weekends out of the year, except for at key times.

He went. He negotiated with them to get the rights to use it to create a flea market. He knew nothing about flea markets. Once he got the agreement, he went to the biggest operator of formal flea markets in the country and he flipped the agreement to them for a cash upfront and a percentage of all the revenue they got from leasing the flea markets. He got it for I think 20 years. That was pretty interesting. Probably one of the ones everybody loves is Carnival Cruise. You know what that is.

[0:28:11.9] MB: Yup.

[0:28:12.9] JA: A cruise line that’s got – I think they own now five or six other cruise lines. I knew the marketing guy when they started. The man that started Carnival Cruise had one ship. It was a beat-up used ship. The guy was so capital impaired that he could only afford to paint it on one side. He would have to bring it in on the painted side, so that people coming on would see it and it would look at least reasonable. It would go out I think 800 rooms and would go out half full every week.

The man who owned it had a brilliant distinction. He realized that every week it was going out half empty. Those 400 rooms at that time were worth $800 a week. That's $320,000 worth of buying power down the drain. He got my friend who is now deceased, but my friend who was the marketing manager to go to every radio station, television station, publication and trade them credit for use on Carnival Cruise in exchange for advertising. He actually let them have two years to use their credit, but he used his right now.

His credits drove all kinds of paid cash people. When anybody from the media used their credits, which he absolutely made possible, but a lot of the media used it as gifts to their employees, bonuses, gifts to their clients. A lot of the clients would buy second and third rooms, so they got cash even on the utilization of the credits. When anyone redeemed the credits, the owner of carnival would charge a $39 surcharge. That charge covered the incremental cost of the cold cuts for the buffet, the sheets. Most of them were three-day cruises. He made money from the excursions, from the gambling. That's how he built Carnival Cruise.

The guy that started home shopping and then QVC modeled it was a guy that had a very unsuccessful radio station in a small city in Florida. He literally, very fascinating, couldn't sell advertising, so he would trade to merchants for merchandise. He had all this merchandise and he had to get rid of it. Every Saturday, he would do four or five hours of literally an on-air auction to sell all the electric can openers and all the hair dryers and all the pots and pans that he had. That was the genesis. He started making so much money that he started buying the same timelines and bunches of other radio stations and then he moved it to television stations. Man, go on and on and on and on.

There was a company in Australia, very fascinating. There was a law that you could not do building advertising on the outside of a building downtown, because of aesthetics. There was a guy that was very brilliant. He realized that you could put an ad on the inside of a ground-level window. He bought the rights to do that in an enormous number of buildings, then he went to the big outdoor advertising company and he sold his rights to them for a big fee, plus a piece of all the future advertising. I can go on and on.

[0:31:51.9] MB: It’s incredible.

[0:31:53.4] JA: Yeah. Well, I mean, it's a way of thinking. I've got that classic story that people, your group won't be as aware of this, but the story is pretty cool. Years and years ago, an insurance company called ColonialPenn started out with a focus of trying to create group policies, going to organizations, going to associations, going to unions. They were struggling. They were having a lot of trouble breaking in.

After a couple of years of mediocre performance, one of the very brilliant, brilliant, brilliant directors said, “Let's look at this differently. If we cannot sell a client, a group, why don't we start our own?” They started an organization called the American Association of Retired People, AARP, so they would have a client. Now AARP has something like 16 or 20 million members, it's a huge revenue source, it's a viable big, big company and it produces – Well, they had to divest themselves after about 20 years, because they had a monopoly. ColonialPenn made billions of dollars from it. I can go on and on. It's a way of thinking, Matt.

[0:33:07.7] MB: How do you start to train yourself to think that way, to see these gaps and opportunities that are all around us that seem invisible to most people and yet, someone can just pluck an empty parking lot or an empty stadium and turn it into a million dollar deal?

[0:33:24.8] JA: Well, I'll tell you how I am able to do it and I'll tell you how I've tried to get other people to do it. My skill set comes from two distinctions; one, I've had so many diverse experiences that I can see possibilities, applications, correlations, combinations that I think most people do not get the chance, because they're very vertical in their life experiences. What I've done is two things and not commercial crafts. We've created programs we sell occasionally, not often, that give them this broad spectrum. They have a context.

What I tell the most people is spend time traveling outside whatever you do, whatever you're interested in. Study how other businesses industries operate, study other areas of interest, study how other people market, study other products service offers, get all your friends and your neighbors and your relatives to send you all the promotional stuff that they get from whatever they're interested in, whatever they're signed up on, whatever their industry is.

On Saturdays if you live in a decent city, go to the convention hotels and walk around. There's normally 10 or 15 different events going on. Ask the people at the door if you can walk in for hour watch and expand your horizon. Start learning what you don't know, because that's where your opportunity lies. In business itself, very candidly, my skill has always been bringing to an industry that which no one else in the industry has ever been exposed to. It's the one-eyed man in the land of the blind. I would just borrow success approaches from all kinds of outside industries, combine them and then introduce them to an industry where everybody is doing the same thing the same way. My client gets outrageous advantage, because nobody else thinks that way.

It's a thought process that has to be cultivated. One time, we did a program that we called how to think differently. Actually, it was called do something different. Every week for 13 weeks, we gave an assignment to the people. Very simple. First assignment was somewhat like this, whatever your regimen or protocol is Matt, when you awaken in the morning; you get up, almost everybody has to go to the bathroom, that's natural. Then you have a sequence you normally follow. Maybe you take a shower, maybe you turn on the coffee, maybe you watch CNN, Fox, MSNBC, Bloomberg, then maybe you read a paper. Then you get dressed.

Then if you don't work at – you work at home, you go to your computer and you go on Facebook, or you go to whatever you do. Or if you go to work, you probably take either a service, could be an Uber, can be train, bus, or you take the fastest, most expedient form of transportation, the highway. We would say change your regimen for a week. Get out, but obviously if your bladder is full, go to the bathroom, but do everything else different.

If you'd normally have coffee first, take a shower first. If you normally get dressed last, get dressed first. If you normally read the paper last, read it in the middle. If you normally drive down the highway, drive down the side streets and force yourself to break your pattern. I had lots of things like that we did. It was very profound, because the way that you turn on your receptors and your sensors is to break your rigidity, if that makes sense. We don't even know we have rigidity.

[0:37:11.9] MB: That totally makes sense. Start stepping outside of our daily routines and rituals and also borrow broad-based knowledge from different industries and topics and places and cultivate a broad set of thinking skills, so that you can really start to see things in a different perspective than other people see them.

[0:37:32.3] JA: Yeah. You don't have to be brilliant to see what I call making the money connection. You have to have the right sensory capability. The sensors are only going to turn on as you broaden your understanding of what's possible. I forced myself. I've been very blessed. It's a little bit challenging, but my consulting practice has never been vertical. I've never done one industry, or one category. I take on any industry, any problem that is within the realm of revenue generation, competitive. I don’t do operations and I don't do technology, because it's not my skillset.

Anything else, I usually have enough historic understanding, empirical experience and capacity to adapt, adopt, extrapolate to take it on. If you don't have anything like that, hoping and praying is not the way to do it. Force yourself to be interested in that which is never fascinated you before.

There's a great book that is out recently. It's called Range. It makes the case that in our society today that there are generalists, there are specialists and then there are synthesis. The people that will own and rule the business world are the synthesis, because they have the diverse capability of handling all the new challenges that have no historic precedent. Specialists only have what they know historically. Generalists, worse. Synthesis have this broad spectrum of understanding of so many possibilities they can draw from.

[0:39:19.9] MB: Funnily enough, we and we'll throw this in the show notes for listeners, but we actually interviewed David Epstein, the author of Range a couple weeks ago in this.

[0:39:27.9] JA: He’s really good?

[0:39:28.7] MB: Yeah, he was awesome. I'll shoot you a link to the interview too.

[0:39:32.2] JA: I’d like that, because in fact, if you'd let me, I'll send it out to my list, because it might be very useful. I thought that was – it was a little bit deep psychological. If you get through the depth of it, I thought the message was powerful, didn't you?

[0:39:46.3] MB: Oh, it was amazing. Well, the funny thing is that this is full circle, because I think when we were hanging out in Laguna Beach, you actually told me about Range. Then I was like, “Oh, this book sounds really interesting.” I bought it and read it and then I was like, “This guy is amazing. We got to get him on the podcast.” We interviewed David and now you get to listen to the interview, so that's pretty funny.

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[0:41:22.0] MB: Changing gears a little bit, tell me about greatness. How do you think about greatness, what is it and how do people sometimes fall short in their pursuit of it?

[0:41:32.5] JA: Well, I mean, I have a really interesting, I guess I'd call it a character flaw. I get very excited about a concept for a period of time and I develop it and I explore it and I explain it, then I jettison it off. Somebody said I'm like a intellectual, what do you call it? Gigolo, because I'll have a concept, take it to my room for the night, I have my intellectual way with it and then throw it out in the morning.

A couple years ago, I got very deeply interested in the concept of greatness. I haven’t really revisited it for a while, so this will be fun. I got to dust off the intellectual cobwebs. My conclusion was this; with little exception, every human being is programmed in our DNA to want to be great, unless you have some mental affliction, or physical affliction, or birth defect. You really want to be great. You want to be a great entrepreneur, if that’s your calling, manager, leader, team member. You also want to be a great friend, if you have children, father, you have significant other, whether it's lover or partner. You want to be great at whatever you do as far as hobbies.

Yet, more than the vast, something like 98% of people are mediocre at – there’s eight or seven categories identified. The question is why? Why is somebody who definitely and maybe not desperately, but inherently wants to not be – you don't come home at the end of a day from work, whether you're leading, following, managing and say to yourself, “Self, I went and spent eight or 10 hours and I did a mediocre job.” You don't go out selling and come back and say, “I was really crappy today.” You don't go to your loved one and say, “Honey, I did a really shitty job today. I didn’t do well. I didn't contribute well. I didn't perform well. I didn't advance any attributes in my job.” You don't come home and purposely be boring, or uninterested, or non-contributing. Let your kids run awry. You don't purposely be a crappy friend. Yet, sadly if you look at it, the vast majority people are exactly that in every category.

I ask myself why and what does it take to change. Very delightful and this might be a great conclusion to our discussion for today, I came up with four very wonderfully clear-cut answers. If you can squarely reconcile yourself to them, you can transform yourself in any or all of these eight or so categories.

The first reason that people are not great in any of these categories, career, job, business, relationship, parenting, friendship, skillset, is that nobody really takes the time to help them see what greatness looks like, both in your brain as executed, as expressed and then what it is like validated when it's received by the other side. It's not that hard. If you don't have no reference model, how are you going to get there? Just accidentally? If I say, “Okay, I'm going to go climb Mount Everest.” You have no reference model of how to do it, how not to asphyxiate, or get oxygen deprivation, how to do it, strengthen yourself, how to do it in phases, you think you're really going to do it? Think about it. No.

First thing is getting a context of what greatness looks like in any and all these categories. Second, maybe five areas is reconciling yourself to where you are on the continuum against that. You know what it's supposed to look like. Now you got to say, “Okay, as an entrepreneur, as a leader, as a manager, as a team member, as a friend, as a partner, as a lover, as a parent, as a hobbyist, as a rock climber, as a here where I am on the continuous.” You have to know what I'll call is the gap, because it's basically you're looking at personal performance arbitrage really, isn't it? You're looking at the gap.

There's another word for it and I'll think of what it is. Then you've got to basically figure out what are the different options to get me in each category from here to there. You got to understand what they are, what they require, the pros and cons of each. Because all one size never fits all in anything, but not even close. If you see a woman wearing a one-size-fits-all dress, one woman looks really hot, the rest it's either too tight and ugly, too short, too lose, too long. You got to figure the right strategy in each category to achieve your goal the safest, the fastest, the easiest, the most predictable.

Then and this is where it gets really interesting, I believe in what I call the log jam event theory, Matt. The log jam means you've got maybe these eight categories of let's call of impaired greatness, or greatness deficiency. One of them is going to have more ultimate impact in opening up the positive flow of the rest and all the rest. If you've got a terrible relationship in your personal life, you probably are not going to be able to achieve, realize, manifest greatness than anything else. Does that make sense?

[0:47:27.3] MB: Totally.

[0:47:27.9] JA: You got to figure where the log jam is first. That may seem divergent, but it's actually very strategically astute, because once you relieve all that diversionary emotion and energy dissipation, now you can re-shift it to all the other areas and then you've got to be able to go, “What's my first imperative, second impairment, third impairment.” Imperative. Excuse me, not – and well, it could be impairment and imperatives. Then you systematically, once you've identified the strategy, you work through it. Now that's the second or the third category. I believe you're married and have children, don't you Matt?

[0:48:08.3] MB: That's right.

[0:48:08.9] JA: Okay. How old are your children?

[0:48:11.7] MB: I have an 18-month-old and basically a newborn.

[0:48:14.2] JA: Perfect. Okay. As or when, I don't know, because I can't remember. My children are all adults now, they start walking, trying to talk, trying to eat, trying to poop, trying to walk talk, eat. What else would they be doing? They're not ready to ride a bike yet. Walk, talk, eat, poop, speak, lots of the same thing.

Usually in the beginning, they are not very effective and they fail. When they try to walk, they fall over. When they’re trying to poop, they miss the spot or they can't quite get out of their diaper. When they're trying to eat, the spoon may go in their eye, or their hair, or their chest, but it very rarely initially goes into their mouth. It were it not for the parent being their champion, their advocate, their fan, their coach, their mentor and putting them, standing them back up, putting the spoon back in the right place, taking them and sitting them on the toilet, even though they miss. They go, [Inaudible 0:49:13.9]. That’s great. Then repeating certain things, so they have a better reference, they would never gain proficiency, would they?

[0:49:23.5] MB: No.

[0:49:24.3] JA: Same thing in this. You need to be able to – because the first time you try to execute anything that you might understand intellectually, the statistical probability is you will F it up big time transaction. You need someone to believe in you, what I call a sword and a shield. Can be a mentor, coach, a support person. Somebody that is going to hold not only you responsible, but going to be there for you throughout the transitional process until you achieve, if not mastering a level of greater proficiency.

What happens in all these eight areas is it's not linear. With each level of improvement and progression, the glory, the wonderment, the ecstasy of this is asymmetric. It keeps multiplying exponentially, so you keep growing and your ability growing and your quality growing and your proficiency growing and you're loving that's growing and your bonding with your family growing and your parenting and levels that you can't even imagine, until and unless you go through that. Does that help?

[0:50:41.1] MB: Yeah, that's great. Such a good break down. The point about how the first time you do anything, you're almost guaranteed to fail. Yet so many people try something once, beat themselves up and then give up.

I know we're running out of time. One question we like to ask everybody as a wrap up is for listeners who want to take action on something we've talked about today, it could be any of the topics or themes, what would be one action item that you would give them as a next step to start implementing some of these ideas in their lives?

[0:51:12.1] JA: I'll give you a couple suggestions. It's not meant to be self-aggrandizing. We have a website that as of today it's going to be changed. Right now, you don't even have to opt-in and it's got an enormous amount of stuff on it that doesn't sell anything. Again, you can get it take leave your name, your e-mail. There's a whole collection of stuff on it for be up being preeminent. There's a whole collection of stuff on greatness. There's a document called The Abraham Mindshift Challenge. There are two videos on relational capital. I would encourage people to get them. Or if you want to get the files and put them on your site, I have no problem with that. It doesn't matter. We're not doing them to monetize it. That's the first thing.

Second is start committing yourself in terms of non-linear thinking, to start every day when you meet somebody from another domain, ask them questions, learn about what they do, how they do it, how they monetize, how they operate, what they read. Ask them if they would forward to you some of the things they read. Start going online and just randomly visiting things you're not interested in.

Every time you do that, make a note of one distinction that you gain, that you've never thought about that might have value, or be interesting. Start really looking at biographies of people who are non-linear thinkers. I mean, breakthrough thinking and it's true, there's nothing more than taking elements that are always there and recombining them in new ways.

People like myself, Tony Robbins were not original thinkers. We are original synthesizers. We just take the stuff that's always been there and put them together. Also and this is old, because I have to think about new applications. We used to always talk about the fact that most breakthroughs do not come from the industry you are in. This is just analogy, fiber optics which redefine the whole era of telecommunication did not come from telecommunication. It came from aerospace and was borrowed.

Federal Express built their whole business by using what the Federal Reserve Bank was using, which is called the hub-and-spoke method for clearing checks overnight. The ballpoint pen or roll-on deodorant, one of them borrowed the technique from each other and I can go on and on and on and on, but you'll never get breakthroughs if you don't break out of the rigidity of your limited paradigm. That's why I call it giving yourself a paradigmectomy.

[0:53:50.9] MB: Well Jay, thank you so much for coming on the show, sharing all this wisdom, all this knowledge. For listeners who want to check you out, find all of your stuff online, obviously we'll put some things in the show notes, where can they find you?

[0:54:06.3] JA: Well, I mean, it depends. If you just want to find the resources, which are there in contributions, Abraham.com. Very easy. Abraham.com. The place to go is the 50 shades site and there's some cool stuff. I think there's 8 or 900 hours of stuff, audio, video and there's thousands of pages. As I said, right now it'll change soon, but there's no opt-in required. Not one item sells anything. If you're serious about a business that's very large and can be grown and you're a serious entrepreneur making serious money, running a serious business and you want it to be seriously better, then there's a way to contact me on the website.

Thank you very much. If you want to do more, I'm happy. I hope this has value and I will be happy to take your interview of Epstein and put on my site and reference you. If you send this to my office, we'll put it out for you to a podcast, okay?

[0:55:00.8] MB: Awesome. Well Jay, thank you so much. We'll definitely follow up on the Epstein interview and we'll let you know when this episode airs. I know you got to get to a meeting, so thank you very much for coming on the show.

[0:55:10.6] JA: My pleasure. Thank you, Matt.

[0:55:12.6] MB: Thank you so much for listening to the Science of Success. We created this show to help you our listeners, master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is matt@successpodcast.com. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener e-mail.

Don't forget, if you want to get all the incredible information we talked about in the show, links transcripts, everything we discussed and much more, be sure to check out our show notes. You can get those at successpodcast.com, just hit the show notes button right at the top.

Thanks again, and we'll see you on the next episode of the Science of Success.

Roland Frasier: How To Build Lasting Wealth, Influence, and Happiness

October 15, 2019 by Lace Gilger in Money & Finance, Influence & Communication

In this episode we discuss how to make the most important decisions in your life. Where should you spend your time? How do you evaluate different opportunities? Are you focused on creating wealth or income, and which is more important for you? Should you make a big change in your career or industry? We dig into all of these important questions and give you the tools to answer them with our guest the legendary Roland Frasier.

Roland Frasier is a serial entrepreneur who has founded, scaled or sold dozens of different businesses. He is currently CEO of the War Room Mastermind, where he advises over 150 major companies and principal in DigitalMarketer.com, among several other successful online companies. Roland has experienced business success in several industries including real estate, law, publishing, consulting, and many others. He has worked with major companies such as Microsoft, Infusionsoft, Etihad Airlines, Harper-Collins Publishing and Uber.

The biggest business breakthroughs often come from applying unexpected places and cross applications
The importance of creating models and frameworks for solving business problems
Take what you read and break it down into something that’s simple and useable
How do you take what you’re reading and learning and turn it into something that is actually usable and applicable?
- Research down to the base
- Cross apply that with experience
- Apply the correct geometric framework
The Long and The Short
The dangers of being “cash poor” and “asset rich”
Are you over-focused on income or wealth?
Are you a dancing bear?
Its so easy to get trapped into reinvesting 100% of your profits into growing your company
How do you balance our time between short term income creation and long term wealth creation?
- Formula: Income Needs = Long Term Growth Desires + Lifestyle Costs + Cushion
If you want yourself too far on one side or the other, it’s time to rebalance your focus a bit
Life is so fragile - you have to balance living for today and living for tomorrow
Classify your opportunities as either “wealth” opportunities or “income opportunities”
You should be hustling, but you shouldn’t be hustling all the time.
- You have to stop and think.
- You have to stop and recover too.
If you study some seriously successful and ultra driven people - they often achieve that success at the cost of their own personal and family lives
If you want to really innovate, you have to take time to think.
The world will demand 400% of your time. You have to limit the number of opportunities you take on. It’s easy to drown in opportunity.
Once in a lifetime opportunities come around 3 or 4 times per year.
PFM + Will it move the needle in terms of what you want to accomplish personally and financially?
- People
- Fun
- Money
Saying “not now” is not the same thing as saying no - it’s a great way to defer opportunities
The power and importance of asking for things
Be inquisitive and child like in asking the things you are curious about
The “No harm in asking” Rule
In a business deal, if you don’t ask for what you want, it sure as well won’t be handed to you.
The power of “inception” via the principle of Socratic Influencing - how you can get people to think that your ideas are theirs
Lead people logically to the conclusion that you want them to arrive at
The absolutely magical power
Should you “grow where you are planted?"
The power and importance of developing your personal brand to help your business
Homework: Determine what are you going to spend your time on?
IDEA: Create an “Life Priority Matrix”

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

Roland’s website
Roland’s LinkedIn, Facebook, and Twitter
The War Room Mastermind
DigitalMarketer

Media

[Article] Mckinsey Quarterly - “Have you tested your strategy lately?” By Chris Bradley, Martin Hirt, and Sven Smit
Roland’s Media Appearance Directory

Books

Strategy Beyond the Hockey Stick: People, Probabilities, and Big Moves to Beat the Odds by Chris Bradley, Martin Hirt, and Sven Smit

Misc

[Article] The Eisenhower Matrix

Your Brain is Playing Tricks On You - 18 Surprising Biases That Control Your Life with Dr. Daniel Crosby

March 21, 2019 by Lace Gilger in Focus & Productivity, Money & Finance

In this episode we discuss why it’s so important to study and understand psychology if you want to master any aspect of life. We look at evolutionary science behind how your brain can often play tricks on you. We share a simple and impactful model from psychology for dealing with stressful and tough situations, and we discuss the dangerous illusion of the “quest for certainty” and how you should actively embrace taking risks in your life with our guest Dr. Daniel Crosby.

Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. His most recent book, The Behavioral Investor, provides an expert look at the useful mix of psychology and investment science. His work has appeared in the Huffington Post and Risk Management Magazine, as well as his monthly columns for WealthManagement.com and Investment News.

In order to understand how the financial and capital markets work - we have to understand human behavior.
Since almost everything we do is largely a function of interacting with humans - in order to understand life, business, the world - we have to understand human behavior and the human mind
Psychology underpins most of reality - in order to understand anything you have to understand the human mind.
Human nature is the “bottom turtle” in most disciplines and facets of reality
Evidence based growth is a powerful niche - because the leadership and personal development space is full of voodoo, bad thinking, and wrong common sense
The evidence based approach is harder but ultimately much more fulfilling and impactful
Things that have served us well from an evolutionary perspective often serve us poorly in the modern world and the financial markets
Loss aversion is a great example of a pro-evolutionary trait that malfunctions in modern society
The human brain hasn’t been upgraded in over 200,000 years.
Your 200,000 year old brain is trying to cope with systems that are tens if not hundreds of years old - this leads to a number of problems and issues.
We are wired to act - we feel a burning need to take action and do something - and yet often times the best investment strategy is to do nothing
In the world of investing - the less you do, the better off you are. The research is crystal clear on this.
The best performing investors are people who either died or forgot about their trading account!
“Success begets failure.” As you win, you become more convinced of your skill, and you start to make worse and worse decisions, becoming sloppy and undisciplined
You must be a rules based, systematic investor when it comes to decision-making.
Bad design —> bad decision —> bad outcomes.
Set great rules and follow them slavishly.
Most people self report incorrectly. They think they work more than they do and they think they have less free time than they do. You probably under-report to yourself how much time you spend on TV.
You have more free time than you give yourself credit for.
The free time we’ve gained as a society has been replaced minute for minute with watching TV.
There is a very real, physical side, of dealing with stressful and difficult situations
Before you do any interventions to prevent anxiety - you can get a HUGE amount of mileage out of taking basic care of your body - sleeping better, drinking less caffeine, getting in some moderate exercise.
People who have to pee are better at managing risk. “Inhibitory spillover.”
There is a huge interplay between the mind and the body.
The more you study performance and achievement - you see again and again that success is about the mastery of the basics, there is no magic bullet.
The “RAIN" model for dealing with stress (based on cognitive behavioral therapy)
- Recognition
- Acceptance
- Investigation
- Non-identification
Catastrophizing often puts us in a negative spiral.
Emotional states are fleeting - they don’t define you.
We are more than what happens to us - at any time we can change our RESPONSE to any stimulus.
Self esteem science is junk science. 15,000 studies were examined on self esteem - and what they found was that the research was largely junk, and self esteem has no predictive ability on achievement.
There is NO substitute for TAKING RISK, DOING HARD THINGS and SINKING AND SWIMMING ON YOUR OWN MERITS.
The only way that you will truly feel good about yourself is by taking risk and putting yourself out there.
The biggest risk of all is not taking any risk.
In our best efforts to protect ourselves from harm we bring about the very thing we are trying to avoid. You aren’t really protecting yourself - you’re brining about the absolute realization of what you’re really scared of.
The quest for certainty is very dangerous. There is uncertainty. It’s part of the game. The alternative of embracing uncertainty is to always settle for the lowest common denominator.
Once you own the fact that the world is uncertain, it changes your perspective.
The goal is to tip the scales of probability in your favor.
In an uncertain world, process and evidence are the core things to focus on. Control what’s controllable.
Look for models for living that are data driven and make common sense.
If something seems to good to be true it probably is.
Personal progress and investment success involves sacrifice and discipline and hard work.
The “backfire effect” - often times when presented with data and evidence that disagrees with people’s world view, people often become MORE committed to their idea or belief than they were before.
Meet people who don’t share your beliefs and try to understand why they hold the beliefs that they do.
Homework: Go somewhere that makes you uncomfortable.
Homework: Seek first to get your own house in order. Take a hard look at yourself.

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

This week’s episode of The Science of Success is brought to you by Bespoke Post and their monthly Box Of Awesome! The team at Bespoke Post are always out scouting for quality and unique products to send people just like you each month! Whether you’re in search of the perfect drink, a well-kept pad, or jet-setting in style, Bespoke Post improves your life one box at a time.

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Want To Dig In More?! - Here’s The Show Notes, Links, & Research

General

[Social] Daniel Crosby Twitter
[Social] Daniel Crosby LinkedIn
Daniel’s Podcast Standard Deviations
Daniel’s Site for Nocturne Capital

Media

[Article] PubMed - “Inhibitory spillover: increased urination urgency facilitates impulse control in unrelated domains” by Tuk MA, Trampe D, and Warlop L.
[Article] Psychology Today - “Let it R.A.I.N.” by Rick Hanson Ph.D.
[Article] “Backfire effect” Posted by: Margaret Rouse
[Article] Think Advisor: 'Buy What You Know' Is 'Dumb Advice' By Jane Wollman Rusoff
[Article] Think Advisor: 3 Behavioral Biases That Hurt Investors By Ginger Szala
[Article] Abnormal Returns: Q&A with Daniel Crosby author of The Behavioral Investor
[Article] Brinker Capital Blog: “You will never regret your vacation” by Dr. Daniel Crosby
[Article] ETF Trends: “Five Questions: Behavior in Investing With Dr. Daniel Crosby” by Jack Forehand
[Article] NerdEcon: A Book Review: The Laws of Wealth by Nicholas Haberling
Wealth Managment .com Author Directory
[Podcast] Listen money Matters - The Laws of Wealth – A Chat With Daniel Crosby
[Podcast] EO Fire - 1846: Behavioral finance and the science of being less stupid with Dr. Daniel Crosby
[Podcast] Patrice Washington - Dr. Daniel Crosby: The Best Thing You Can Do is Nothing
[Podcast] Art of Manliness - #222: The Laws of Wealth
[Podcast] Part-Time Money - 035: The Secrets to Investing Success and Building Wealth with Author Dr. Daniel Crosby

Videos

Daniel’s YouTube Channel

TEDTalks - TEDxHuntsville - Daniel Crosby - You're Not That Great: A Motivational Speech
TEDTalks - Sex, Funds, & Rock N' Roll: Daniel Crosby at TEDxHuntsville
TEDTalks - Can being weird make you rich and happy?: Daniel Crosby at TEDxBYU
TEDTalks - Value Investing and Behavioral Finance - Dr. Daniel Crosby
InvestmentNews - Daniel Crosby: Emotion and Investing
InvestmentNews - Daniel Crosby: The future is behavioral
Municipal Employees' Retirement System of Michigan - Dr. Daniel Crosby - Keynote Speaker

Books

The Behavioral Investor by Daniel Crosby
Man's Search for Meaning by Viktor E. Frankl
The Laws of Wealth: Psychology and the secret to investing success by Daniel Crosby and Chuck Widger
Personal Benchmark: Integrating Behavioral Finance and Investment Management by Daniel Crosby and Chuck Widger
You're Not That Great by Daniel Crosby

Episode Transcript

[0:00:04.2] MB: Welcome to The Science of Success. Introducing your host Matt Bodnar.

Welcome to the Science of Success. The number one evidence based growth podcast on the internet. With more than three million downloads and listeners in over a hundred countries.

In this episode, we discuss why it’s so important to study and understand psychology if you want to master master any of life. We look at the evolutionary science behind how your brain often playas tricks on you. We share a simple and impactful model from psychology for dealing with stressful and tough situations and we discuss the dangerous illusion of the quest for certainty and how you should actively embrace taking risks in your life. With our guest Dr. Daniel Crosby.

I’m going to tell you why you’ve been missing out on some incredibly cool stuff if you haven’t signed up for our email list yet. All you have to do to sign up is to go to successpodcast.com and sign up right on the home page. On top of tons of subscriber only content, exclusive access and live Q&A’s with previous guests, monthly giveaways and much more. I also created an epic free video course just for you.

It’s called, “How to Create Time for What Matters Most, Even When You’re Really Busy”. Email subscribers have been raving about this guy. You can get all of that and much more by going to successpodcast.com and signing up right on the home page. Or, by texting the word “smarter” To the number 44222 on your phone. If you like what I do on Science of Success, my email list is the number one way to engage with me and go deeper on what I discuss on the show, including free guides, actionable takeaways, exclusive content and much, much more.

Sign up for my email list today by going to successpodcast.com and signing up right on the home page. Or, if you’re on the go, if you’re on your on the go, if you’re on your phone right now, it’s even easier. Just text the word “smarter” to the number 44222. I can’t wait to show you all the exciting things you’ll get when you sign up and join the email list.

[0:02:35.1] MB: In our previous episode, we asked, “How do you make decisions that let you see beyond your everyday inbox, busy work and the demands of others?” We uncovered that there are huge mismatches between how you think you spend your time and how you actually spend it.

We shared how you can deal with the fear and the reality of disappointing other people and not meeting their expectations and we shared one simple strategy in 30 minutes that can help you reclaim control of your time, with our guest Laura Vanderkam. If you want to finally take control of your time, listen to our previous episode.

Now, for our interview with Daniel.

Today, we have another exciting guest back on the show, Dr. Daniel Crosby. Daniel is a psychologist and behavioral finance expert who helps organizations understand the intersection of the mind and the markets. His most recent book, The Behavioral Investor provides and expert look at the useful mix of psychology and investment science.

His work has appeared in the Huffington Post, Risk Management Magazine as well as wealthmanagement.com and Investment News.

Daniel, welcome back to the science of success.

[0:03:47.1] DC: Great to be here, thanks for having a repeat guest.

[0:03:49.8] MB: Yeah, absolutely, well we’re excited to have you back on the show, there’s some really great examples and research studies and things you pull out in the book, we thought it would be a great opportunity to not only look at a lot of these concepts and the context of the financial markets but also really expound upon them even more broadly and share these ideas with the listeners.

To begin, one of the themes, or kind of core ideas that you begin the book with is this notion that in order to understand how the capital markets work or in layman’s terms, how the stock market or the financial markets work, we have to understand human nature, tell me about that idea?

[0:04:27.6] DC: The idea is that capital markets, stock markets are human creations that are driven up and down by humans and so it’s only as we understand human behavior that we truly understand capital markets. I think a lot of novices in the stock market will say, you know, “The way that this works is I look for good companies and I buy them and then I’ll do well.”

Unfortunately, it’s not that quite easy and there’s a whole lot of irrationality, there’s a ton of psychology and human nature that’s baked into market. So that’s the thing that makes them frustrating but that’s also the thing that makes them exciting for people like me is, it’s not just accounting, right? It’s actually a canvas on which we’re painting the human struggle and that is what makes it so fascinating for me.

[0:05:11.8] MB: I think you could even go one step further and extrapolate this idea, since almost everything we do is largely a function of human interaction whether it’s business, whether it’s life, the world at large, the reality is that in order to understand almost anything, especially how the world works, we have to begin with the understanding of human behavior and the human mind.

[0:05:34.1] DC: Well, I think that’s exactly right and that’s one of the things that I love to joke about is how being a psychologist is so great because we can co-opt every other discipline effectively, right? Even when I’m watching The Super Bowl and yawning as was the case this week. Even as I’m watching The Super Bowl, all of this is just psychology, it’s all the same things we see in capital markets.

It’s human behavior, it’s momentum, it’s coming back from defeat, it’s keeping your head held high. Absolutely, almost anything you would ever encounter has human nature as sort of the bottom most hurdle. I give this example in the book of how we used to think that atoms, we have this notion of atoms early on but we used to think that they look like little solar systems basically.

We thought everything was sort of a fractal that was solar systems all the way down, everything was just sort of a little solar system within a larger system within a larger system and it’s only as we understood sort of the fundamental parts of an atom that we’re able to harness atomic power to either fuel a city or demolish a city and I say the same thing about human nature. It’s only as we understand that human beings are the thing that’s at the very bottom of this.

We can understand a handful of the tendencies to which we’re most prone that we’re able to create systems and processes to help us master markets and help us master ourselves. I think a correct understanding of human behavior’s a prerequisite as you said to almost any successful endeavor.

[0:07:14.5] MB: That’s such a great point and in many ways, really, the reason why we embark many years ago to begin and start the science of success to follow the same quest that you’ve applied within the discipline of finance but much more broadly of how do we understand the human mind and how do we look at specific instances of when our brains might malfunction or short-circuit and learn from those mistakes or those biases and how they can impact our behavior.

[0:07:42.3] DC: Well, at the risk of putting words in your mouth, you know, your podcast, your show is all about evidenced based growth and I think that’s such a powerful niche because in the sort of human progress personal development, leadership space, there’s so much voodoo and there’s so much sort of bad thinking and common sense that it’s refreshing to see someone like you doing what you're doing.

I’m trying to bring that same thing to markets and the reason that I wrote this book relatively hot on the heels of another book is because I was going to conferences and hearing all this sort off folk wisdom passed down from trading coaches and you know, different people who are trying to make help traders and hedge fund folks and asset managers make better decisions.

You know, knowing the research as I did, I knew that some of what they were saying was inconsistent with the research. I want us to be evidence based investors, just the same way that you’re about evidence based growth and I think the evidence based approach is sometimes counterintuitive, it’s almost always harder to swallow because it usually asks more of us but I think it’s ultimately more fulfilling and has more power to get you where you’re going.

[0:08:55.7] MB: Great insight and you know, one of the things I really enjoyed about your book is this idea that there’s a number of concepts, mental models, et cetera throughout the book that apply to the financial markets but obviously everybody who is listening here isn’t necessarily a trader or someone involved in that world and yet, I think there’s some really fruitful insights that we can pull out of them.

One of them just to dig a little bit deeper was one of the early ideas you talk about in the book is this idea of how humans or how the brain in general as we’ve been talking about is this thing that evolved over thousands, millions of years and yet it’s been thrown into modern society which is developed in the last couple of hundred years.

There’s all kinds of areas in places where the brain short circuits or misfires and cause us to do something that feels right and seems like it’s a good idea but ultimately is a really bad decision.

[0:09:50.6] DC: Yeah, I think one of the most important themes of the book as you said is that things that have served us well evolutionarily, often serve us poorly in capital markets. If you look at something like loss aversion, you know, our fear of dying or our fear of losing something, that served us very well over time.

There used to be 11 or 12 different humanoid species and we wiped them all out and the reason that we’re still here and they’re not is because honestly, because we were a little more cowardly than they were. We were more fearful, we were more prone to pack up and move on, we were more prone to run back in the cave and hide than they were.

Their bravery got them killed ultimately and that led us to procreate and to thrive. But the same sort of fearful mindset that kept us safe on the Savannah's of Africa keeps us all in cash through this roaring bull markets and doesn’t lead us to compound our wealth in a way that keeps up with inflation.

You know, likewise, the brain itself hasn’t had an upgrade in in over 200,000 years. When they look at the skulls of our ancient ancestors, hundreds of thousands of years ago, they can hypothesize that their brains look just like ours. We’ve got these 200 year old brains that are trying to cope with financial markets that are about 400 years old. Developed financial market’s only about 400 years old. The brain evolved to help us make quick split second decisions and the best investors have a profoundly long term mindset.

There’s a handful of ways in which the brain wants us to do one thing that’s comfortable and evolutionarily adaptive and it is exactly 180 degrees the opposite of what Wall Street demands of us to be successful.

[0:11:45.1] MB: One of those ideas that I really enjoyed and this is something that I uncovered back when I was doing a deep dive on Buffett and Monger is this idea of how we’re often wired to act and yet markets reward inaction. Tell me a little bit more about that?

[0:12:01.2] DC: Yeah, there’s some really fascinating studies on how markets reward us doing nothing, right? You think about almost every part of your life. I just got back from the gym, I’m trying to get fit like everyone else, early in the year, I’m still dedicated to my goals for the year but you know, I just got back from the gym so if I want to get stronger, I lift more weights.

If I want to get smarter, I read more books, if I want to get good at a job I spend more time on that job but when it comes to investing, we find again and again, that the less you do, the better of you are. Again, it’s the inverse of what you’d expect. There’s really great studies on this.

First of all, this has been studied in 19 different countries and in every country in which it’s been studied, the more active someone is, the more they mess with their account and check in to their account, the worse that they tend to do. There’s also a great study cited in James O’Shaughnessy book, What Works on Wall Street, where a large asset manager wanted to look at their retail accounts.

That’s like you know, your everyday mom and pop accounts. They wanted to drill down and understand, what were the behaviors of the best performing accounts in this large asset manager. They found that there were two things that these accounts had in common. The two things were that they had either forgotten that they had an account or that they had died.

You know, they go in looking for the evidence of skill and intellect and width and trading systems and what they find is you know, forgetfulness and death. We see again and again that our brains are wired to act but markets reward doing nothing.

[0:13:41.8] MB: Such a fascinating mental model and a great example of what’s completely counter intuitive. Because it’s so easy to get caught up in the fear, the need or the desire to constantly check your account to constantly pull things in and out to react to the news that’s always flashing and blaring and telling you about the latest crisis. I love the example of basically the best traders of the people who forgot that they had a trading account or the people who had died, it’s incredible.

[0:14:10.8] DC: Yeah, you’ve got research out of Taiwan that shows that one in 360 day traders are successful. Meanwhile, you’ve got the dead folks and the forgetful folks over here kicking butt. I mean, it is hard to wrap your mind around but these people who are sitting in front of four screens with every chart in the world on them are getting outperformed by people who are just going about their lives. But yet the research is unequivocal. It’s very strong at this point.

[0:14:38.2] MB: You know, another one of the examples you had was this idea of how success begets failure. How we can – how success can cause the becomes sloppy and undisciplined. Tell me a little bit more about that?

[0:14:51.8] DC: Yeah, there’s interesting reasons, psychological and physiological. In the book, I talk about – tried to take a deeper dive on the sociology, the physiology of some of these concepts. On the physiological reason why success begets failure. It has to do with the rush of testosterone. We find in the animal kingdom that animals, say rams who are fighting for lady rams or wait, I guess they’re sheep.

Anyway. Rams who are fighting for partners, right? They’re butting heads, they’re combatting one another, when they win, they’re flooded with testosterone and so they take on a bigger run, they’re feeling good, they’re feeling powerful, they take on another ram, beat that one , flooded with more testosterone.

At some point, this rush of testosterone, kind of goes to their head and they lose their critical thinking and decision making skills and they’ll bite off more than they could chew, they’ll take on an opponent that they have no business taking on because of this rush of testosterone.

We see that, John coached, the author of The Hour Between Dog and Wolf which is another excellent book. He studied this and people who were traders on the floor of the stock exchanges in New York and London. He found that successful traders have this extreme rush of adrenaline and testosterone when they were on a tear.

This caused them to become strangers to their rules, to let go of the risk management protocols, to take bigger and bigger risks just like a ram who is fighting for his lady. They took bigger and bigger risk that ultimately tended to end in their undoing and so you know, a big theme of the book is all around mental models, systems processes and following these plans rather than discretionary decision making, sort of you know, seat of your pants decision making.

Because very real sense. As you win, you become more convinced of your skill and you start to let go of what you know to be true, you start to let go of your rules.

[0:16:58.2] MB: You had a great, very simple heuristic for explaining this in the book which is this idea that bad design lead to bad decisions and lead to bad outcomes.

[0:17:08.3] DC: yYah, absolutely. Getting that design right is all important and one of the things that we have to be careful to do is to create a system that you can’t override because you know, in my personal life, I’m a rules based systematic decision maker with my investments but I tell you, there are times when I want to override those rules, there’s times when those rules look crazy to me and I’ll tell you, one of the most immediate example that comes to mind is when Trump won the election.

Love him or hate him, most people thought that this was going to bring a lot of uncertainty into the markets and people no less auspicious than Paul Krugman, a Nobel Prize winning economist for saying this is the end of the US market as we know it. Yet, all of my rules, all of my systems were saying no, stay the course, you know, all my signals were staying, keep doing what you’re doing and I was able to do that but man, everything in me was scared, you know?

Everything in me was scared that the market was going to crash and that hasn’t been the case, it’s been far from the case. It’s just one, I mean, you know, I think investors who have been at this a while can cite a hundred instances of where the design was telling you one thing and in your head was telling you another thing and you had to stick with those rules. There’s a great guy with the best audited track record, investment track record of all time.

A guy named Jim Simons who is an award winning mathematician and hedge fund “gillionaire”. He says we set great rules and we follow them slavishly and that’s something that I tried to live buy and in my investing life and in my personal life. There’s just things you need to do every day. Spend 30 minutes on self-development and reading something that’s going to feed your mind and your spirit, you know?

An hour at the gym, do whatever. There are going to be days when that doesn’t seem like the thing to do but I can promise you, if you can stick with it, over time, you’ll come out ahead.

[0:19:04.3] MB: The piece of that that’s sort of unsaid is this idea that it’s really important to spend a lot of time and energy on the front end, investing in building those rules, in building those decision criteria and creating the effective designs that you then put in place.

So many people get caught up in the reactivity of everyday life and never set aside a half a day or a few hours to really think through and do some homework and some research and say, what should these rules be and how should I set them up?

All the work is the hard part of sitting down on the front end and actually creating the system. After you’ve done that, it’s much easier to follow it.

[0:19:47.7] DC: I mentioned something in the book that I’ve not gotten any takers on but I say that asset managers should work four days a year, they should have access to their models and make tweaks perhaps quarterly or less and that they should spend the rest of their time reading.

Basically reading and contemplating and considering opinions that diverge from their own and you know, nobody’s taking me up on that but we have this idea that people need to be hammering away at a problem at all times of the night and day. We left very little time in modern life in this sort of cult of business that we’ve created for contemplation, for reflection, for creating mental models like you talked about that will do all of the work for us going forward.

If you can get it right that first time, you’re going to be so well served by just simply following that playbook and yet most of us I think in the corporate world are so trapped in the business of putting out every little fire that we don’t have time to be contemplative and I think that that’s a real dramatically to the detriment of people’s wellbeing and even to the detriment of the companies that we work for. I’m 100% on board with what you’re talking about.

[0:21:05.2] MB: How do people start to proactively create a time, the space, to build these better designs and create better decision criteria?

[0:21:16.3] DC: Well, I think the first thing we have to do is be honest with ourselves about how we spend our time. One of the most consistent findings in psychology is that people just miss apprehend and misreport their own behavior. If you ask people what their average workweek looks like and then you observe their average workweek. Most people say they work way more than they do.

Most people say they have much less free time than they actually do. If you ask people about stuff like you know, their TV consumption and stuff, they’re going to tend to report that – under report that by about 50%. I think the first thing we have to understand is, you’ve got time for the things that you value, we have to stop making excuses about how busy we are because most of us, you know, unless you’re working three jobs to just get by.

Most of us have more time than we give ourselves credit for, we as a civilization have more free time, more discretionary time than anyone has ever had in human history. A recent study I found showed that the free time that we have gained has been replaced minute for minute with watching TV. We have an inordinately increased amount of time relative to people who lived 50 and especially a hundred years ago and what have we done with that extra time?

Well, we stare at our phones and we watch Netflix. I think the very first thing you have to do is take ownership of your time to take ownership of how busy you are or not, and then allocate that time to stuff that has long term impact and not try and snow yourself as to how busy you really are.

[0:22:57.7] MB: I had a listener email me this week with a very similar story, how he used to feel trapped, how he used to feel like he never had any time, he was constantly putting out fires and after listening to a couple of different episodes of the podcast.

He had this breakthrough and realized that he was spending hours a day on things like Facebook and Instagram and all this stuff and completely shifted the way he was allocating his time and realized that he had tons and tons of free time that he could spend on all kinds of things and start to really focus on improving and developing himself and it’s amazing what – it’s almost like once you get a little wedge in there and crack open a little bit of that contemplative time, it really starts to compound on itself and create more and more time and more ability to focus.

[0:23:42.2] DC: Well that’s right, you know, I consider myself probably like most people, a good steward of time, I consider myself a reasonably productive person but then I got the new iPhone and it gives you a second by second reporting of how much time you’re spending on your phone and it’s shocking to me. You know, I get that report every week and I just think about the opportunity cost of the hours and hours.

I spend, staring at my phone or scrolling through Twitter or on angry birds or whatever. It’s like you know, I can be doing a lot of good in the world in the time that I spend, you know, the time that I waste on here. I think when you have a really candid look at yourself, you’ll see that you have more opportunity than you think.

[0:24:28.0] MB: I’m going to jump around a little bit because there is a number of different things I want to talk about from the book. One of the other interesting themes that you had was this idea of the physical side of dealing with stress and dealing with risk. Tell me a little bit more about that.

[0:24:46.0] DC: I think most people think about stress as almost entirely a psychological phenomenon and that’s partially true but there’s so much more we could be doing from a physiological standpoint. I have not always worked in finance, I was for a time and a season, a clinical psychologist and that’s what my PHD is in.

One of the things that I found very consistently is that people would present to me with things like sort of garden variety anxiety. It would come in and talk about how they’re being anxious, they were having panic attacks, things like this and I would always start with things like diet, exercise and nutrition and often, what I found is people were filling their bodies with insane amounts of you know, caffeine, they were sleeping poorly, they were not exercising, they were not surrounding themselves with the people that cared about them.

I would say, look, before we do anything else, you can get so much mileage with just having two cups of coffee a day and going on a 30 minute walks and nobody wants to hear that. Nobody – everybody wants the magic pupil, everybody wants you to speak the magic words into existence that are going to help them feel better but the mind and the body work in a reciprocal fashion and feed off of one another.

Yes, part of stress is mental and part of it is physical and it’s such an under appreciated way of managing stress is to watch what you eat, to manage your sugar intake, to decrease your consumption of caffeine and to get regular exercise. If everyone was doing these things, we would see a fraction of the cases of stress induced disorders that we do now.

There’s also interesting, one of probably my favorite study in the whole book talks about people’s willingness to take risk who had to pee. They found that people who had had a lot to drink and had to use the restroom were actually able to manage risk better than people who did not need to use the restroom.

They called it inhibitory spill over, basically, you were already inhibiting yourself, you’re already holding it, you’re already holding back and this tendency to hold back physically, generalized to a tendency to hold back psychologically and when taking financial risks. I think we are just beginning to scratch the surface of the inner play between the mind and the body and you know, I was happy to discover that the secret to being a great investor was just always needing to pee.

[0:27:25.4] MB: That’s a great example and it’s so fascinating. You know, the more I study performance and achievement, I see the same pattern again and again which is that success is not about finding a magic bullet, there are no magic bullets, it’s just about mastering the fundamentals and mastering the basics.

[0:27:45.0] DC: That’s exactly right.

[0:27:48.2] MB: You also shared in the book, when dealing with stress, a great model called the rain model, I’d love to hear more about that?

[0:27:58.4] DC: Yeah, the rain model, I think I cited two different places in the book and really, it is very intuitive and it just talks about recognizing, accepting, investigating and non-identification. So recognizing first like, “Okay, I am stressed” right? And then beyond that accepting it. You know a lot of jumped straight to judgment. We’re so programmed to jump straight into judgment and this judgment that psychologist that’s referred to as catastrophizing sets us down a negative spiral.

You know go, “Oh you know I am stressed. Oh great, here we go again, I am freaking out. This is going to be terrible. I am not going to be able to go to work, no one is going to love me.” And we go down this downward spiral that just gets worse and worse. So first we have to recognize it and then we have to accept it. We just say, “Okay it is what it is,” this scary eastern philosophy sort of meditative practice of saying, “Look, okay I am stressed. It is not good or bad, it just is.”

Then we investigate the sources of that stress and see if there is anything we can do about it right? We say, oh you know maybe I am stressed because of this. Maybe I am stressed because there is something unspoken between me and my partner and I should go have a conversation with them. You know maybe I am stressed because I am sitting at this desk all day and I need to go stand up and stretch and get a drink or take a walk, whatever it is you investigate it.

And then I think the coolest part of it is this non-identification piece because I think so many times we conflate our emotional reality in a moment with our self-worth. We think, “You know I am anxious therefore I am intrinsically a basket case,” and that is not the case. You know emotional states are of necessity fleeting and so this doesn’t define you. You know you’re not defined by your anxiety. You are not defined by your depression, whatever emotion it is that you’re feeling.

And so this is a really powerful model that I talk about in two different places in the book and try to give references so people can dig a little deeper if they are interested.

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[0:31:40.2] MB: What would be a specific practice or application to apply the R.A.I.N model for somebody who is listening who’s currently dealing with a really stressful situation?

[0:31:51.0] DC: So the R.A.I.N model is really about – it is really a lot like cognitive behavioral therapy. So it is really about recognizing and challenging beliefs which is really all about what CBT is about. So we’ve got an activating event so whatever it is that’s upsetting you and you can say in that moment, “I’m going to choose to respond to this differently.” We’re not going to say the activating made me do something. It is taking this power back.

So this could be anything from a disappointment at work, a personal failure, a heated argument with a loved one. It could be a 100 things, any kind of activating event that puts you in a funk, you can say, “I can choose to be different. I can choose to approach this differently and I don’t have to feel or act any certain way as a consequence of what’s just happened.” You know this is basically the fundamental thinking of I think the greatest call it a self-help book that was ever written.

Man’s search for meaning is this reality that we are more than what happens to us and that in any place and at any time, we can choose our response to a stimulus and I think it is a powerful way to move through the world that takes back ownership of your choices and your emotions and says, “I am not a victim of my circumstances.” So yeah, there is all kinds of places I think you could apply this.

[0:33:18.4] MB: Tell me about – another part of the book you dig into this idea of self-esteem science and how I think the phrase you use is you call it junk science. There’s so many people that have been impacted by this. I want to hear a little bit about what your thoughts are on it.

[0:33:36.9] DC: Yeah, so I am 39. I’ll be 40 late this year and so I grew up very much in this gold star generation when the research on self-esteem was right at the forefront of our best thinking psychologically and we thought that the way to get people to make better choices, to live our lives was to just tell them that they were great but you know effectively to shower them with praise and I see this in a way that I was raised by my parents.

I see this in the way that I was taught at school, sort of everyone gets a trophy, everyone gets a gold star and I am forgetting the exact number. I believe it was 15,000 different studies that were examined in a meta-analysis. So that’s just a study of all the studies on self-esteem and what they found first of all that most of the research was just junk science. Most of it was just pop psychology and then of the non-junk science, most of them showed that self-esteem didn’t predict anything.

It didn’t predict how well people would do in school. It didn’t predict whether or not someone would live a life of crime. It didn’t predict anything much and they found that basically, people have a strong BS meter. People know when they are being complimented for nothing and people know when they are being complimented for having genuinely achieved something and so effectively what they found in the self-esteem research is there is no substitute for taking risks.

Doing hard things and sort of sinking or swimming on your own merits because the only way that your self-esteem is truly built is by doing hard stuff like taking risk, doing hard stuff and then yes, being complimented, being recognized but recognizing people for getting 7th place and you know, knowing that they still got a ribbon, they know they got 7th place. It doesn’t work and this is an invitation to be cruel or to be dismissive of people who aren’t on the metal stand of course.

But what it is, is I think again, a mental model for life. Say, “You know the only way that I am going to really feel good about myself is taking risks, putting myself out there, putting in the hours, doing the work and then hoping the rewards come.” There is just no shortcut to feeling good about yourself.

[0:36:01.4] MB: And this ties into what we were talking about earlier, how the brain is hardwired to have things like loss aversion and the social risks of taking these things whether it’s starting a business, whether it is quitting your job, all of these different things seem really, really interesting and really, really risky. It might be something as simple as making a sales call because of our evolutionary programming and yet the reality is that it’s not life or death. It is not as scary and dangerous as it often seems but our mind is malfunctioning essentially.

[0:36:33.2] DC: Yeah, that is exactly right and I can’t – I mean it is my own quote. I can’t quote it right now but there is a paragraph in the book where I essentially say, “The biggest risk is not taking any risks.” You know the biggest risk is not that you start a business and you know it fails which frankly will likely happen if you start a business, that’s what happens to most small businesses is they fail but the bigger risk is still just spending 40 years in a job you hate.

You know I came across clients all the time who were not dating, not loving, not putting themselves out there because they were scared of getting hurt and in the process of not trying to get hurt, they were hurting themselves. So a lot of times because of the way that we’re wired and because we are so risk averse and we’re so loss averse, in our best efforts to protect ourselves from harm we bring about the reality of the very harm that we are trying to avoid.

And that is such a powerful concept to internalize to say, “Look am I truly protecting myself or am I bringing about the absolute 100% realization of the very thing I am scared about?” Because I think that is often the case.

[0:37:43.4] MB: I think the way you describe it in the book was the quest for certainty and how dangerous it can be.

[0:37:49.6] DC: Yeah absolutely. I think there’s a place where I talk in the book about this quest for certainty and I sight research that shows that human kind is more comforted by a negative certainty than a potentially positive uncertainty. So I specifically give the example of adult children of alcoholics. You know I talk about some of the damage that is done by alcoholism which is the leading cause of child abuse and one of the leading causes of death.

That is drunk driving in the US, I say “Look alcoholism does all this harm and yet a slight majority of adult children of alcoholics go on to marry alcoholics.” Now you would think rationally that children of alcoholics knowing the pain brought on by substance abuse would run a hundred miles away when they began to date someone with a drinking problem and yet they tend to marry people with drinking problems because the devil that you know is less psychologically intrusive than the devil that you don’t know.

So that’s again, something that we have to investing and in life just own that there is an uncertainty. There is uncertainty, it is part of the game and we have to embrace it because the only other alternative is to just always be settling for the lowest common denominator and this thing that we are familiar with.

[0:39:15.4] MB: You make another really good point and this is something that I think about a lot and I also bring it to conversations a lot which is this idea that life is uncertain. People always want a sure thing. They are always trying to make sure that they are making the perfect decision. They are making the right choice that whatever life choice they’re making at this particular threshold is something that has to be absolutely perfect.

And the reality is, you could walk across the street in 10 minutes and get killed that life is completely uncertain. We just don’t know and the great part about investing as a skillset and one of the other tools that taught me about this which is poker is that you start to realize that you can do everything right and things don’t necessarily work out and the flip side is you could do everything wrong and sometimes it still works out too but either way, the world is an uncertain place.

And you have to be able to operate and think and make decisions in the context of uncertainty to do anything and to be happy and to achieve any real results in the world.

[0:40:16.8] DC: Yeah that is exactly right and I think once you own that the world is uncertain and I think that death is one of the things that makes it so absolutely uncertain just like you said, once you own that the world is uncertain, once you have mourned the loss of that uncertainty or that justness or the fairness of the world because there is none to be had unfortunately, I think the best you can do is control the controllable.

You want to tilt probability in your favor at every turn so yes, you might get hit by a drunk driver one day but you should never drive drunk, right? You can tilt the probability in your favor with investing too, right? You could do these things, you could invest in a way that is low turnover, low cost, many of the things that I talk about in the book but yeah, even in spite of this there are going to be times where doing the right thing is going to feel awfully bad.

And in fact in investing sometimes your neighbor gets rich for doing the wrong thing. You know your neighbor could throw all of her money and pot stocks and make a fortune owning one single pot stock and you have your diversified portfolio that is doing quite as well. Well, you still did the right thing and so taking this process, trusting the process, taking this process based approach to living and to investing is I think an important way to think about it.

Controlling everything that is controllable and realizing that there is much that is out of your control and this is sort of the best you can do.

[0:41:48.0] MB: That makes me think of even the broader category we’re talking about earlier, the idea of evidence based growth itself is rooted in the same mental model or the same framework, right? In an uncertain world, we have to have process, we have to have evidence, we have to have something to use as a framework to understand reality. You know people say, “Oh well you can have an evidence based approach but scientific studies and psychology studies are proven wrong all the time. So I am just going to go with whatever my gut tells me is right.”

But the reality is, you have to look at which models have the most predictive power, which models are the most effective just because a certain model is wrong some of the time because nothing is certain, doesn’t necessarily mean that it’s still not the right model and the right process to be using and you really have to do a lot of the hard work of thinking on the front end and understanding which models are you going to invest your time and energy and which processes are you going to follow and execute on.

[0:42:44.1] DC: Yeah, it’s interesting. I talk a little bit about choosing a good model in the book and I think we are not helpless there. There are some things we can look to, to determine whether or not a model is replicable or whether or not it’s one to build your life around and so the first thing is we want evidence in the data, right? We want just like your podcast is all about, we want to be evidence based. We want the data to support what we are doing.

But the second thing is we need to be philosophers too. We need to see that this makes some philosophical sense that there is some common sense to it. In the world of investing there is a couple of funny indicators. We that overtime the S&P 500 moves in the S&P 500 have been correlated with the production of butter in Bangladesh at about 96%. Now would you want to invest with someone who is going to buy and sell based on Bangladeshi butter production?

Well no because it is stupid like you know philosophically it makes no sense even though that the data are there. So I think if you look for models for living that are both data driven and have an element of intuition to them, they feel right philosophically or from the common sense standpoint, I think you won’t be led astray much.

[0:44:04.6] MB: You know that reminds me of another topic you talk about in the book which is this idea of looking for truth in the wrong places and in many ways that’s another example of one of these cognitive biases or mental models of how our brain’s misfire but it also shows that we can easily get deceived about what kinds of data and information and evidence we should be supporting.

[0:44:28.3] DC: Yeah, so one of the things that I talk about in the book is the power of story and story can be used like most psychological concepts to our benefit or toward detriment but I sight a research out of Princeton that looks at people who are listening to stories, you know two people who are hooked up to an FMRI that is measuring their brain activity. So if you and I are sitting across from each other having a conversation about nothing in particular, our brain activity doesn’t look all that similar.

But the minute that you started to tell me a story, our brains become actively synced and so the power of story is very alluring. So this is one way that we can be misled or look for truth in all the wrong places is through a seductive story. So I would tell people to be on guard against anyone that is trying to sell something via a story. It isn’t necessarily bad but just know that you’re susceptible at this point. The other thing I think people like to be told is that that things will be easy.

This is another way that we look for truth in all the wrong places is that we want things to be easy and you see this I think at financial services more than anywhere else. It is like if something seems to be good to be true than it probably is. You know the truth about personal progress and investment success is that they both require an element of sacrifice, of discipline and hard work and any formula that doesn’t include those ingredients I think is one that is set up to fail and it is likely profiting someone at your expense.

[0:46:02.3] MB: You also shared a really interesting example of the idea of the backfire effect and how sometimes information that we don’t want to hear or disagree with can have really interesting consequences.

[0:46:15.7] DC: Yeah, so the backfire effect is pretty incredible. I think the example I gave in the book is of parents who are failing to vaccinate their children. So there’s all these parents I think especially in Southern California or other affluent parts of the country who have stopped vaccinating their kids because they fear that it contributes to autism spectrum disorders and so as a result, you are seeing diseases in this country that you have never seen in a hundred years.

You’re seeing measles outbreaks in Orange County and things like this that are just wild and are totally unnecessary and so the science of course contradicts this and says that you should vaccinate your children but what happens is when people are given a strong message when their beliefs are strongly rebuffed with facts and then they survey these people and the strength of their belief after the fact, they find that in many cases they have doubled down on their beliefs.

And so I think we have to be careful and this is why I quit Facebook a couple of years ago because you are watching this people argue about politics or religion or whatever it is screaming at each other sighting facts and understanding that nobody’s minds are getting changed that way. You know people are really, really recalcitrant to front and center attacks under deeply held beliefs. I think the way that you change someone’s mind is through relationships.

Through contact and through bringing people into exposure with different ways of being and different ways of thinking. So I think the best among us, the most growth minded among us will actively seek out opportunities to expose ourselves to new ideas and new people and new context because that is how you grow but we are very, very resistant to fact only attacks on our beliefs. They just don’t work very much.

[0:48:12.5] MB: It’s a fascinating piece of research and so interesting. So tell me a little bit more about the strategy that you’ve seen or recommend for influencing people without a direct frontal assault using facts and data.

[0:48:29.3] DC: So I think the best thing you can do is bring people into contact with people who don’t share their world view and so it is easy to hate or stigmatize or vilify an idea. You know whether you are for abortion or against abortion, whether you are left or right leaning in your politics, it is easy for us to put labels on the people that espouse these beliefs and from a distance, snip it then and attack them and we saw in the last election.

This is so disheartening to me but we saw that over 60% of people who voted for Trump didn’t know anyone who is voting for Clinton and vice-versa. So whoever your preferred candidate was, most people said they did not have a single friend who was voting for their non-preferred candidate. So we have really quarantined ourselves geographically, religiously, politically, even the news media makes it possible for us to sort of self-select into our biases and our ways in a way that wasn’t applicable 50 years ago.

Everybody had a more or less interest nightly news program. Now you’ve got every flavor of news that you want and people just tend to select the one that is most consistent with their own predispositions and biases. So I don’t think there is any substitute for just meeting people who don’t share your beliefs and understanding that they are good people too. They arrive at these positions for reasons that are probably larger they mirror the reasons that you arrive at your differing positions.

They are trying the best they can. They love their families too, they are good people too and so I think that that’s how minds gets change. As people with different world views work shoulder to shoulder and we can see that we are not the demons we made each other out to be, I think that is how ideas change and I think I hope the listeners to your program will be proactive about seeking out both opinions and especially people that they wouldn’t normally because I think that’s the most powerful way to bring about change.

[0:50:41.7] MB: So for listeners who have listened to this conversation and want to concretely implement some of the themes and ideas that we’ve talked about today, what would be one action item or piece of homework that you would give them to start executing on some of these things?

[0:50:58.9] DC: So I would suggest consistent with that last point, I would suggest that you would go somewhere that makes you uncomfortable. You know whether it be to a different religion’s religious service, whether it be to a political rally of your non-preferred political stripes, whatever it is even something as small as watching your non-preferred news channel for 30 minutes to an hour tonight instead of tuning into your favorite strand of biased news that would be my number one recommendation.

Because the danger with reading a book like mine, I always get a little bit frustrated when people read something like The Behavioral Investor and they write to me and they go, “Oh wow, you know I read the part about egotism or emotionality and that was totally my neighbor,” or that is totally my wife and you know I have to write back and go, “You know the reason I wrote this is so that you could be self-critical.” The reason I wrote this is so you could turn that bright light of introspection back on yourself.

And so I think we have to seek first to get our own house in order and I think a way to do that is both by reading a book like this, which I hope will challenge your assumptions but even more than that, exposing yourself to new situations and just being cognizant of your responses.

[0:52:18.2] MB: And for listeners who want to find the book, find you, find your work online, what is the best place for them to do that?

[0:52:24.0] DC: Yeah, so the book is The Behavioral Investor. It’s available on Amazon and anywhere else you buy books. I am very active on LinkedIn, Daniel Crosby PHD and on Twitter @danielcrosby and I also have my own podcast called Standard Deviations. So any of those will be just great.

[0:52:40.2] MB: Well Daniel, thank you so much for coming back on the show, for sharing all these wisdom and digging into these topics. Some really, really interesting insights.

[0:52:48.4] DC: Thank you for sharing your platform.

[0:52:50.8] MB: Thank you so much for listening to the Science of Success. We created this show to help you, our listeners master evidence based growth. I love hearing from listeners. If you want to reach out, share your story or just say hi, shoot me an email. My email is matt@successpodcast.com. I’d love to hear from you and I read and respond to every single listener email.

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Why Your Brain Struggles To Understand Money with Jeff Kreisler

February 08, 2018 by Lace Gilger in Money & Finance

In this episode we discuss how money messes with your brain. We look into the obvious traps we fall into when we think about money, examine how cultural influences shape our financial choices, and explore the key biases that underpin the most common and dangerous financial mistakes that you are most likely to make with our guest Jeff Kreisler.

Jeff Kreisler is a bestselling author and the winner of the Bill Hicks Spirit Award for Thought Provoking Comedy. He is most recently the co-author of the new book Dollars and Sense: How We Misthink Money and How To Spend Smarter with Dan Ariely. (who we have previously had on the show as well?) Jeff is a regular contributor for CNN, Fox News, MSNBC and more!

Get rich cheating??? What’s that all about?
The common tropes within the self help industry (and how many of them are not based in evidence)
The power of satire to explore the underpinnings of human behavior
What is money?
Why do we have such a hard time thinking about money?
Awareness of your biases is a huge difference maker (even if you do nothing other than just being aware of your biases)
Spending is very obvious in our culture, but saving is not
Research shows men are more willing to admit they take viagra, than how much money they've saved in their 401ks
We dig deep into several of the mental biases that stop you from understanding money
The relativity bias and how that impacts spending habits
‘What do you want for dinner” vs “would you rather have chicken or fish for dinner”
One of the most obvious traps that we fall into with money
“The Pain of Paying” Bias and how it impacts what we think about money
“The credit card premium” and how using a credit card makes you pay more
Anchoring bias and arbitrary coherence.
How your social security number could impact how much you pay for a bottle of wine
We often obsess about small financial decisions, but make judgements on a whim with large financial decisions like buying a home or car
Self control is really hard
“Ulysseses contracts," reward substitution and how to create self control
How self awareness is the cornerstone of making better financial decisions
The locksmith example and how we misunderstand value and fairness

Thank you so much for listening!

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SHOW NOTES, LINKS, & RESEARCH

[Book] Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely and Jeff Kreisler
[Book] Get Rich Cheating: The Crooked Path to Easy Street by Jeff Kreisler
[TEDTalk] TEDxEastSalon- Jeff Kreisler: Get Rich Cheating
[BluRay] Magnolia
[Personal Site] jeffkreisler.com
[Twitter] Jeff Kreisler
[Twitter] JK Behavioral Sci
[Website] People Science
[SoS Episode] How a Judge Literally Rolling Dice Could Get You Double The Jail Time - The Anchoring Effect

Episode Transcript

[00:00:06.4] ANNOUNCER: Welcome to The Science of Success introducing your host, Matt Bodnar.

[0:00:11.8] MB: Welcome to the Science of Success; the number one evidence-based growth podcast on the internet with more than a million downloads and listeners in over a hundred countries.

In this episode, we discuss how money messes with your head. We look into the obvious trap you fall into when we think about money, examine how cultural influences shape our financial choices, and explore the key biases that underpin the most common and dangerous financial mistakes that you are most likely to make in your life, with our guest Jeff Kreisler.

I’m going to give you three reasons why you should join our e-mail list today, by going to successpodcast.com and signing up right on the homepage. There is some amazing stuff that’s only available to our e-mail subscribers, so be sure to sign up and join the e-mail list. Number one, you’re going to get an awesome free guide that we created based on listener demand. Our most popular guide, which is called How to Organize and Remember Everything. You can get it completely for free, along with another surprise bonus guide when you sign up and join the e-mail list today.

Next, you’re going to get a curated weekly e-mail from us every single week called Mindset Monday. Listeners have been loving this e-mail; it’s short, simple, filled with actionable videos, articles and things that we found enjoyable within the last week.

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In our previous episode, we discussed how to build a rock star brain. We went into the neuro-chemical compositions that create moods from happiness to depression. We looked at how you can change the building blocks of those neuro-chemicals by changing your diet and your daily habits.

In a world where people are more stressed than ever, sleeping less and trying to do more, we look at the causes of brain drain and what we can do to have physically happier brains with Dr. Michael Dow. If you want to think with crystal clarity, listen to that episode.

[0:02:28.1] MB: Today, we have another exciting guest on the show, Jeff Kreisler. Jeff is the bestselling author and winner of the Bill Hicks Spirit Award for Thought Provoking Comedy. He is most recently the co-author of a new book Dollars and Sense: How We Misthink Money and How to Spend Smarter with Dan Ariely, who was a previous guest on the show. Jeff is a regular contributor to CNN, Fox News, MSNBC and much more. Jeff, welcome to the Science of Success.

[0:02:54.1] JK: Thank you for having me.

[0:02:55.6] MB: Well, we’re excited to have you on here today. To get started, I love to talk a little bit about a previous book that you wrote and there is a Ted Talk around this as well, just called Get Rich Cheating. Tell me a little bit about what inspired you to give that talk and what underpins that.

[0:03:13.2] JK: Sure. I can give you the short-ish version, which is that I was spent many years doing political comedy. One of the things that drove me into that was pointing out the hypocrisies that’s obvious in politics. Through that, I ended up getting up to and to work for Jim Cramer’s thestreet.com writing a humor column about finance.

Then through that, I got an opportunity to pitch a book idea to a publisher and I pitch this idea of get rich cheating. It was basically looking at these get rich quick books. Typically it’s how to flip real estate is almost all of what their suggestions are. Looking to that, combined with this study of hypocrisy, I guess you could say I had both in the world of finance and politics and sports and people showing up their pre-package advice, all of which sort of had the same theme.

It felt like it was a great way to use a vehicle of satire to make a commentary about our obsession with money and really what our system of gaining money was really about. Whether it was the restriction in this real mobility that we talked about, or just the fact that we became so obsessed with getting money and getting rich that we often could justify cutting corners and being unethical.

The book became a combination of really digging to the research of the Enron’s and Bernie Madoffs and the steroid scandal, and even the lesser known things. I mean, I’m sure many of your listeners remember world com. There were plenty of smaller scandals where people got rich, but didn’t get in trouble. Or the trouble they got in was a small fine. One of the over-arching themes of the book, which is what then fed this lecture and talk and show was everyone’s doing it, no one is getting caught, why not?

It was a cost-benefit analysis. There’s no cost. One guy get caught, Bernie Madoff, no one else got in trouble. The benefits are gigantic. This message resonated in a weird way. Like I spoke at business school sometimes doing a satirical thing and I wouldn’t say it was a joke. It was obviously funny, but just interesting ideas and people would say, “Yeah, that makes sense.” Because it eliminated the idea of ethics. Obviously, ethics and morality are important for society function. If you’re strictly an economic actor, just cost-benefit, you’ll latch onto it.

I went a little far from the question being, like how was it inspired? It was inspired as a unique vehicle to expose some of the hypocrisies and challenges in our system. It was a lot of fun to do. I did it. Theaters and business schools and comedy clubs and all over the place.

[0:05:51.4] MB: Well, we’re definitely going to include your Ted Talk in the show notes so the listeners can get a taste of that. I just found it really fascinating, because the show – The Science of Success is all about evidence-based growth, and we really try to focus on science, the data, the evidence. I found your speech to be a really great amalgamation of a lot of the tropes within the self-help industry that totally the opposite of evidence-based. People hawking their own personal systems and these kinds of things. I just through it was a great expose in many ways of a lot of those methods and behavior for lack of a better term.

[0:06:29.0] JK: Yeah. One thing I do when I created the show and when I took it off the book page was I looked at the Tony Robbins. I actually think Tony Robbins has some value to add, but he is a great avatar for these self-help people. Remember Tom Cruise’s character in Magnolia for those that might know that relatively obscure reference.

It was just about, like as you said, it wasn’t evidence-based that I was presenting, even though I was using facts about people that did it. It was just these things that resonated with people emotionally. I think I had a whole setup, whereas like you’ve got to visualize your dreams and I would talk about getting rich and being so rich, you could afford [inaudible 0:07:03.9] egg omelets and you can bite your half.

To visualize your dream, then you confront obstacles to your dreams and it’s stuff like ethics and it’s stuff like society and your board of directors. Then you bust through those obstacles to achieve your dreams and stuff about how you cheat on your 10B5 forms, or whatever it is, or how do you take steroids, or who do you use to back you up and all the different ways that people cheated.

It was all in this very emotion-triggering format of visualizing dreams and being a real man and like, “Let’s go get it.” That is what a lot of self-help tends to be is it goes for that emotional response, not the factual one, not the intellectual one and that is what we fall into. In a way, we’ll get in this later. That’s sort of what that my latest book about money is about is about how – when you make financial decisions based upon emotion and often unconsciously based upon emotion. We’re led away from the best scientific rationale intellectual choice. Certainly when it comes to cheating and it comes to get super rich at any cost, the emotion is in there. Our eyes get big and we get excited for all the things we can do and stuff we can buy with money.

[0:08:18.4] MB: Let’s dig into that a little bit. Tell me about your book Dollars and Sense and how – let’s start really simply, how do you define money? What is money?

[0:08:27.3] JK: Sure. Money is essentially supposed to represent the value of other things. Money is a great development and despite a lot of my work criticizing sort of what money has done to us, it has allowed society to become what it is. If not, we’d be constantly bartering, constantly struggling just to survive.

Money allows us to specialize to pursue arts and sciences, to save, money is divisible, money is storeable, it’s fundable and exchangeable. It’s a wonderful thing, because money represents other stuff. Money really represents opportunity costs. Many of your listeners may have heard the concept opportunity cost. They know what it is. An opportunity costs is basically like what are the other things you could do with money besides what it is you’re about to spend on.

If you’re going to buy coffee and buying coffee is the common financial example, so I’ll just stick with that for now. Think you will spend $5 on a latte, what else could you do with the money? Now there is tons of stuff. You could save it, you could buy five lottery tickets, you could buy whatever 500 penny candies.

There’s a world of opportunities both now and in the future and that is what’s great about money. But it’s also what is the challenge about money, because that’s a lot to think about. It’s a lot to conceive of all the possible things you can do with money. It’s impossible for humans to do that. Strictly scientific economic basis, that’s what we should do is we should think about that opportunity cost.

What ends up happening is that because it is so difficult, because it’s so difficult to really evaluate all the options for this $5, we’d end up taking shortcuts. That’s okay, but oftentimes taking those shortcuts, it goes to such extreme lengths that we lose sight of even any other options.

My co-author Dan Ariely who some of your listeners may know from his book Predictably Irrational and other books. He didn’t experiment where he and some colleagues went to a Toyota dealership. They asked people at the Toyota dealership, “Hey, you’re about to spend let’s say $25,000 on a car. What else could you with that $25,000?”

They couldn’t think of anything. They just couldn’t like even get out of the idea of spending it on a car when pressed further. They said, “Well, if I don’t buy a Toyota, I could buy a Honda.” Even there, they thought of an alternative, but it was still within the same category. It was still about buying a car, when really $25,000 is five vacations for five years. It’s a quarter of a year less work in your life. It can be so many different things.

Money is about opportunity costs, which is great, but is also tremendously challenging and it’s why we have such difficulty thinking about money and evaluating what we should do and why, because of that difficulty we end up taking shortcuts that are often not the best decisions.

[0:11:19.4] MB: I feel like it’s really challenging. I mean, someone who comes out of the financial world, I used to work on Wall Street and I’m still an investor by trade. The infinite possibilities of the opportunity cost of money, how do we start to wrap our heads around that?

[0:11:37.1] JK: Well, one thing you can do and one thing  that drove us to write this book is to start being cognizant of the biases that we have, or the value queues, the shortcuts essentially that I’m talking about that we take when we can’t evaluate a financial choice. Once you’re aware of those, then we don’t want you to face every decision and then spin in your head, but you can start setting up systems to help yourself perform better.

For instance, we know that we don’t save enough money. We know that we burn through our discretionary spending at a rate that we probably shouldn’t. If you’re aware of that, then you can setup a system, one idea that we put forward that’s improving the work is if you have a separate account, like a checking account and then you have a savings account and you get some money put in your savings account, some in your checking account.

Because most of us think about how much money we have to spend based upon what’s on our checking account, what’s on that balance when we take out money from the ATM, we can trick ourselves into thinking we have less money, that even if we stop to think about we know, we have 50% of our paycheck went over to this other account. But what we see is how we decide what to spend. We can trick ourselves to end up spending less. That’s one simple suggestion.

Ultimately, the biases and value queues and shortcuts that we talk about in the book and then others talk about elsewhere, being aware of those is the first and the biggest step towards then developing a personal system, or a system within your family, or a system within your company, or even your community to make better financial decisions.

It feels a little woo woo, but it is very true like just awareness is a huge difference maker. If you just think about how in this country we don’t really talk about money that much. I mean, it’s ironic. In a way, we “talk about it,” because we obsess about it. Our sports heroes make their money like who’s making this much and like we’re always thinking about money, but we never think about how we think about it.

In particular, we never think – excuse me, we never really talk about savings. Spending is very obvious. When people are spending, it’s easy to compete. Your neighbor has a new addition on their house, or a new car, or paints their house. Or your friend gets a new flat screen TV. It’s easy to compete on consumption, but you never are aware what people are saving.

Really that’s one of the most important things you can do with money is to save it, or to invest it for college for your kids to go to college, for you to retire. We never talk about that. I doubt very highly that any of your listeners or many of your listeners know what their friends are saving.

Actually there was a study that men are more willing to admit whether or not they used Viagra than how much they’ve saved in their 401K. I mean, like you think the thing about just how dysfunctional and tiny your savings is will be more impactful and more personal and private than Viagra use, but it’s not. It’s something that I hope that as a culture we can start to break through that wall and be a little more comfortable talking about money. It’s understandable that we aren’t. I come from a family that never really talked about those things either, at least not about savings, but just that awareness that it’s an issue, I think will help us grow and develop better habits. If we can compete on the good aspects of money, as well as the bad ones, I think we’d be better off.

[0:15:03.2] MB: I think that’s a really good point. The whole idea of how money in many ways is a central focus of our society with things – you talk about The Kardashians and lifestyles of the rich and famous and all these things, but at the same time it’s only one facet of money. Really the most important facets, things like saving, investing, etc., really aren’t on the forefront. I think in many ways, one of the things that I look at is it feels like our education system in many ways is going to fail to educate us about – in most cases even basic financial literacy.

[0:15:36.0] JK: Right. Absolutely. We could talk for several more hours or days about our education system has failed us on, but that’s certainly true that we don’t have a system that really gives us useful tools to be more financially literate. Part of the issue is that they’ve done studies that show that financial literacy lessons that are very distinctly, like you should do this, like [inaudible 0:16:00.2] and you should put 10% of this check into this. Those things fade. You get that lesson and it disappears from your memory eventually.

Again, our hope with the book is that it’s more like if you – instead of getting that this is what you should do, we present this is why you’re doing what you’re doing, these are the forces at play, then hopefully that will create within yourself an ability to develop your own system, because what limited financial literacy there is and as you’re correct to point out there isn’t much of it, it doesn’t really stick with people, because it’s presented almost like a fact.

Like who remembers the capital of South Dakota? I think it’s Boysie, right? No, it’s Idaho. See, even I don’t know and I’m sitting here, I got a computer, I could look it up. The point is people don’t remember those hard fact rules, but if you give them other tools that help you become emotionally connected to the things that we do, the decisions that we make, you’re more likely to help them make better decisions in the future. That’s not how we teach when we do teach finance. It’s not what we do.

[0:17:01.4] MB: Let’s dig in concretely into some of these biases, as we call them biases, value queues and shortcuts. I want to talk about a couple specific one. To start out, in the work that you did with Dan, what were some of the most obvious traps that people fall into or biases that people fall prey to?

[0:17:19.5] JK: The one that I’ve often used to introduce what the book is about and it’s pretty obvious is this concept of relativity, which is that we often measure something based upon comparing it to something else. The easy example why this doesn’t work and this is the holiday season, is sales. You go and you go to a store and you’re more likely to buy a sweater that used to be a $100, but it’s marked down to $60, than you are to buy a sweater that’s just listed at $60.

It’s because you think there is more value, because you’re “saving $40.” It used to be a $100, and I compare it to a $100, $60 is a great deal. Whereas, just $60 on its own, there’s nothing to compare it to so you don’t know how to evaluate that. It is a simple trap and it’s a simple solution. You shouldn’t ever think about what your “not spending.” You should think about what you are spending and besides is that worth it? Now maybe it’s worth it to buy a $60 sweater, so be it. Go for it. Maybe you would’ve paid a $100, so in a way like you do feel like you’re getting value. 

Don’t just look at that number that at what it used to be. That is something that retailers and so many commercial interest do is they put a price out there and then that price is slashed, because that helps us compare the two.

One real-world example I like to give people, what’s an easier question to answer? What do you want for dinner tonight, or would you like chicken or fish for dinner? The first, it’s a whole world of possibility. The second, you have something to compare it to, do I like chicken or fish better? That’s an easy choice, or it’s an easy process to decide yes or no. Whereas, if it’s wide open, you can’t.

The same is if you’re looking at a sweater and it’s $60 and you’re trying to decide, “Is this worth it? I don’t know if it’s worth it to spend this money if I valued that highly or not.” That’s more difficult than would you like a $60 sweater, or a $100 dollar? Of course, I like the $60 sweater. That’s what that choice becomes. It doesn’t become, “Do you want a $60 sweater, or do you want to spend money on a sweater becomes you want $60 or a $100.” That’s really obvious trap that I think we all fall into frequently is getting suckered by sales, by stuff being marked off.

Another one that really has stuck with me and I think I’m seeing it more and more is something called the pain of paying. That is the concept and the idea that when we pay for something, it stimulates the same region of our brain as when we feel pain, physical pain. That’s important. Feeling pain has an evolutionary purpose. You put your hand on a stove and that burn teaches you not to touch the stove anymore.

We should learn from pain, but often what happens in the financial world is instead of healing that pain and being conscious of what we’re doing and learning not to do it, we just numb the pain. You stop feeling it. Financially, the way that the pain hits us is twofold; one is just being aware of the spending. When you pull a $20 bill out of your wallet and you hand it over to someone, you’re aware that you’re spending that $20.

When you use Apple Pay and just swipe it at something really briefly, you’re much less aware how much you’re spending. There are studies showing when people use credit cards as the classic example of less awareness of paying, they spend more, they tip more and they’re more likely to forget how much they spend.

I ask people all the time, “Do you use credit card?” “Yes.” How many people know at the end of the month exactly what their credit card bill will be? Almost nobody knows that. We forget how much we spend and just adds up. 

An amazing thing to me, a study that I found that just floored me was that a fact, they call the credit card premium, it takes place even when you don’t actually use the credit card. If you just put out paraphernalia for a credit card, like a credit card swipe machine, a little MasterCard sticker, just putting that at the place of payment makes people spend more and more likely to forget how much you’re spending.

It’s less than using the credit card, but it still impacts. We’ve become so in-tuned with that shortcut, with that value queue, that bias that it’s just a trigger to us. It’s Pavlovian. Not being aware of that pain of paying. Not feeling that pain makes us do things that maybe we wouldn’t if we just stop to think, “Is it worth it?”

Many of your listeners I imagine, are a point in their lives when they’re probably starting to save like 401Ks, like starting to save for retirement, starting to invest more. You think about funds where you invest in like an index fund and there’s a management fee. For ease of numbers, let’s say there’s a management fee of 1% and you’ve got a million dollar portfolio, in which case you should buy both of my books, not just one.

Let’s say you got a million dollar portfolio and there’s 1% management fee. What happens is that 1%, you never see that 1% leave, right? You just get your statements at the end of the year. Somewhere there is a line that says that they took their 1% off of everything. But what of instead of it just being buried in a statement, at the end of every year, you have to write your broker a check for $10,000? You’d feel that pain and you would at least stop and say, “Oh, is it worth it to pay $10,000 for what this broker is doing or not?”

We don’t feel that pain and therefore, because we’re not aware of it and therefore, we don’t have that hand on the still burning moment of saying, “Oh, should I change or not?” That’s this pain of paying are really the way that our culture has evolved to numb that pain of paying is a huge, huge thing that we fall into and it’s something that concerns me as I look at the way technology has really advanced. I mentioned Apple Pay.

Many of these FinTech developments are “make paying easier.” Yeah, it’s easier but it’s makes paying easier. It doesn’t mean it makes your choices better. It just makes it easier for that money to flow out of your pocket. That isn’t necessarily a good thing. Again, we don’t want people to become freaks and think about every spending decision and you have decided to have your coffee every day for 5 bucks. Great, just spend it.

When you’re not aware of decisions at all and it just flows out when you’ve got Amazon technology everywhere with one-click spending and you never think about what you’re doing, that’s not financially healthy. I think what ends up happening is it’s like – it’s almost like we have an obesity crisis in finance, but no one is aware that they’re obese.

We have a spending crisis, but no one is really aware they’re doing it because we don’t feel that pain of paying. The relativity and the pain of paying are two of the early ones we talked about in the book. There’s tons of them, but those are two that I always feel like everybody deals with that and gets what we’re saying when we explain it.

[0:23:50.7] MB: I think those are both great examples. The relativity bias makes me think of a joke. My father-in-law always says, which is when his wife comes home from shopping he goes, “How much did I save today?” Instead of he say this like, “How much was everything on sale?” I’m curious, is there a component of anchoring bias embedded within that bias?

[0:24:10.3] JK: Absolutely. Everything isn’t totally clean. It’s just one force impacting another. Anchoring is very much at play when it comes to sales. Anchoring is the idea that you see the first figure that you see about a product will determine what you think it’s worth. Especially when it’s something you can’t assess.

One example is where they came out with the iPhone. Steve Jobs said this iPhone is on sale for $600. When you come out with the iPhone, how did you evaluate what an iPhone is worth? You’ve had cellphones, but all of a sudden you can do all these other things, have this functionality. You can look at pictures, you can go online, you can do amazing things, but how do you evaluate what’s the worth? We said, $600. 

Then a few weeks later the price was lowered to $400. Suddenly, oh my gosh, that’s a great deal. Then the factors at play both that relativity, like it seems like a relative great deal, and the fact that we had heard $600. We think, “That’s the number associated with it.” We are drawn to. I mean, it’s called anchoring, because it’s like an anchor that you just can’t get too far from it.

When I was looking at the research here, one of the amazing things about anchoring is not just how often it comes into play, but that it is so powerful that the numbers don’t have to necessarily relate to the product you’re buying. There is a thing called arbitrary coherence. Arbitrary is the keyword here that they didn’t experiment with.

I have people write down the last two digits of their social security number completely random. Like what the numbers could do. Then they would have them bid on items that they really couldn’t assess the true value, like obscure wines or random chocolates, or new technology thing. Stuff that you didn’t know what it was worth at all.

They found that those people that had written down high two numbers like their social security ending in 89 or 94, they would bid higher on all the other products that were random, than those that had low social security numbers, like 24 or 12. It was just because they had had these high numbers primed into their head.

Now by all rights, the social security number has nothing to do with the price of a bottle of wine. But because we are creatures that seek consistency, that seek to make logic, that look for value queues, we will grasp on to whatever number, whatever anchor we can find in order to give ourselves some stability.

It’s something that you should be aware of as consumers. You walk by a store and they have a $1,000 item, a pair of sneakers for a $1,000 in the window. No one is going to buy a $1,000 sneakers. You go inside and suddenly there’s a $250 sneaker and subconsciously, you have that $1,000 crazy thing in the window that anchored you to this is a place to buy expensive sneakers and $250 doesn’t seem so bad.

Anchoring is something that works with relativity, that is everywhere. Go to buy a car and there is a car on the showroom floor that’s all suit up that’s $75,000. Suddenly spending $35, $40,000 doesn’t seem like that big a deal.

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[0:30:07.2] MB: What are the other examples that when you’re talking about fees and the pain of paying, and if you look at your brokerage statement, one of the mental models that I think is one of the most powerful around finance, money, personal finance, etc., is the power of compounding and how incredibly impactful compound interest can be over time.

One of the most interesting ways to look at fees specifically is to think about the compounded value of fees, especially percentage fees over time. That 1% that you don’t see gets compounded essentially out of what you’re doing over time. If you run the numbers, even small differences in the management fee can make a huge, huge difference over like a 20-year time horizon and what the compounded end result is.
[0:30:56.6] JK: Yeah. That’s one way that you might better think about looking at the – a fee is like a – it’s like a negative compound interest. I’m not sureif that’s quite the right term. But yeah, you lose that $10,000 and it’s not just, “Oh, is it worth $10,000?” The question is is it worth $10,000 this year? Well, next year is actually $11,000, which the following year is $12,100. Again, two component for some off the top of my head.

Yeah, is that value worth it? I mean, it’s staggering and there are people that have developed charts to show what you lose. That’s not to say the choice is, “Okay, have something with no management fees, or the lowest management fees. Because that isn’t always the best choice. It’s just be aware. What often happens is that we obsess over these sorts of details for small financial decisions, but not large ones.

We go to a supermarket and we can’t decide if we should get the organic tomatoes that are 35 cents more than the regular tomatoes. We sit there and we weigh and we think about whether or not organic is really good for us. What is our health [inaudible 0:32:01.8] and all the stuff. Then we go and we buy a house, or we remodel a home for $200,000 and someone comes and says, “Hey, for an extra $5,000 you can have something Italian. You’re going to have some marble thing.”

You’re like, “Okay, whatever. It’s just $5,000. Who cares?” All the tomato saving in the world is not going to add up to that $5,000, but oftentimes it’s the little ones we obsess about, not the big ones. We would suggest that you obsess about the big decisions and let the little ones go. That we reversed the mindset.

I remember my own personal life example is I went on a family vacation. I can’t remember. It was a long time ago, but we went to Capri, the Island of Capri. Which is a super expensive island, and I’m sure it was a real expensive vacation. It was a special trip. I don’t know exactly what it cost, because I was along for the ride as a little kid back when this happened.

Let’s say the trip cost $15,000. I don’t know if that’s what we know. Say that that’s the figure. I can remember my parents arguing with a cab driver over like $2 of a tip. Spending 20 minutes arguing about this. I didn’t think about it at the time, but in retrospect it’s like, “We just rode off. Hey, let’s spend 10 grand, but we’re going waste our time arguing over $2.” I think there are deeper psychological reasons and I don’t want to get too much on the couch here and talk about my mother and my feelings towards my family. From a perspective of rationality and money and what’s the standard of scientifically-backed approach that wasn’t the wisest choice at which battle to pick.

[0:33:35.6] MB: For someone listening, how can they pick the bigger battles when they’re facing that decision?

[0:33:42.8] JK: I think it’s up to them to decide whether the less frequent to special spending times, and by special I mean you can just categorize it as large. Buying a house, buying a car, starting a new job and signing up for your benefits and your 401K withdrawals. Think about those things that really have a significant amount of money involved with it, because those are the ones, it’s almost like the compound interest deal. Those are the ones where the little decisions will mean a lot.

Don’t worry about that other stuff. Now that’s not to say you should never think, “Should I spend $5 on a latte?” Our advice would be, they’re spending that is infrequent and small. You go to buy a pack of gum once in a while. Don’t worry. Don’t jest about that.

Then they’re spending that is relatively small, but it’s frequent. That’s a habit. You decide to spend $5 on a coffee, or you just decide every night I’m going out to my favorite restaurant and bar and I’m spending a $150. Don’t think about that every time, but once in a while, once every  year, once every six months, look back at all that spending and decide whether or not it’s worth it and how you might adjust that habit. Then it becomes a habit again, but do consider it once in a while.

Then there is the big spending things. For those, because you have so much of impact, because the result of that choice can impact your ability to do all those other smaller choices and  have the money to have a $100 dinner every week, it’s worth taking some time and thinking about what are the real forces at play here and what really matters to me and ultimately, what are the opportunity cost as your listeners move forward in their lives and get to a point where I am, like I have two young kids and we have a nice house. It’s a small house and it’s like, “Oh, we could spend more to get a bigger house. But does that mean that we can’t take some cool real experience vacations that might enhance our lives more than just having more room?”

It’s a difficult choice, but it’s something to think about and it’s a way. Oftentimes, with that example people are just like, “Oh, I got to get the bigger house.” They don’t think about what they’re giving up. Our advice would be at those moments, that’s when you do think about it. Don’t worry about what you’re giving up when you’re buying that $1.50 piece of gum, but do one it’s a $150,000 more of a house or so.

[0:35:57.2] MB: I think this also comes out of being in the financial world, but it’s definitely not a perfect model, but the yardstick that I typically use to think about the opportunity cost of spending, and again more for big picture spending items, like you’re talking about. It’s to think about sort of, I just one alternative and that’s basically if I were to invest this at a – let’s say between a 6% and 8% compounded annual return for 20 years, what’s a better use of these funds? Just spend it on this, or is it just to invest it?

That’s definitely not a perfect proxy, but it’s a good enough proxy in many ways to just think about, “Okay, what’s a better use of this capital? Is it to spend it on a new sofa and renovating the kitchen? Or is it to spend it on investing this money, so that I can have savings and build some wealth over time?”

[0:36:45.7] JK: Right. It’s great that you’re able to think about that, because that’s a difficult way. It’s challenging for us to think about the future like that. We have a chapter on the book all about self-control and that itself could be a whole book. The real challenge of self-control particularly when it comes to savings and investing for retirement and while we have such retirement prices is that people have a hard time thinking about the future selves.

Even though it’s me when I’m 65, 75, I’m not connected to that emotionally as much as I am to me right now. To think about my needs later, it’s really hard to connect and to feel obliged. We always think of ourselves as being better in the future. I may not save now, but in a couple of years I’ll start saving. You keep making those promises to yourself.

Or you think everything will be fine. “I’ll be fine by the time I’m 70.” You don’t think about all the things you need and part of that is because we’re not emotionally connected, and when it comes to saving it’s also because it’s so hard to figure out. In retirement, you have to forget how long are you going to work? How much money will you have saved? How long are you going to live after you stop working? What’s your cost of living going to be? What are your health issues going to be? What are your kids going to be doing? All these things that are just totally unpredictable.

In some ways it’s easier to not think about all that hard stuff. At the end of the day, a lot of what we humans want to do is we want to go the path of least resistance. We want the easy solution, the quick solution. That’s understandable. That’s human nature. We don’t suggest you try to change human nature. You just are aware of it and every now and then you choose the hard path.

Also ever now and then, you create systems to let the easy path happen. Places that have speaking of retirement that have made it so that you start a job and the default option is that you are putting aside money for retirement, as opposed to you have to select that. You have to opt out instead of opting in, because you’re automatically in. That the savings right is skyrocket. I mean, it’s tremendously different, just because the easy way is just to let the default ride.

When that default is savings, people do it more. You can apply that to so many things. I mention having two different account, like you can go one time to your HR department and say, “You know what? Put $200 of every check combined into this separate account.” You put it in an account and it’s there and you never have to think about it again. You can set up default systems, so that you don’t have to think about it every time. That’s what we would advise you to try to do as much as possible when you recognize your own financial failing.

[0:39:16.6] MB: Let’s dig a little bit deeper into self-control since we started talking about that. What were some of the lessons that you saw from the work that you did around the book?

[0:39:24.9] JK: That self-control is really hard. That we looked at different situations and it ultimately is about emotion. I’ll take a mini-detour to say that when it comes to the world of finance and particularly, let’s be honest comes to men, I’m thinking about world of finance. We don’t think emotion plays in. We think it’s just a number game.

Really emotion does play in it. Emotions are things like being connected to the desire of now to falling for the temptation of now. To falling for like I want this motorcycle, I want this sound system, I want these things that I can feel now as opposed to that stuff that’s way in the distant future that you’re not emotionally connected to.

I mean, an easy study, or example is studies that show that  in a state of arousal, people will do totally irrational, unethical, immoral things, because they are emotionally compromised. One lesson, or one sort of practical piece of advice is to try to insulate ourselves from those challenging emotions, to insulate ourselves from the difficulty of self-control.

There are thing that we call Ulysses Contact. Called Ulysses Contract, because in the story of Ulysses, he wanted to hear the sound of the sirens, but he knew that you go by the sirens and all these ships crash against the rock, because they were so tempting. He had himself tied to the mast and he had his crew put stuff in their ears so they couldn’t hear the sirens and he told them, “No matter what I say, don’t let me tell you to go sail closer to the sound.”

That worked. They got past the sirens. He heard the songs and it was great and not on Spotify. He didn’t crash. You can setup systems for yourself to do the same thing and make it so that you can’t take it out, that you can’t misspend your money, that you can’t fall victim to your feelings of self-control.

In some ways, that tax penalty that comes when you setup an IRA and you are penalized, I think it’s like 10,000 or maybe it’s a percentage. I’m not sure. You’re penalized if you take early withdrawal. That’s an essence, a Ulysses contract and you’re getting punished for not sticking with the promise you’ve made to yourself.

Being aware of that, being aware that you may have to lock yourself into the good behavior can be a way to overcome self-control. There are other tricks, something we call reward substation, which is if you’re having trouble doing something because it doesn’t feel good, that you find an alternative, a way to reward yourself in a way that does feel good.

Obviously, you don’t want to undermine the benefits, like if you’re having trouble exercising, don’t reward yourself with a milkshake. That’s silly, but if you’re having trouble exercising, reward yourself with an hour of Netflix, or reward yourself with something else that provides you pleasure, so that pushing through that difficult thing that you don’t want to do becomes about achieving a goal that you want, not about achieving whatever the goal is of exercise, of losing weight, of better health and all that if you don’t connect to it.

[0:42:18.9] MB: In many ways, you know that makes me think of essentially using decision architecture to create self-control for yourself similar to everything about weight loss or something like that. Taking all these snacks out of your house, so that there’s nothing to snack on. Or putting your gym clothes next to the bed ready to go, so that you are – make it easier for yourself to go to the gym the next morning.

[0:42:41.0] JK: It’s exactly that. It’s recognizing and being comfortable admitting that we have human failings, that we’re not like perfect machines and saying, “Okay, I’m not a perfect dude that’s just going to get up and work out and never eat candy. I have to make it hard for myself.” Studies regarding like people trying to have better diabetic outcome. That literally show putting a bowl of healthy snacks, celery, carrots, grapes, whatever it is, put in a bowl of healthy snacks in the front of the fridge, or on the counter has tremendous impact versus, like having it be that candy.

You walk through a lot of offices. They have administrative cubicles in the middle and people have little candy. It’s great. You go and you grab some candy and you chat with that person and it’s a great relationship. Because it’s so easy, you just grab it. If you do hide the bad snacks and we’re not saying don’t ever have a snack, you’ll be a miserable person if you never eat a piece of chocolate. If you hide them, you’re less likely to eat them. That’s admitting that it’s a challenge.

I don’t have the data on this. I haven’t seen it, but I know that guys, especially guys who consider themselves high achievers, they don’t want to admit their failings. That is actually the best thing you can do and in some ways, the strength – it’s a sign of a really strong person is recognizing those areas that you’re not also met and seeking to improve them. That’s what we can do when we see what our failings are, whether it’s we eat too much snacks, or we don’t save enough money, or we buy too many thousand dollar shoes.

[0:44:11.9] MB: I mean, that is probably the single most recurrent theme on the podcast, the idea that self-awareness is really the cornerstone of improvement, making better decisions and understanding what needs to be done to get where you want to get and whether it’s saving money, whether it’s your own personal health, whether it’s achieving your goals, you have to start with a really honest assessment of who you are, where you skills are today and once you are capable of doing that, you can really move past any obstacles.

If you get trapped – caught in the trapped of self-sabotage, it becomes really, really hard to – and lack of self-awareness becomes really hard to ever move beyond the same thing that keeps stopping you over and over again.

[0:44:54.8] JK: Absolutely. I will say I’ve been speaking more to groups that are involved in the investment community, like fund managers and people in New York and London, who are super high-achieving alpha dog guys, largely men who – top of the finance game. A world where you think is very just need jerk reaction opposed to things that sounds what I call woo-woo, soft science like self-awareness and mindset.

I have been really pleasantly surprised by how receptive they become. I don’t have the data to say they weren’t receptive 15 years ago, but I feel like that they probably weren’t. I mean, that’s not hard science. Regardless, I’ve been happy to see how they have embraced that, even these highest achievers in a field that you think are very closed off to emotions playing a role. They’re very open to it.

I tell people, like if these super alpha dogs get it, the rest of us can certainly get it. You see in sports too, like Tom Brady is an alpha dog, but he is very like, “It’s about your mind-body set. It’s about  your health, mental health, your physical health, and having all those pieces together.” I’m really pleased that that’s extending to all different practices in all different fields.

[0:46:13.4] MB: One other bias that you wrote about that I want to touch on is fairness and effort. Tell me a little bit about how we sometimes think erroneously about that.

[0:46:22.5] JK: Sure, as I said before what happens is it’s hard to assess the value of something in the financial realm and other realms is what’s it worth to pay. We go for these shortcuts. One shortcut that we take is we assess the effort it took to produce something. People are more willing to pay for a locksmith that fumbles around and breaks them stuff and have to run back to his shop 10 times, it takes an hour to open your door.

Then locksmith who comes and opens it in a minute, not because it looks like it was a lot more effort, that it was a lot more fair to pay for all that work. When really what should matter is what’s the value to you of getting into your house? It shouldn’t matter how long it take. In fact, that first – the second person who spend just one minute is more valuable, because in the other hand that other locksmith you’re paying for his incompetence.

We don’t know how to asses value. What’s the value of getting into your home? What is that worth financially? Unless, you’re working hourly and the tab is running, or the meter is running in your house, there’s no way to know what that’s worth. We fall for effort.

It’s something that happens to us outside of the locksmith. People will pay more for data recovery if a technician takes a week to fix and save your computer data than if they take an hour. Consultants. Large firms hire like a McKenzie or an outside consultant. They show up with a 600-slide PowerPoint presentation explaining everything they’ve done. The food was served on the flight out to Columbus that week to study with you. All you care about is the final slide and the final recommendation, but they had this long thing, because it shows how hard they worked and then they throw you a check for 250 grand for your company and you sign off on it, because it’s hard to assess the value of what they’ve done. You look at the effort of whether or not it’s fair.

It’s a real challenge, because people can take advantage of that. You might say, McKenzie takes advantage of the fact that we don’t know how to assess their value. There are times and that’s good and times when that’s a challenge. There is a story, I think it’s just a fable, but it’s illustrative that a woman saw Pablo Picasso in a park and walked up to Pablo Picasso and said, “Will you paint my portrait?” He said, “Sure.” He looked at her for a minute, then with a single brush stroke, he painted a perfect image of her and gave it to her and she said, “Oh, my God. This is beautiful. You captured everything about me. I don’t know how you possibly did this. How much do I owe you?”

He said, “$5,000.” She said, “What? That’s totally unfair. It took you no effort. It only took you a minute.” He said, “No, it took me a lifetime plus a minute.” She judging just on that effort couldn’t assess the value of his whole lifetime of knowledge. It’s those knowledge economy, the people that are professional writers, but they only take an hour to do something. She is paying for that hour, you’re not really paying them what the value is. We oftentimes will underestimate value, at the same time will overestimate, because we see the effort.

Restaurants are great at playing into this. You get a menu item at a fancy restaurant and it describes everything about the food, like where the spinach was grown, the meat, what the name of the cow was and how often it was petted by aboriginal kids, all these things and how far it traveled across the land and how many people lost its fee bringing this piece of meat to you. It’s really just a cheeseburger, and you’ll pay $35 for it, because it seems like it was worth the effort. A reliance on what we can see is a challenge.

It’s been interesting to me to see how companies become more aware of that, not just to be that manipulative person, but also to proactively – I mean, the City of Boston had a real problem, because there are tons of potholes in the winter. Let’s say there are a 10,000 potholes around the City of Boston. If you live in Boston, you open your door, you see three potholes on your street, you call the city, you never see them fix it. You’re going to think they’re doing nothing.

The City of Boston, they created basically a website that show the 10,000 potholes and also showed which ones they fixed that da. If you went there and saw, “Oh, they fixed 25 potholes today. It wasn’t the one on my street, but they’re clearly working.” Suddenly, you see their effort. Suddenly you appreciate the value of took enough steps, like your tax dollars and your government and all that. The point is they are showing me effort.

Oftentimes, companies that are being undervalued, or people that are being undervalued could show their effort more. The trick is of course when to know as a consumer are they showing a real effort that we should value, or are they showing effort in a fake attempt to inflate their worth?

[0:50:49.5] MB: I love that Picasso story, and it’s funny. I was actually going to give that example, but you beat me to it. It’s one of my favorite stories and I commonly share that with people. I’m curious, we talked a little bit about this and as we’re wrapping up, what are some practical pieces of advice, or maybe a piece of homework to give to somebody listening to this, that they could start with as a beginning step towards understanding their own biases and how that impacts their thinking specifically within the realm of money?

[0:51:19.8] JK: Well, there are a ton of things you can do. Before giving a piece of advice, it applies to everyone. The suggestion would be to look at which bias, or which value queue really resonates with something you do, and then sort of address that. One common thing you can do is if you are – the pain of paying I mentioned is something that’s very common and that a lot of people suffer with is start paying cash a little bit more.

It’s a challenge in our economy to try to be all cash. Many places don’t even take it anymore, but start paying cash a little more frequently and see if you make different choices. Similarly, you could look at your monthly credit card bill, or even get a buddy, a spending buddy and I don’t suggest you use a spell, so if a neighbor listeners are married, but get a spending buddy and go through your monthly credit card and just explain every item on there and justify it and say what it was.

Then you’ll find just having gone through that process when you start spending again and you have your next credit card bill, you either do it again with a spending buddy, or just be aware of that. You’ll be more conscious of what each item is that you spent. Talked about the idea of having a different account for discretionary spending and you can do that. If you have the ability, you can try using a prepaid debit cards for weekly spending.

If you really are spending too much money on a week-to-week basis, like you go out and you spend a lot, set up as give yourself a prepaid debit card of however much money you think you can spend each week and give it to yourself on Monday. Don’t give it on Friday, because Friday you’ll go out on the weekend and spend it all. Give it to yourself on Monday and that’s all you can spend.

Stuff like this is pretty restrictive and I wouldn’t suggest going through your life like this, but you do it two or three or five times and you start to recognize your own patterns and you start to get into better habits. Then you can go back to stuff that’s maybe a little less cumbersome. To whatever extent possible, don’t have things on autopay. Don’t just use the latest technology, because it’s easier to pay. Amazon developed a store recently where you just walk in, you never go to a checkout counter, you walk in, you put stuff in your bag and a little chip reader, scanner somehow connects your credit card and pays. You walk in, you walk out.

That’s so much “easier” to shop. That’s not good for your spending. Don’t leap to the first new technology thinking it’s great, without thinking about what it really does. Ultimately, the thing is just to stop and think every now I then, I mentioned the different type of spending, the small spending, the habit spending and the big spending. Every now and then just stop and think about those habits, stop and think about the big spending, and just take a beat and think about opportunity cost, think about what else you could do. You’ll find that that adjust your mind and adjust your mindset and adjust the way that you value money in the future.

[0:54:07.9] MB: Jeff, where can listeners find you and your books online?

[0:54:12.0] JK: JeffKreisler, K-R-E-I-S-L-E-R.com. My Twitter is JeffKreisler. I also have a behavioral science Twitter JeffKreislerbs and the [inaudible 0:54:21.8] to there. Starting in 2018, I’ll be the editor of a new website called peoplescience.com, which is all applied behavioral science. Certainly just going to jeffkreisler and following down that rabbit hole.

Plus I speak for groups all over the nation, colleges and companies. I’m often near you wherever you are. Folks coming out around the world, so I’m hoping to get abroad on 2018. Jeff Kreisler is a good start. Yeah, that’s it.

[0:54:51.5] MB: Well, Jeff thank you so much for coming on the show sharing all of the wisdom that you have about personal finance, biases and how we often missthink money.

[0:54:59.8] JK: Thanks so much for having me. It’s a great podcast. I hope you have the greatest success.

[0:55:04.2] MB: Thank you so much for listening to the Science of Success. We created this show to help you our listeners master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is matt@successpodcast.com. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener e-mail.

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How You Can Work Less & Achieve More by Mastering This ONE Key Principle with Perry Marshall

April 13, 2017 by Lace Gilger in High Performance, Decision Making, Money & Finance

Check Out Perry's Epic Course on 4xing Your Productivity With 80/20

In this episode we look at what rabbit populations, craters on the moon, files on your hard-drive and the GDP of countries have in common, we discuss The power of fractals, the math of chaos theory, and what that all has to do with the 80/20 principle, How your understanding of the 80/20 is only the tip of the iceberg, how to generate 16x more leverage to achieve your goals, we go deep into sales wisdom from one of the world's top marketing consultants and much more with Perry Marshall.

Perry Marshall is a trained engineer and one of the world’s most sought-after business consultants, helping clients across 300 industries by combining sales, engineering, art, and psychology. Perry is the bestselling author of several books including The Ultimate Guide To Google AdWord, 80/20 Sales and Marketing and Evolution 2.0.

How Perry went from being laid off and surviving on ramen and bologna sandwiches to becoming one of the world's top marketing consultants
How your understanding of the 80/20 principle is only the tip of the iceberg
What Fractals and Chaos Theory have to do with the 80/20 principle
What the pattern that Earthquakes, volcanoes, tornados and hurricanes follow has to do with marketing strategy
Fractals are everywhere in your life, nature, and the universe
The raw power of the butterfly effect
How the 80/20 principles rules everything in your life and business
“Levers within levers, within levers” and how that can shape your focus
Where to find the tiny hinges that swing huge doors
What do rabbit populations, craters on the moon, files on your hard-drive and the GDP of countries have in common?
How to align yourself with the 80/20 principle and harness its incredible power
Do you want to live in the IS world or the SHOULD BE world?
If you deal with reality the way it is things become effortless
Once you understand the 80/20 principle, it transforms what you focus on
How most problems in life are a result of being on the wrong side of the 80/20 equation
What is “racking the shotgun?” and why is it so important
Don’t focus on fixing the bad 80%, focus on reproducing the successful 20%
One of the jobs of civilization is to mitigate the 80/20 principle
The world will always condition you to focus on the underperforms (the 80%)
You can get “A's" in six different subjects, but you’re gonna make a living in ONE
If you try 20 projects, the law of 80/20 says 1 should succeed!
Failure is OK, you only have to go get rich once
The 20% is 16x more leverage than the 80% that doesn’t generate results
Everyone is in sales in some form or fashion in their lives
Sales is not a convincing people process, sales and elimination process
First thing you should do in sales is disqualify people as quickly as possible
Never ask someone who can say no but who cannot say yes
The key questions you need to ask to disqualify sales leads
The story of the $2700 espresso machine
The 8 different modalities of selling and how you can thrive by embracing your own unique sales strengths
And much more!

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

SHOW NOTES, LINKS, & RESEARCH

Check out Perry’s Epic Course on how to 4x Your Productivity Using the 80/20 Principle
[Website] Fractal Foundation
[Website] 80/20 Curve
[Book] 80/20 Sales and Marketing by Perry Marshall
[Book] The 80/20 Principle: The Secret to Achieving More with Less by Richard Koch
[Personal Site] Perry Marshall
[Blog Article] How To Perform An 80/20 Analysis by Matt Bodnar

Episode Transcript

[00:00:06.4] ANNOUNCER: Welcome to The Science of Success with your host, Matt Bodnar.

[0:00:12.6] MB: Welcome to The Science of Success. I’m your host, Matt Bodnar. I’m an entrepreneur and investor in Nashville, Tennessee and I’m obsessed with the mindset of success and the psychology of performance. I’ve read hundreds of books, conducted countless hours of research and study and I am going to take you on a journey into the human mind and what makes peak performers tick, with the focus on always having our discussion rooted in psychological research and scientific fact, not opinion.

In this episode, we look at what rabbit populations, craters on the moon, files on your hard drive, and the GDP of countries have in common. We discuss the power of fractals, the math of chaos theory, and what that all has to do with the 80-20 principles. How your understanding of the 80-20 principle is only the tip of the iceberg. How to generate 16 times more leverage towards achieving your goals. We go deep into sales wisdom from one of the world’s top marketing consultants, and much more, with Perry Marshall. 

The Science of Success continues to grow with more than 800,000 downloads, listeners in over 100 countries, hitting number one in New and Noteworthy, and more. I get listener comments and emails all the time asking me, “Matt, how do you organize and remember all this incredible information?” A lot of our listeners are curious about how I keep track of all the incredible knowledge I get from reading hundreds of books, interviewing amazing experts, listening to awesome podcast, and more.

Because of that, we’ve created an epic resource just for you; a detailed guide called How to Organize and Remember Everything. You can get it completely free by texting the word “smarter” to the number 44222. Again, it’s a guide we created called How to Organize and Remember Everything. All you have to do to get it is to text the word “smarter” to the number 44222 or go to scienceofsuccess.co and put in your email.

In our previous episode, we discussed how you can create success by mashing two seemingly unrelated ideas together. We looked at why energy is the currency of the biological world and how that impacts the evolution of money within our society. We went deep into understanding money and its role in our lives and we looked at why you should investigate your own biases about money, with Kabir Sehgal. If you want to improve your understanding of money, listen to that episode. 

[0:02:27.6] MB: Today, we have another awesome guest on the show, Perry Marshall. Perry is a trained engineer and one of the world’s most sought after business consultants and marketing experts helping clients across 300 industries by combining sales, engineering, art, and psychology. He’s also a bestselling author of several books including The Ultimate Guide to Google AdWords, 80/20 Sales and Marketing, and Evolution 2.0.

Perry, welcome to The Science of Success.

[0:02:53.8] PM: Hey, thanks for having me on the show, and you guys got a big following and a lot of interesting guests that you had. It’s really an honor. We talked earlier and I think we’re going to have a rocking conversation today. 

[0:03:07.8] MB: I think it’s going to be great, and there’s so much that you talk about that I think the audience is really going to enjoy. Before we dig into that, tell us a little bit — I kind of gave a brief bio. Tell us a little bit about yourself and your story.

[0:03:20.1] PM: I was about 25 years old when I got laid off from my first engineering job and my wife was three months pregnant. I could have stayed in the same track I was on if I was willing to move, but I wasn’t willing to pull up roots, and so I ended up going into sales. I thought, “Well, this shouldn’t be too hard.” A couple of years of bologna sandwiches and ramen soup later, it’s like, “Wow! This is not for the faint of heart.”

I eventually did find my way and I eventually did find the groove, but really, there were some excruciating periods of time where the bills weren’t getting paid and I just try all these stuff and it wouldn’t work. I would spend all my time trying to pound through brick walls and everything. 

Eventually, 20 years later, writing a book that’s — The book that I wish I’d had when I was starting out, or for that matter, all the different marketing stuff, because any more — If you don’t have some marketing to back you up as a sales person, you’re screwed. That’s what that’s about. 

Life is a lot different now. Ironically, I’m a sales and marketing consultant. I think that actually goes back to the fact that it’s not hard to teach what was hard for you to learn. I had a huge learning curve. I think I can explain a lot of that stuff in ways that were never explained to me.

[0:05:02.2] MB: I know one of the transformational ideas in your life is the concept of the 80/20 principle. I’d love to kind of — Many people hear that and they think, “Oh, yeah. Of course, I know what he 80/20 principle is.” Your understanding of it is so much deeper than that. I’d love for you to kind of explain to the audience why the surface level understanding is really only the tip of the iceberg.

[0:05:25.4] PM: I heard about the 80/20 principle back when I was marketing manager and I thought, “Oh! That’s interesting. Okay, 80% of your sales come from 20% of your customers.” I actually printed out a QuickBooks report and I went through it and, “I’ll be darned. That’s pretty much exactly right. That’s interesting.” 

At that point, I thought I knew it. I thought I knew what it meant, and I really didn’t. I would politely suggest that most people have never really explored what it actually is and what it means. Let me tell you two little stories back-to-back that will kind of tie this together for you. 

The first story, it goes back to when I was in college and my wife went to the library and came home with a book on fractals and chaos. Hopefully, most people have seen fractals before, those computer images where there’s spirals, and there’s a spiral on the spiral, and there’s a spiral on the spiral on the spiral. If you haven’t seen this, you should type fractals in YouTube and just start clicking on stuff and you’ll quickly see it. 

She brought this book home and I was looking through it, and I discovered, “This isn’t just interesting shapes. This is actually a major way that the world works.” If you look at a tree, you see that branching pattern, but then you can zoom in and the branches have branches, and then those branches have branches, and you can get down the leaves and you could get a microscope and even the little veins that feed the individual cells are still showing that branching pattern. That’s a fractal pattern. It’s a pattern that repeats over and over and over again.

What the book explained is this is very closely related to the way that things like earthquakes, and volcanoes, and weather, and hurricanes, and tornadoes, and avalanches are all predictably unpredictable. They always follow certain patterns. It’s just the specific instance that you can’t quite predict. You can be sure that somewhere in the Rocky Mountains, if you clap your hand at the right place at the right time, you’re going to trigger an avalanche. It speaks to the way cracks travel through glass when a rock hits your windshield and cracks on the sidewalk, or sand dunes — Getting these whole new lens for the world. There had never been language for any of these. Of course, I had seen all my life, but suddenly, there was language. I thought it was all very interesting. 

Then, I went out to my car the next day, and it was as cold November day and there were ice crystals on my car, and I looked at those ice crystals and I go, “Oh my word. Those are little tiny fractals growing on the roof of my car.” They’re everywhere, and I couldn’t — From that point forward, I couldn’t not look out the window and see the pattern, the traffic is fractal, and rivers are fractals. 

Anyways, that’s a little geeky. Of course, I know your audience probably enjoys things like that. Fast-forward to — Actually, this is more than 10 years ago, I was reading Richard Koch’s book, The 80/20 Principle. Early in the book, he just mentioned for maybe a paragraph or two that the 80/20 principle was closely related to fractals and chaos, and the butterfly effect which says that a butterfly’s wings can trigger a hurricane six months’ later half a world away, because that’s how weather actually works. That’s why you can’t predict it more than two or three weeks out. 

He made this comment, and all of a sudden, something clicked in my brain and I connected 80/20 to the fractals and the chaos. What I suddenly realized was 80/20 is the arithmetic of chaos and fractals. That means there’s an 80/20 inside every 80/20, and then there’s  another one, and another one, and another one, and this all just exploded in my brain in about 10 seconds. I was in a coffee shop and I jumped up and I drove home, and I ran home, and I got out my calculator, and I got all these pieces of paper.

At that time, I had been in my own business for about a year and a half. I had quit my job as a sales manager. Hang out my shingle as an independent marketing consultant, and I had a few clients, and I was selling some products, and I was little wobbly still, but getting going, and it was starting to go well. I realized, “Oh my word! This 80/20 thing, it applies to everything in my business, every just column on every spreadsheet, every web visitor. How many people fill out the form? How many people call on the phone? How many people buy a product? How many people turn into a good client?”

80/20 is predicting all of these stuff and I was just having this massive geek-out moment and I was realizing, “Hey, wait a minute. There are levers within levers within levers, and now that I can see them, I know exactly what to do,” where before, it was a mystery. 

It’s kind of like when I was a brand new guy and I get laid off my job and I found a sales job and I was kind of blissfully ignorant, I didn’t know where the levers were. Then, I don’t know what I don’t know. Then, I just keep getting kicked in the teeth and, pounded in the head, and clobbered by two-by-fours, and I never know when the next one is coming. 

Now, I’m actually — It’s like, “There’s really reliable ways to know that two-by-four is coming.” Also, there’s really reliable ways to know where there’s more business in a place where you just found a little bit versus other places where you’ve already found all that you can get. That was a huge, huge, huge thing for me. In fact, it might be the most significant moment I’ve ever had reading a book in my whole business career, and it totally tilted my world. 

Interestingly, during the following year, I started teaching Google AdWords. I started speaking at seminars. Since that time  I’ve written the world’s bestselling book on internet advertising, which is The Ultimate Guide to Google AdWords, and 80/20 was how I figured out Google AdWords. 

Back then, and I’m talking about 2003 right now, Google AdWords was this crazy, weird thing that most people didn’t understand. It was a wild west kind of a deal. It’s like, “Now, we’re bidding on positions in a search engine, and how does that work, and where the whole English language is up for sale, and how do you organize a campaign, and how do you write these ads, and how do you run these tests.” All of a sudden, I realized, “80% of this doesn’t’ matter. 20% of it matters a lot, and 20% of the 20% matters even more, and 20% of the 20% of the 20% matters even more,” and there’re these tiny little hinges that swing big doors. “I can figure this out,” and I did. In fact, a lot of the things that I figured out then have now become standard best practices in $100 billion industry, which we call pay per click marketing. 80/20 is really important, and I just want to say to everybody listening, if you’ll stick with us here and really get into some application, I think you’re going to find this really fascinating. 

[0:13:57.2] MB: I find it amazing that the 80/20 principle can describe everything from the GDP of countries, to the distribution of wealth of individuals, to craters on the moon, so it’s amazing. 

[0:14:09.3] PM: Yes, it does. Literally, it’s true. 80/20 describes rabbit populations, it describe the size of files on your hard drive. Let’s take your hard drive. 20% of the files take 80% of the space, and 20% or 20% of the files take 80% of 80% of the space. That means 4% take up 64%. You can have 80/20 squared 80/20 cube, 80/20 of the power of four. 

80/20 cube says that 1% of the files on your hard drive take up 50%. It’s also true of customers. 1% of your customers give you 50% of your money. 1% of the drivers gets 50% of the speeding tickets. 1% of the real estate owners own 50% of the real estate. 1% of the people own 50% of the wealth. This is a truism. It’s true regardless what country you go, of what state you’re in, or what kind of system of government that you have, and see, “This is extremely powerful, because if the same ratios hold for real estate in Belgium as for the size of craters on the moon, as for the size of pebbles on the beach, then it tells you that there’s something very, very fundamental that’s going on in the world and you either align with yourself with it, or fight it, and nature doesn’t care.” 

If you want to fight it and get your teeth kicked in, you can go right ahead and you can do that, and the universe does not care. On the other hand, if you align yourself with it and harness it, you can develop great wealth, you can achieve great things, you can have a very large disproportionate amount of influence. It’s really just a question of; who decides to live in the is world, versus who prefers to remain in the should be world? I just got to a point where I’m done living in the should be world. I’m going to sell and market the way the world really does work, and I’m going to harmonize with this.

[0:16:29.5] MB: Such a great statement, the distinction between the is world and the should be world. We talked about that a lot on the show and it’s something that definitely bears repeating. 

[0:16:40.0] PM: Trust me. I could live in the should be world for a really long time. I’m an idealistic person, and I get all these ideas. I don’t think any of us can afford to stay there. It’s fun for a while, but — Reality is actually a lot — If you just deal with the reality the way that it is, life is just so much easy.

[0:17:00.4] MB: Yeah, aligning yourself with reality whether or not you think that’s the way reality should be is how you achieve almost anything with these. It’s almost effortless once you feel aligned. You know that? That makes me think of the fact that once you understand this principle, it completely transforms what you think about and what you focus on, and you kind of hinted on that, talking about the tiny hinges and focusing on the wrong things. 

I think you’ve talked about in the past how — Or said something around the lines of, “Every problem in business, or most problems in your business, is because you’re on the wrong side of the 80/20 equation.” 

[0:17:40.3] PM: Yeah, that’s right. I’ll tell you a quick story. My friend, John Paul Mendocha, dropped out of high school when he was 17 and he hitched-hiked to Las Vegas and he decided to become a professional gambler, which his mother was, I’m sure thrilled with. That’s literally what he did. 

After a few weeks in Vegas of poker and black jack, he’s like, “Dang! This is harder than I thought it was going to be.” He was hanging out a gambling book store one day and he starts talking to this guy. He finds out this guy runs a gambling ring and he’s been doing it a long time. He’s like, “Hey, could we work something out?” and they agreed. It’s like, “Yeah, for a percentage of your winnings, I’ll teach you what we do.” They agree, “Jump in the jeep, John, we’re going for a ride.” “All right. Here we go.” 

John gets in the jeep and they’re driving down the highway and John goes, “Okay. How do I win more poker games?” The guy says, “You have to play with people who are going to lose, not people who are going to win. People who are going to lose are called the marks. You want the guy that just showed up from Wichita, Kansas with his grandmother’s inheritance money that thinks he’s going to get rich in Vegas. That’s the guy you want.” 

John goes, “Okay. Where do I find all these marks?” His friend says, “Here, I’ll show you.” He pulls in to a strip club parking lot and they walk into a strip club and there’s women, and music, and pounding rock and roll, and people drinking, and all these stuff going on in there, and it’s really loud, and Rob and John sit down at the table, and Rob always carried a sawed-off shotgun with him, which gives you a little hint of what kind of guy Rob was. 

He pulls his sawed-off shotgun out of his jacket and he holds it under the table and he says, “Watch this,” and he opens the chamber and then shuts it and he racks it, and makes this noise, and they look around and several people in the club, these biker-kind of-guys, are like, “Hey, what was that?” The club owner comes over and he says, “Hey, is everything okay over here?” “Everything is fine. Just teaching the lad a lesson. Don’t you worry about us. We’re not going to cause any trouble here.” 

He looks over to John and he goes, “John, did you see those guys that turned around when they heard that noise?” John goes, “Yeah.” He goes, “Don’t play poker with them. They’re not marks. Play poker with everybody else.” That is what — In 80/20 in marketing, that’s what I call racking the shotgun. Racking the shotgun is anytime you do something to a crowd, or somebody else does something to a crowd. 

By watching, you can figure out who’s the minority that’s paying attention and who’s the majority who’s not. It could be racking the shotgun is who searches for a certain keyword on Google and who doesn’t. Who clicks on an add and who doesn’t? Who fills out the form and who doesn’t? Who opens the email, who doesn’t? Who clicks on the link, who doesn’t? Who buys the stuff, who doesn’t? Who buys the upsell, who buys the super duper upsell? It’s all racking the shotgun. 

Everything we do in marketing is racking the shotgun, and all the time, 24 hours a day, 7 days a week, the world, the is world is telling you what people do, how they behave, and you have to expect totally disproportionate results. 80/20 says that if you hire 10 sales people, two of them are going to sell 80% of the stuff, and the other eight are going to sell 20% of the stuff, which means the two are 16 times better at selling than the eight. 

That is going to happen. If you go out and hire 10 sales people, it almost doesn’t matter whether you try really hard to find good ones or not. If you’re good at finding good ones, then you’ll get better ones. If you’re not, you’ll get worst ones. Either way, that ratio is going to be true. You’re going to have a disproportionate number of winners and losers, and what most people try to do is they try to fix the eight bad sales people. No. No. No. No. No. You get rid of most of them at last, and you put all your energy into supporting the good ones and finding more good ones, because, frankly, you’re going to sell more with three good sales people than with 30 bad ones. 

[0:22:53.5] MB: That’s a great lesson, and it’s so important. You made two really, really key points there. One is that the 80/20 curve and kind of the whole model is sort of an inescapable patter. It doesn’t matter if you think it should be that way or want it to be that way, or even try to kind of wiggle out of I in some way. It’s going to continue to repeat itself in whatever sample of data you’re looking at. 

The second piece is that you shouldn’t focus on fixing the bad or the kind of mediocre performing 80%. You should really focus on all of your attention on the 20% that is producing and how can you do more of that. How can you support that? How can you add on to that? I think it’s a critical lesson. 

[0:23:37.1] PM: Exactly. Let’s just take a step back and let’s acknowledge that one of the jobs of civilization is to mitigate 80/20. There’s always going to be kids that are slow in school, and there’s always going to be people who can’t pay their bills, and there’s always going to be an old person who needs medical care. That’s always going to be true. Yes, we need to take care of the disadvantage and — Okay. That’s understood. 

However, beyond that, you really have to fight almost everything you’ve been taught your whole entire life in school and everything else if you want to be excellent and achieve things, because the world will always — Even your training and your conditioning will always condition you to go fix the under-performer. When, actually, what you should be doing is you should be super-charging the few things that work. Like in school, the very best students are supposed to get straight As and it’s like, “Well, did you get an A in everything?” You know what? You can get As in six different subjects, but you know what? You’re going to make a living in one subject.

You could be a savant and probably be more successful than if you’re well-rounded. If you’re terrible in English and you’re terrible at social studies, but you’re really good at math, there’s some place that will hire you to do really amazing math. They don’t really care how good your English or your social studies. 

Another thing is that, a lot of the times, you never get to what’s really successful until you’re willing to fail, because failure is a rack the shotgun. If you’re an A student, is conditioned to never fail. Therefore, an A student will almost always be mediocre unless they unlearn the A student instincts and relearn — Because here’s the thing. One of the things that 80/20 says is that if you’re willing to fail 20 times, one will be a slam the ball out of the park home run even if the other 19 are total dogs. It always guarantees it. In fact, it puts a whole different perspective on failure if you expect to fail 80% of the time. It gives you more courage to put yourself out there. It’s like, “Okay. We’re one closer.” 

You can use 80/20, fortunately, to eliminate a lot of things like, “I’m not diving in that swimming pool. There’s no water in that.” There’s a lot of failure that goes on that’s unnecessary, and I’m not suggesting you should do that at all. I just think the world has this very warped idea. If people knew how many things we try, how many experiments. We’re always trying stuff. You know what? Most of the time the results are disappointing. You know? You don’t need that many victories to have a successful life. You don’t. 

[0:27:04.5] MB: That’s another great conclusion of the 80/20 principle. You don’t have to be successful. I think, actually, Charlie Munger who — I don’t know if you’re familiar with, but we’re a huge fan of him here on the show. 

[0:27:15.6] PM: It’s on your website. Yeah. 

[0:27:17.1] MB: Yeah. He says the same thing, which is you only have to get rich once. Which is the same idea, essentially, is that you can fail a bunch of times, but if you succeed one of those times, that’s the only time that matters. 

[0:27:28.8] PM: That’s right. Then you just need to not lose it. There’s an 80/20 strategy for that, and that’s probably not where we’re going to go today, but absolutely. If you know that there’s levers within levels within levers, so 80/20 of the power of four says that .2% of what you do gets you 40% of your results. 

If you’re in any performance-oriented profession, so you could be a computer programmer, or you could be in sales, or you could be in some kind of negotiation. If you stop and think of last year, what’s .2% of your 250 days that you’re working? Let’s say one day, I’m going to submit to you that 40% of what you accomplish last year happened in one day, and you probably never really realized it. If you really zoom back and you go, “All right. What did we really accomplish?” Most of us have 100 days a year where we really accomplished nothing at all. What this really means is most people are doing way too many trivial things. Most things people do they know aren’t going to create anything big, so why are they doing them? 

[0:28:54.2] MB: Yeah. That reminds me, I would have to paraphrase a quote, but there’s a great Tim Ferriss’ quote that’s very similar that’s essentially the vast majority of what everyone does it totally worthless. It’s those few random things — It’s very hard to find what they are, but it’s those few random things that happen to create almost all of the positive outcomes in your life. 

[0:29:17.5] PM: Yeah. If you start to recognize the pattern and to realize how disproportionate they are — I said this before, but I should really emphasize it again. The 20% that generates results is item for item 16 times more leverage than the 80% that doesn’t. When you start recognizing those levels, they’re laying all over the place. They’re right in front of you all the time. 

It’s just like the biker bar story. 20% of the people in that bar were bad ass guys that you don’t want to play poker with them, but I guess if you wanted to go rob a bank, or sell cocaine, or ride Harley’s, or whatever, then you get 16 times more attraction with those guys than you would with anybody else, of course. Then, if you’re trying to win poker games, there’s 20% of that room that’s going to be far easier to win a poker game than everybody else. You just have to figure out who it is. 

That’s what a professional really does. This actually leads to something very important about sales, which is sales is not a convincing people process. Sales is an elimination process. Before you try to convince anybody to do anything, you should figure out, “Should I not even be talking to this person at all?” When you do that, that takes so much pressure off of the situation and it makes you not seem like at times you’re a salesman. 

I know a lot of people that are listening here, they’re not even in sales. The fact is, is everybody has to convince somebody to do something for a good portion of our life. We got to get coworkers, there’re departments, you got to get buy-in on some project. We all have to get cooperation, and if you understand that — If you start within a question, “Well, do they have the money or the resources to do this in the first place? Do they have the ability to say yes, or they actually only have the ability so say no?” 

I think, a lot of times, when we ask for stuff, we’re asking people who can say no, but we can’t say yes. If you’re trying to get a job, don’t go to HR. HR cannot say yes. They can only say no. You go to a department head. If he likes you, he’ll get you through HR. Do they agree with your fundamental selling proposition in the first place, or not? A lot of times, you actually know, or you can ask them before you try to get into this. 

You can just save so much time, and if the other person knows that you’re not going to try to ram anything down your truth, if they know that you’re going to figure out if it’s a fit before you attempt to sell them, then they actually come towards you, because you’re disqualifying. It’s kind of reverse psychology. Really, you’re just basing it in the truth. The truth is 80% of the people, I might consider for this, not my customer. 

[0:32:37.0] MB: Tell me the story of the $2,700 espresso machine. I love that example.

[0:32:44.5] PM: One of the things — When I have the epiphany about 80/20, and I realized there was an 80/20 inside every 80/20, I immediately realized, “This tells me that 20% of my customers would spend four times the money, and 20% of them would spend four times the money, and 20% of them will spend four times the money,” which is really just another way of stating 80/20. 

I went home to look it was true, and already with a 18-month-old business, I could already see that was true.  Let me give you a hard example of this. If let’s say that a Starbucks store sells a 1,000 $4 lattes every week, and they’re at Starbucks, and they’re going to buy their stuff and you say, “All right, 4,000 people a week are buying these lattes.” That pretty much guarantees you almost like a law of physics that every week one of those 4,000 people is going to buy a $2,000 stainless steel espresso machine. In other words, all those people, they have a coffee-itch, and they are there to scratch it, and 20% of them have 16 times more itch than the other 80%. Then, 20% of those have four times more itch than that 20% that we just talked about, and on and on it goes. 

You can start doing the math, and you can go, “All right. For every thousand cups of $4 espresso, I’m going to sell one $2,000 espresso machine. By the way, I’m also going to get — I’m going to get 10 people that come in here and spend $300 or $400.” What are they spending $300 or $400? Maybe they come in once and they buy a whole bunch of stuff. Maybe they come every day and they buy CDs, and they buy coffee mugs, and they buy bags of coffee, and maybe they buy the $200 espresso machine, but they are going to do that. 

I guarantee, if you give them the opportunity to spend that money, they will spend it, and the amount of money they spend will fit something you referred to earlier, which is called the 80/20 curve. If you put 80/20 on a graph and you get the least interested people on the left and the most interested on the right, that graph — It looks like a ramp that goes up, up, up, up, up, and it just goes infinitely towards the top right side and it never stops, and it goes until you run out of people.

80/20 will reliably predict how many espresso machine Starbucks is going to sell. 80/20 says there’s 7 billion people in the world, and this is how much money they’re all going to make at these different levels. It’s also going to say, “Here’s the top 10 people in the Forbes 400.” Guess what? Even when we’re in the Warren Buffett-Bill Gates stratosphere, 80/20 is still true at the very tippy-top of the world. It’s true everywhere. It’s fractal. It’s macro. It’s micro. It is everywhere.  

[0:36:09.9] MB: I think even once you have sort of a cursory understanding of the 80/20 principle, the espresso machine example, for me, was so interesting, because you think of it sort of vertically kind of going out in sideways in terms of smaller and smaller piece of the population. But that really turns and it also goes vertical, and I think it’s so interesting, and I know it’s hard to kind of visualize it on just listening to this. But you have a website, where it’s 8020curve.com that you can kind of plugin some numbers and see all the different examples. 

[0:36:43.1] PM: Yes. We have examples there. It also means that if 50 people a year each buy a $2,000 espresso machine, it means one of them wants to spend $100,000. At that point, most people, they’re like, “What?” You know what? Maybe they spend a million. It might be the guy that buys a Starbucks store, or a franchise, or something like that. The math works all the way up to things like that, because they’re still scratching the coffee-itch. 

What this means, practically speaking, is it means that if you have a bunch of customers that all did one thing, there’s a bunch more money in your list, and it’s the existing customers. You don’t need to go get a bunch of new customers to sell the espresso machines. If you didn’t have an espresso machine before, and now you do, you can go back to that crowd and sell espresso machines. It means you can have the junior espresso machine. You could have super-super-deluxe espresso machine. It means that an awful lot of small companies and freelancers can make a huge increase in their income just by inventing an espresso machine version of what you sell. You go, “Okay. What would make this really deluxe, really special, much easier to use, or much bigger of an experience?” You don’t just slap a big price on something. It needs to be worth the money. If it’s worth the money, they will buy it.

[0:38:23.9] MB: So many people fail to think about the opportunity to create these upsells kind of within their existing audience, and I think that’s what’s so fascinating. In the book, you also mentioned things like you have a coach ticket for $300 and you have a first-class seat, or a luxury seat on some of these international flights that can go for, literally, $10,000 or more.

[0:38:47.1] PM: Yes. Yes. Yes. Yes. That’s a perfect example. In some of the really nice airlines, like Singapore Airlines, or Emirates, yeah, they’ll have these little pads in $15,000 and they have the most expensive vodka, and the most expensive sushi, and the most expensive caviar. If you do the math, they can totally go all out on the food and it’s still only a few hundred dollars. 

The fact is, for every hundred people that want to fly coach, there’s that one guy, and he’s got the alligator shoes and all of that, or he wants to sleep because he’s a got a meeting when he arrives, and it’s a super important meeting. Frankly, if he’s 10% better at his meeting, it’s worth the $15,000, because he’s working on a $10 million, or a billion dollar deal. It’s totally worth it from the customer’s perspective.

[0:39:46.5] MB: You touched on earlier the idea that everybody, to some degree, has to sell, or is in sales, even if they don’t realize it. I’d also be really interested for you to share the marketing DNA concept that you have and the idea that everyone has a unique sales style. 

[0:40:04.7] PM: My first sales job was at this rep firm, and the people there, they were great people, they were great human beings. I loved them. There was Wally, and there was Fred, and there was Mike, and there was Steve. They were all great folks. One guy in particular, Fred, he was really successful and he had a lot of accounts, and he sold these really big deals. I would watch him in action. He would say things that I can’t figure how he got away with them. Do you ever know a salesperson like that? They could just kind smack a customer on the side of their head and get to guy to smile and say thank you. 

Fred just mystified me. I was like, “How can I be as good as Fred?” On top of that, to make matters worse, Fred had a very hard time explaining what he did in words. He wasn’t actually a very articulate person and he could barely spell, but he could still sell like crazy. 

It was like I was trying to be Fred. Actually, there were a lot of people I was trying to be like. I listen to these motivational tapes and stuff, and later I started to figure out why he was selling like crazy and why I wasn’t. It was because I had a fundamentally different style of selling than he did. All of my instincts ran totally counter to how he did his job. 

I figured out enough of that, that when I got fired from that job and got a new job, that the new job was a much better fit. In fact, it went really well, and I worked there for four years, and I made good money, and they sold the company, and I got stock options. It was a really happy story. 

Then, fast-forward another 10 years later, and at that point, I’ve been a marketing consultant for years and I’ve worked in 300 industries, and I have dealt with every kind of marketing and salesperson you can imagine. I started to realize the people’s selling styles can be extremely, extremely different. How one of them sells, has nothing to do with how somebody sells. 

Let me give you some examples. In fact, I’ll tell you what I ultimately concluded. I came up with — There were eight different modalities in selling, and I’ll tell you what they are. One of them is the alchemist. The alchemist wants to sell by showing you something that got invented yesterday that is super new and super cool that you have never seen before. It’s all about the new. 

A producer is somebody who sells you based on it’s reliable, it obeys the rules, it’s proven, it follows the 146 steps. Now, you’ll notice that an alchemist is almost the complete opposite of a producer. 

Here’s another one; is live versus recorded. Some people thrive in the moment, in gun fire, hostage and negotiator, throw him into a situation, and this Fred was the hostage negotiator. I am not. I was more like the recorded, which is whether it’s video, whether it’s audio, whether it’s in print. I want to sit and I want to perfect that message before I put it out there. That’s why I write books. Fred couldn’t write a book to save his life. I could negotiate a hostage situation to save my life. Do you know what I’m saying? 

Then, the next one is images versus words. There are people that sell you by showing you stuff, “Look at this.” “Look at that.” “Look at this.” “Look at that.” Maybe they sell bright, yellow Corvettes, or something. Then, there’re people they sell with words. They sell with stories. They sell with descriptions. They write catalogs. They write copy. They write the big, long webpages that are ugly, but they sell a lot of stuff. 

Then, there’s empathy versus analytics. Some people pluck your heart strings and they tell you a really moving story, they make you laugh, the make you cry. Other people sell with proof, and data in spreadsheets, and graphs, and numbers. 

Those are eight components. What I did was I devised a profile test online where you can go take it and it will tell you, “This is how you naturally sell.” Do not try to take a job, or a function, or an entrepreneurial adventure that forces you to sell outside your style. Do it within your style, because that’s the 80/20 of your skill set. The 20% of your skills that will produce 80% of all of your results are probably concentrated in one, or two, or three of these areas, and then you have these others that are weaknesses. 

For example, we’ve got a guy, his name is Joshua Earl. He was a computer programmer. He took the marketing DNA test, and the marketing DNA test said, “You are a copywriter.” 18 months later, he had quit his job and he was a full time copywriter, and he loves what he does. He didn’t really enjoy computer programming. 

I think if you’re going to sell anything. I don’t care if you do sell for a living, or if you don’t sell for a living. If you have to persuade people to do stuff, you should figure out what is your persuasion groove? What is your natural way that you can convince people to do stuff, because it’s already there, it’s already been present in most of the interactions that you’ve been successful with. Now, you just need to build on it. 

[0:46:26.8] MB: for listeners who want to take kind of a concrete first step to implement the 80/20 principle in their lives, what’s a piece of homework that you would give them as a starting place? 

[0:46:37.9] PM:  I would respectfully suggest that you read my 80/20 book, it’s called 80/20 Sales in Marketing. In fact, it has a link to the marketing DNA test inside which is normally $37, so it’s a really nice discount. I would encourage you to read that. 

As far as specific actions — I want you to think about — Think about how somebody gets to you. Let’s say that you’ve got certain keywords, or ads, or whatever, that are on the internet, and people. Think how 80/20 applies to every single step. 80% of the people search — Or 100% people search, 80% don’t click on your link, and 20% do. 

Then, the ones that come to your website, 80% leave without doing anything that you want them to do, and 20% do what you want them to do. Then, the 20% that filled in the form, the 20% of them actually get on the webinar or talk to you on the phone, and 20% of them buys something. 20% of them actually buy something else. 

What I want you to do is I would like you to sit down with a piece of paper, go to Starbucks, or wherever your favorite thinking place is, and just sketch it out and realize that, okay, you’re dealing with 20% of the 20% of the 20% or the 20%, which is some tiny fraction. What I want you to do, starting from now, is instead of beating yourself up for the apparent massive waste, because, hey, it’s true. 99.5% of these people never do what you want them to do. Instead of lamenting over those, I want you to focus on the fraction that do it, do what you want to do, and I want you to ask yourself, “What’s the next 20% —  What’s the giant step that 20% of these people would take that’s four times bigger than the step they took before that I haven’t asked them to take? How do I even get bigger doors on these tiny little hinges.”

Sure, you can improve your ratios everywhere else, but you’re not usually going to improve them by a huge, huge amount. Most of steps, you’re not going to improve 10-X. You might improve 50%, or you might double them, or something like that. Either way, most of the money, most of the success, most of the whatever you are after is in this small number, and there’s a bunch of stuff you’re doing now that you don’t actually have to do. 

[0:49:33.1] MB: Great advice, and we’ll be sure to include links to all of these in the book, the 80/20 curve, everything in the show notes so listeners can get access to all of that. 

Perry, where can people find you and find your books line?

[0:49:47.0] PM: You can go to perrymarshall.com. In fact, we sell the 80/20 book for $7 including shipping in the United States. It’s an incredible loss leader but we do that for a very particular reason. You can also find my other books, and we’ve got a lot of things and you can get on our email list, and you can study what we do and how we do it. 

In fact, what I would suggest you do, if you want to see 80/20 sales in marketing being done as opposed to just describe, just go buy the book for $7 and see what happens. We use 80/20 all over the place. It’s layered in into what we do. The up-sell is from the book, and the emails that you get, and whether you get a lot of emails or only a few based on what you respond to, or whether you respond to things, whether you opened the emails or not. All of that is self-adjusting. 

Again, you can go to perrymarshall.com and you can see all of that happen. It’s one thing to read about it, but it’s another thing to have it done to you and see how that works. I actually have a lot of people that get on our email list just to see what we do.

[0:51:04.2] MB: Perry, this has been a fascinating conversation. I really, really enjoyed digging into the 80/20 principle and some amazing stories and examples and some really concrete ways to apply it and think about sales and marketing. Thank you so much for being on the show.

[0:51:19.4] PM: Thank you for having me and thank you for going on all these weird little nooks and crannies of the universe as I try to stitch and saw together and help people be more effective and persuading. 

[0:51:31.0] MB: Thank you so much for listening to The Science of Success. Listeners like you are why we do this podcast. The emails and stories we receive from listeners around the globe bring us joy and fuel our mission to unleash human potential. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an email, my email is matt@scienceofsuccess.co. I’d love to hear from you and I read and respond to every listener email. 

The greatest compliment you can give us is a referral to a friend, either live or online. If you’ve enjoyed this episode, please, leave us an awesome review and subscribe on iTunes, because that helps more and more people discover The Science of Success. I get a ton of listeners asking, “Matt, how do you organize and remember all these information?” Because of that, we’ve created an amazing free guide for all of our listeners. You can get it by texting the word “smarter” to the number 44222, or by going to scienceofsuccess.co and joining our email list. 

If you want to get all these incredible information, links, transcripts, everything we just talked about and much more, be sure to check out our show notes. You can get them at scienceofsuccess.co. Just hit the show notes button at the top. 

Thanks again, and we’ll see on the next episode of The Science of Success.

Your Brain on Money - Its Role in Biology, History, Life & Society with Kabir Sehgal

April 06, 2017 by Lace Gilger in Money & Finance

In this episode we discuss how you can create success by mashing two seemingly unrelated ideas together, why energy is the currency of the biological world (and how that impacts the evolution of money within our society), we go deep into understanding money and its role in our lives, and we look at why you should investigate your own biases about money with Kabir Sehgal.

Kabir is a former a vice president in emerging markets at JP Morgan. He is the new york times and wall street journal bestselling author of the book Coined and has served as a speechwriter for the John Kerry presidential campaign, having been featured in Fortune, The Harvard Business Review, and other publications. Kabir is a CNBC contributor as well as a grammy winning producer, composer, and Jazz musician.

We discuss:

Creating an opera about the financial crisis
How you can create success by mashing two seemingly unrelated ideas together
The idea of lateral combination vs incremental growth and how it amplifies possibility
What is Money?
Unit of Value
1. Instrument of Exchange
2. Counting mechanism
Why Kabir defines money as a symbol of value
The neurological triggers associated with money
How a trip to the Galapagos islands transformed the way Kabir thought about money
The “biology of exchange” and how money expresses something deeply biological and rooted in evolution
Why energy is the currency of the biological world (and how that impacts the evolution of money within our society)
The rich history of money
Looking at financial decisions through brain scans and MRIs
How talking about money can change the electrical conductivity of your skin
Fascinating research data about how money impacts
How making money creates a brain state almost identical to cocaine addicts
What does research show makes men more excited - dead bodies, naked women, or money?
How your genetic composition impacts your psychology of money
How twin studies demonstrate people’s genetic preference for certain financial behaviors and risk profiles
The anthropology of debt
The history of bartering and how social debt was actually the first currency
Think of money as a measurement of debt
What’s the difference between currency and money?
What does Genghis Khan have to do with the history of money?
What are Native American potlatches and what do they tell us about tipping behavior?
What is Soft Money, what is Hard Money, and what are the differences?
Does the weather impact your financial decisions?
What is the Soul of Money?
Misquoting Jesus?
Do Jesus and the Hindu scriptures offer the same financial advice?
Understanding money and its role in our lives
Why you should start with investigating your own biases about money

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

SHOW NOTES, LINKS, & RESEARCH

[Book] Jazzocracy: Jazz, Democracy, and the Creation of a New American Mythology by Kabir Sehgal
[Book] Coined: The Rich Life of Money and How Its History Has Shaped Us by Kabir Sehgal
[Book] Nonzero: The Logic of Human Destiny by Robert Wright
[Bio] Brian Knutson
[Wikipedia] Nixon in China
[Musical] Hamilton on Broadway
[SoS Episode] Trading Your House For A Tulip, Your Love Life, And What It All Has To Do With Making Better Financial Decisions with Dr. Daniel Crosby
[Book] Thinking, Fast and Slow by Daniel Kahneman
[Personal Site] Kabir Sehgal

Episode Transcript

[00:00:06.4] ANNOUNCER: Welcome to The Science of Success with your host, Matt Bodnar.

[00:00:12.4] MB: Welcome to The Science of Success. I’m your host, Matt Bodnar. I’m an entrepreneur and investor in Nashville, Tennessee and I’m obsessed with the mindset of success and the psychology of performance. I’ve read hundreds of books, conducted countless hours of research and study and I am going to take you on a journey into the human mind in what makes peak performance tick, with the focus on always having our discussion rooted in psychological research and scientific fact, not opinion.

In this episode, we discuss how you can create success by mashing two seemingly unrelated ideas together. Why energy is the currency of the biological world and how that impacts the evolution of money within our society. We go deep into understanding money and its role in our lives and we look at why you should investigate your own biases about money with Kabir Sehgal

The science of success continues to grow with more with more than 875,000 downloads. Listeners in over 100 countries, hitting number one new noteworthy and more. I get listener comments and emails all the time asking me, “Matt, how do you organize and remember all this incredible information?” A lot of our listeners are curious about how I keep track of all the incredible knowledge you get from reading hundreds of books, interviewing amazing experts, listening to podcast, and more.

Because of that, we created an epic resource just for you. A detailed guide called How to Organize and Remember Everything. You can get it completely free by texting the word “smarter” to the number 44222. Again, It’s a guide we created called How to Organize and Remember Everything. All you have to do to get it is to text the word “smarter” to the number 44222 or go to scienceofsuccess.co and put in your email.

In our previous episode, we discussed the fundamental principles of GameTtheory, we correctly guess the answers to SAT questions without ever knowing what the questions were, we looked at how to use Game Theory in practical ways and went deep on how a college professor and his student started a beverage company, sold a billion bottles of tea and competed against Coke, Nestle, and other major players to become incredibly successful with our guest Barry Nalebuff.

If you want to learn how to apply the lessons of Game Theory to being successful in your life, definitely listen to that episode.

[0:02:25.7] MB: Today, we have another fascinating guest on the show, Kabir Sehgal, Kabir is a former Vice President in emerging market at JP Morgan. He’s a New York Times and Wall Street Journal bestselling author of the book Coined and has served as a speech writer for John Carry during his presidential campaign. He’s been featured on Fortune, the Harvard business review, many other publications. He’s also a regular contributor to CNBC as well as a Grammy winning, producer, composer, and jazz musician. 

Kabir, welcome to the science of success.

[0:02:53.3] KS: Thank you so much for having me. Really a pleasure to be here.

[0:02:56.2] MB: Well, we’re super excited to have you on today. For listeners who may not be familiar with you, kind of fill in some gaps in that background and tell us a little bit about yourself.

[0:03:05.5] KS: You covered a lot of it. I guess I just find myself mostly as a writer and that’s writing words and writing music and creating content. For me, that’s taken me to write several books, you talked about my first book, Coined, history of money, but I’ve written about jazz and I’ve written I think up to seven books now. Children’s books as well. 

That’s one of my passions is writing and also, writing music. I’ve just finished writing my first musical opera on the financial debt crisis. So I try to be inter-disciplinary in my topics and also my approach but the one commonality is trying to express myself through the written, and spoken, and performed word.

[0:03:50.4] MB: That’s fascinating, it kind of reminds me a little bit of, and I’m sure you’ve thought of the comparison but almost Hamilton-esque in the sense of like combining this two totally different mediums. But an opera about the financial crisis sounds really interesting.

[0:04:02.9] KS: Yeah, you know, the thing is, when you want to create a real unique idea, you could have a lot of success by sort of mashing up two different disciplines together. If I were going to write an opera, I could write an opera today of things you’ve heard before.

But why not take it in a completely new direction and you know, that’s why the opera in Nixon in China did so well because they took a story about Richard Nixon going to China and turning that into music. Something unexpected and so this idea, there’s like incremental ideas of like staying within one profession or one discipline and like incrementing the idea or improving a product five, 10%.

When you take one discipline and mash it up with another discipline, you start to get all these different combinations that you didn’t think of before and it creates and it sort of amplifies possibility. You also create a new aesthetic, you create a new brand, you create a new way of looking at the world. It might seem weird, but it definitely gives you the many more permutations of invention and innovation.

[0:05:10.6] MB: It’s fascinating, I love that advice and as somebody who has been so creative across seemingly kind of disparate, non-related fields, I think that’s some deep wisdom to share with our listeners, I love it.

I’m curious, I’d love to kind of dig in a little bit and talk about some of the kind of the core concepts and lessons from Coined.

[0:05:30.9] KS: Sure.

[0:05:32.5] MB: One of the first things I’d love to kind of get your thoughts on, just really simply you know, I think people have a lot of preconceptions about this, but what is money?

[0:05:41.2] KS: That’s a good question. The typical definition of money that comes from economic theory and economists is that money is three things. Money is a unit of value, it’s an instrument of exchange, and is used for counting things.

Unit of value, instrument of exchange, and basically a way for counting a value and I have always found that to be sort of a very limiting definition of money. Yeah, if you define it, a unit of value is something that you count, a store value is something that captures money, an instrument of exchange, we transact.

But money could be more than that thing. Money to me, and I define it in my book, is really a symbol of value. Because anything that represents value has sort of a neurological trigger in our brain and that means that a potato can function as money or some type of currency.

If there is an invasion by aliens into the earth and there’s some kind of rare metal that they bring in and it becomes valuable, that new metal will take on monetary value. So anything that simulates sort of the reward circuitry of the brain, and we can get into that, that to me is what money is, a symbol of value and I think probably the economist and the most well described with Milton Friedman is, you know, whatever society determines should be money will be money. 

You can go back to caveman days or you can go today, whatever the people deem to be money will be money. So it’s very user defined and today, what is money? The definition of money of changing and it always will be changing because our minds are changing and, you know, our brains are plastic, the neurological wirings are changing. It will continue to change as use cases change.

[0:07:23.9] MB: I definitely want to dig into kind of the psychology and some of the rewards circuitry around money but before we do, I’d love to — and I think this is a kind of a natural segue into that. Tell me a little bit about the phrase you talk about, “the biology of exchange” and how you kind of, in the book you start with the really kind of physical, biological components of it and even the journey you took to Galapagos islands and other things, I’d love to kind of weave that into how our brains think about money.

[0:07:52.3] KS: Sure, well you know, I started writing this book with the history of money and you could think about, if you’re going to write a book on the history of money, where will you start? Most books will start in, I guess, Mesopotamia or the beginning of human civilization, sort of Neolithic era of 10,000 years ago or maybe even the great rift valley in Africa.

I was like, “Money expresses something deeply survival based and evolutionary.” I started thinking about it and sure enough, I said, “I think there’s a biological component of why we use money.” In order to dramatize this point, I went to the Galapagos islands because that’s where Charles Darwin, that’s where he came up or was inspired to come up with this theory of natural selection, the evolution of my natural selection.

So I get to the Galapagos, go and hang out with some friends who are marine biologist and what do we do? We go diving into the water and all of a sudden there’s this sea turtle that comes up to me and there are some wrasse fish, this little fish that are going up next to it’s fin and they’re cleaning the turtle, ingesting these parasites. What becomes clear is, this is an exchange going on.

The turtle’s getting cleaned and in exchange, the fish are ingesting or getting the calories they need to survive, the parasites. This is obviously an example of symbiosis and the turtle and the fish is not the only example. This, of course throughout the Galapagos, different stages of the ecosystem, you see a symbiosis.

You see transfers and the first type of currency, the natural currency, the currency of the biological world is energy. Energy, energy, energy. When this starts to get mapped on the history of humanity, you start to see the first types of currency is the first types of things that come traded as a currency or some kind of value is food products.

You look at salts or barley or butter and these are items that give us the calories we need to survive that we take this things and we ingest it and it gives us basically a survival mechanism. Even today, you can say, “Well, you know, that’s a far cry but you know, what do we use money on today? Well, we use money to acquire the resources, namely the food and the energy products that we need to survive. We literally need bread to get bread.” 

So it’s been abstracted away because over thousands of years, but its original purpose, money was an instrument to acquire the needs to survive and there are genetic implications, there’s biological implications and a lot of supporting evidence from neuroscientist that show that there’s actually this energy concept is actually the evolutionary historians that are looking at, indeed, it wasn’t until the brain expanded and we got symbolic thought that money as we knew it was invented. But at its core, money is really an evolutionary product and that’s why I went to the Galapagos, to dramatized that accounts.

[0:10:58.2] MB: After going to the Galapagos, where was the next place on your journey, the next destination that kind of follow the history of money?

[0:11:06.2] KS: That’s a good question. I think for me, it was getting together with a neuroeconomist, because when I started realizing that there was a biological input, there’s input for money and why we use it, I wanted to talk to someone who knew about this. So I met with Dr. Brian Knutson at Stanford University who is one of our leading neuro economist, sort of like an emerging discipline of brains scientists that look at financial decisions. Largely through MRI and brain scans. 

Neuroscience is really sort of like, as they say, 90% neuroscience, 10% economics and hopefully that will change so more economist aren’t factoring in brain insights but you know, we talked about when I say the word money, like your audience, when it hears, when your audience listen to the word money, there may be an actual increase in the skin conductance, the electrical current going through your skin, just at the thought of making money or hearing the word money.

So there’s a biological change, there is a study that shows that, well, if you take money and count it — in China, they did the study where people counting large denomination bills and then they took their fingers and put it in hot scolding water and the people that counted the money reported feeling less pain than the people they were counting blank pieces of paper and then putting their fingers in hot scolding water.

This way, that money sort of dulls your senses. I went to Brian Knutson, this neuroscientist and we talked about, “Hey, is there a biological, neurological reason for this?” He says, "Absolutely there is, there’s a part of the brain called the nucleus accumbens and it’s deep within sort of evolutionary part of the brain, the limbic system of the brain and it fires incessantly at the thought of money. 

He’s done brain science studies and others have done studies that have proven this out, there is a study at Harvard that showed that people who were high on cocaine looking at their brain scan, their nucleus accumbens is firing incessantly. It looks the same as when someone’s about to make money. The brain scan of a coke addict and someone about to make money, the brain scans look almost indistinguishable. 

But Dr. Knutson then, he looked at heterosexual men and he showed them pictures of dead bodies and naked women and money. What got the most excitement out of men was thinking about making money more than getting together with a girl. It just shows you that we’re deeply wired for this thing, to make money, because you realize that we needed to survive. Because survival, you know, is prerequisite to reproduction. 

That was the next step of my journey was understanding the genetic components and having a neuroscientist and reading through the neuroscientific literature to realize, wow, there is actually hard wiring in the brain for money and things that function like money.

[0:13:58.2] MB: Really interesting. The research studies are so intriguing, especially the one about the cocaine finding is fascinating. So I’m curious, what are some of the other kind of components of the psychology of money?

[0:14:12.3] KS: Well, a lot of it comes to your genetic composition too. People don’t often think about it but you know, there is a group of studies called gene studies, twin studies that they take identical twins who have the same genotype, they have the same genes and they separate them over long periods of time and then they ask these twins to make an asset allocation decision.

You want to put your money in stocks, bonds, or cash? They found that twins, even if they’ve been separated for a long period of time, identical twins that they invest and they part their money in similar proportions. That your genetics can in fact influence your financial spending decisions. Dr. Knutson and others, they’ve worked looking at your credit score actually and they found that there is one type of gene, it’s called the COMT gene and there’s two variants of it and it’s evenly dispersed within the population these two types of alleles.

They find that if you have one variant, you’re more likely to be risk averse to put more money in bonds, in cash and to have kind of a decent credit score. If you have the other allele, you’re more likely to be risk seeking, put more money in stocks and higher performing assets but also risk your assets, and to have a lower credit score.

They found that over time, among the sample that they were tracking that there’s one varying to the gene could explain about 97 points on your credit score and that’s about 20% of your credit score. It just shows you that, you know, when you’re making your financial decisions, that often times, it can be your genes and manifesting themselves, the decisions are being — what you’re buying is being manifested by genetic impulses. 

I tread carefully here because look, you can obviously try and thwart your genes, you’re not destined to be doomed by your genes and you can get educated and if you’re not very good in handling your money, you can definitely get classes and so forth. But there is something to be said that if you’re not good with money, you can maybe blame your parents and say you know, my parents made me do it because it’s their genepool after all. There’s definitely genetic reasons and impetus to how we spend.

[0:16:31.5] MB: I’m curious, another concept that you talk about and I know is kind of one of the next steps on this understanding of money that you talk about in Coined is the idea of the anthropology of debt. I’d love for you to share that story.

[0:16:44.0] KS: Sure, so most histories of money going back to Adam Smith and Aristotle, they say that money was invented through barter, right? We’ve all heard this that there is this land and someone had apples, another person had bananas and they were trying to trade with each other, so they decided to barter and then all this bartering started going on. Eventually money was invented out of this bartering, as a way to replace barter. That whole idea of bartering led to money has been with us in economic literature for thousands of years.

Anthropologist have gone back and they’ve studied it and they said, “Well wait a second, this is actually not the case that societies — there’s almost never been a society that functions on barter as the principle of a means of exchange. In fact, it’s usually debt, social debt.” Because you know, bartering is what you do with someone when you're not going to see again, someone comes into your village and go, “Hey okay, let’s trade something and get something of value for each other and because we want to make sure we have a fair trade.”

If I know you, you’re part of my family, you’re part of my tribe or the neighboring society and we have a lingering relationship then let’s just do the transaction on debt. Like, you’ll owe me one. Okay. This whole idea of social debt is really one of the first and probably most ubiquitous currencies in the world, you think back to Neolithic times that if you’re a caveman and you catch some game and you bring it to the feeding station and you’re going to invite your friends because if you don’t invite your friends, the day will come when you’ll be hungry and then they’re not going to repay you. You won’t be repaid because you didn’t really offer to reciprocate or invite them. 

So think about this caveman, inviting you a feeding session, it’s basically like a forward derivatives contract today that, “Look, you’re going to owe me in the future at some time and I’m not sure what the value’s going to be but we’ll figure it out later.” That’s kind of what a forward derivative contract is when it’s traded on the market on Wall street today. When you look at the first types of currencies in the world, it’s actually not coins or paper. It’s, in ancient Mesopotamia, the record show that its loan documents, clay tablets that were denominating loan and silver and barley. Basically saying, “you owe this person X, you owe this person Y”.

That’s the first type of sort of monetary instrument that gets invented as credit and debt. There was some great writers who talked about this that when you think about distance, you think about a mile as a measurement of distance, you think about an inch as a measurement of distance. Start thinking about money as a measurement of debt. Money is a measurement of a way to capture and understand how much debt is in the world because debt is the way, even today when you think about how our monitory system works with fractional reserve banking is basically we’re taking a one dollar or due credit multiplying it through our society into $99.

When you ask about the anthropology of debt, it’s really re-equating ourselves with what money really is which is a measurement of debt.

[0:19:53.0] MB: What’s the difference between currency and money?

[0:19:57.9] KS: Well, currency, if you break it down, currency comes from a word “carer” in Italian which means like to flow and currency is, I like to say, a broader use of money. Anything can function as a currency, right? Like I was saying before, there’s different types of currency, there is social currency, there is financial currency, there is different types of monetary currency. I think that’s like if you're thinking about a scientific term, the mother genus, if you will, will be currency. Money tends to be a financial type of currency. 

The word money comes from the roman goddess Juno Moneta and who is the goddess that was sort of supposed to look after the treasury and after the gauls came in and sacked Rome or that treasury, Moneta means “to warn” in Italian. That name, over the many years has stuck money. To answer your question, currency is like a broader look at money and how I look at money through the book is really looking at currency throughout the world and money is definitely the financial child of the word currency.

[0:21:08.6] MB: Tell us about your visit to Mongolia and why you went there?

[0:21:14.7] KS: Mongolia is a fascinating place. I went there, again, to dramatize the history of money and because I was intrigued that paper money and a lot of monetary concepts that we think of is very western, really started in the east and the Mongolians get sort of a bad rap for Genghis Khan and he is a brutal dictator but they’re also parts of his empire, they’re quite modern. 

Genghis Khan, he basically unified and the Mongols unified so much of the orients and the west and he had a lot of modern innovations. Like he brought modern postal system, he setup a postal system. There was a freedom of religion and so forth. He also precipitated, that was really the beginning of paper money as we know it and really, it was Kubla Khan, he was like, “Basically, I want to invade China.”

He went to the Southern Song dynasty and he fell that kingdom and he took over the Chinese empire, essentially. He realized right away that he needed to use something to unify his lands and he needed something to create a value throughout this land. So he issued paper money and paper money was initially backed by silk and I think essentially silk and silver. The great Marco Polo writes about Kubla Khan as the Khan prints money out of the barks of trees. 

Then, they started spending so much money, they started running out of silver and silk so Kubla Khan does something he decides to cut that link between money and metal and he issues these Edicts saying that, “If you do not use my money, you’ll be put to death, I will kill you.” He also issues Edicts that say essentially that, “If you counterfeit this money, I will also kill you.” You start to see that money is really backed by fear of the kingdom or the Khan in this case and force. 

So this money starts to circulate and throughout this part of China, throughout the Mongol empire, which was quite vast and over time, they started printing more of it, there was a monetary crisis which led to inflation and then an inflation turned into a full-fledged economic collapse. Then there was a plague and all this other healthcare problems, that part of the Mongol empire fell and now I went to Karakorum, Mongolia which is the seat of the ancient Mongol empire. 

There’s nothing there anymore except for some ruins and it just shows you that civilizations could come and go and one of the most important decisions that any civilization, any society can make is what will function as money but also making prudent financial decisions to make sure that they’re not living beyond their means. Because if you do, you could go the way of that part of the Mongol empire or any country that’s really fallen and disappear because of their economic misfortunes.

[0:24:20.7] MB: Very interesting that the Mongols are essentially one of the creators of fiat currency.

[0:24:26.5] KS: Right, yeah. A lot of people lay claim to it. Some people say the Tang dynasty in China, which was 9th century AD, they invented paper money but money didn’t really function and flourish until the Mongols. Then you have sort of the checking system that came about in the Munecian times. Money’s really been a global, an incremental innovation and almost every country has adapted it for their own use case and so many different things have functioned as money throughout thousands of years in human history.

[0:24:57.7] MB: Another facet of the kind of anthropology of money, you talk about tipping and what tipping behavior can say about us, nut you also share the story of a Native American potlatch. I’d love to hear that story. 

[0:25:11.6] KS: A Native American potlatch is a practice when a tribe or a group of tribes will invite everyone to a ceremony and you hold a potlatch during a very special occasion. So let’s say there’s a new chief or a new king or a new queen or someone is getting married and the practice is you line up everyone and everyone sits in order according to their status and there’s singing and there’s dancing and there’s a lot of food and then at the end, there’s a gift giveaway and everyone starts getting gifts. 

So the king or the queen or the chief or whoever will start giving gifts to everyone who’s been invited and your gift, the type of gift and the expense of the gift is based on your status within the tribe. So if you get something amazing, if you get a nice piece of meat for example that means you’re respected. If you get something that is not so good, it might be that you’re too junior or you don’t have much respect and so a potlatch became a way of using currency or giving currency, giving something of value as a way to reinforce status within the community. 

So overtime these potlatches became competitive. It became very competitive where other tribes will come and they would invite a neighboring tribe and they will hold a potlatch and they would give so much of their wealth as a way to shame their guests saying, “Oh I’m giving you so much of my wealth I can afford to give you all this wealth because I am so rich.” 

So essentially they are big timing each other and so the potlatch became a very competitive thing and this has implications even to today but I should say that in Native American tribes, Native American community gifts are not something that you keep. Gifts are something that you keep on passing to other people and this term “Indian Giver” in the West Americans, we may see it as a negative thing. You know Louis and Clark when they did their travels across America, they would give gifts in their trade with Native Americans. 

But then the Native Americans would give the gifts that they had just received to other people or they would give the gift back to Louis and Clark and the early settlers and this was really bizarre. Why are they giving their gifts away? A gifts are meant to be appreciated. But in Native American communities, if you just hold onto a gift, it loses its spirit of being a gift. You have to keep on giving it and that giving and receiving defines social rules within the community and it’s something that we do. 

I saw some poll recently and around holiday season that a large sloth of Americans are embarrassed by saying and admitting that they are re-gifting something but a large sloth of Americans also do re-gift. So we all do it, a lot of us do it so that shows you what a potlatch is and how gifting is so endemic to the idea of money and how even today this idea of re-gifting helps define where you are in the social community. Not only in Native American communities but also in our day to day lives as well. 

[0:28:12.0] MB: Have you ever read the book Nonzero by Robert Wright? 

[0:28:15.6] KS: No. Tell me about it. 

[0:28:16.6] MB: I think you’d really like it. It’s a book about he essentially uses and combines Game Theory and social anthropology to describe the evolution of human societies and it’s a really, really good read and we’ll include it in the show notes as well for listeners who want to check it out. But he talks a little bit about potlatches and I think he even goes there were some tribes where the tradition became so extreme that they would burn all the gifts. It will be like who can burn more stuff as a demonstration of how wealthy they were and how powerful they were that they could torch copious amounts of food and supplies and all kinds of stuff. 

[0:28:52.8] KS: Wow, how perverse you know? It’s absurd but at the same time revelatory about what a society values and wants to express about itself. 

[0:29:02.7] MB: So what is the difference between the concept of soft money and the concept of hard money and what are both of those? 

[0:29:09.7] KS: Soft money I define as — Well, let me start over. I’ll stick a first pin looking at hard money. Hard money is money that’s backed by a commodity or a metal. We often think about gold as being a hard money that the gold standard that it used to be that the dollar or the pound was redeemable by some amount of gold currency, by some amount of gold that there is a special room somewhere that you go and exchange your money and get an adequate amount or an equal amount of hard currency. 

And so, I define hard money as just that, metal back to money and in some cases, you can call it proto money. Anything that has some sort of intrinsic worth like meat, or salt, or barley. All of these things like coffee beans, this things service having value to human that you can eat it, you can consume it, they are instantly valuable. These are different types of hard currencies. Soft money is the opposite of that, which is an article of faith, it’s paper. 

It’s basically saying this piece of paper is basically an IOU from the government and it’s not necessary an IOU for gold. In fact it’s really an IOU saying that this is a legal tender for all debts private and public and so people say that the US government military or the US government is the backing of the US dollar but it really is the faith in our institution, it’s the faith in our government that the dollar will be backed by our government to come to the rescue much like it did during the great financial crisis in 2008-2009.

So increasingly we are in a soft money world and some people say we need to get back to a hard money world where there is the gold standard and so forth but I would say that getting back to a gold standard would be very deflationary for the economy. In fact Winston Churchill when he was the head of the ex-checker in Britain he said it was the worst mistake of his political life to try to get back to the gold standard in the same rate at which Britain left because there was a massive amount like 50% deflation in unemployment and millions are going out of work because they are trying to go back to this gold standard. 

Whereas I always use a thought experiment that let’s say there is a financial crisis in America and you are the president of the United States and you have two options. The first option is you can inflate and issue more soft money and sort of paper over the problems and hope that you can stimulate a way through government spending problems or you can do very little or do nothing. Say, “Oh we cannot issue any more money. We’re going to have deflation.” 

Well one is interventionist and one is not and you probably don’t want to be a politician who’s looking like he’s not doing anything or being very hard lined and that’s why you always have this policy of interventionism and you always have this policy of spending of soft money and that’s why soft money is so ubiquitous in the world because it’s a silent tax on all of us that the government can rob us very slowly with the value of money. The dollar has lost 81% of it’s value on a purchasing price pair parity level over the last 30 or 40 years. Soft money is with us, it’s not going anywhere anytime soon and I think we are stuck with it. 

[0:32:41.6] MB: In many ways that is the modern version of what Kubla Khan began. 

[0:32:46.4] KS: Yeah, exactly. There is a history of money and I talk about it in my book that the history of political leaders that have sought to use soft money and every problem there had been consequences for that. Kubla Khan would be one, you could look at John Law in the early 1716 to 1720 in France, you could look at Benjamin Franklin who wanted more bank notes issued, Abraham Lincoln, these are all people that took us away from hard money. Franklin Roosevelt, Richard Nixon. So there’s many core leaders that have pushed us in the direction of soft money for thousands of years.

[0:33:30.3] MB: The most interesting description or criticism of the gold standard that I have ever heard is the idea that essentially the expansion of credit in an economy that’s tied to the gold standard is not determined by for thought or economic policy. It’s solely determined by random fluctuation of rocks that are pulled from the ground.

[0:33:50.6] KS: Right, I think Warren Buffet has a great line that we dig up metal from these holes in the ground and put them in other holes in the ground and into our vault so we can store them and any Martian looking at us will be like, “Why do you do this?” And so somewhere, you get back to the evolutionary thought. If somewhere the idea of shinny metals and values, those neurons fire together maybe it is something that attracted us, that maybe early primates were attracted to something that had shinny luster and that it was valuable because there’s very little use case for gold. 

Other than preventing fires, it’s a resistance but there is very little use case for gold other than ornamentation and it’s been short of a principle of value for us and it’s hard to explain why that happened other than we were just naturally attracted to it. 

[0:34:45.9] MB: Buffet also has a great criticism of gold as a “asset class” where he says, “If you had all the gold in the world, you can’t do anything with it,” right? Which is what you were saying but he compares it to an asset that’s actually income producing. Like if you had a factory, you can make things and sell them and it returns capital whereas gold just sits there. It doesn’t produce anything. It’s not a productive asset. It’s just a rock. 

[0:35:11.0] KS: Right, exactly. That’s what it is. He’s a wise man. 

[0:35:15.8] MB: He is a wise man. Changing gears, I’m curious you’ve talked about how does weather impact people’s financial behavior? 

[0:35:24.1] KS: So weather manifest itself and through a financial decisions. You can see it in stock market returns. Going back to 80 years ago, we have data on weather patterns. We also have data on stock market returns and so the researchers looked at trading patterns for the largest markets, New York, Tokyo, Hong Kong and London and they looked again at the data and they found that sure enough that on sunny days the markets performed and annualized 25% or something like that versus cloudy days which is like 12%. 

And so it shows you that one type of business barometer or market barometer is the weather and I had a client of mine and my clients manage billions of dollars and I never had a client say, “You know it could be the sun made me buy that stock.” But often times we’re not really aware of what is shaping our financial decisions and this can be found on a very micro level too. Ask any waiter, and you asked about tipping before, but ask any waiter and they will say that when you seat people outside on a sunny day versus a cloudy day or versus seeing them inside, when you seat them outside on a sunny day, people are in a better mood. 

People are in a better frame of mind and this study was replicated I think over a couple dozen cities and they found that waiters sure enough would get more money when they’re guest were seated outside on a sunny day. So again, there is genetics, there is biology, there is weather factors that shape our financial decisions even when you are not thinking about money, you’re thinking about money. 

[0:37:06.4] MB: In the book you talk about the soul of money. What does that mean? 

[0:37:10.6] KS: I think the way you use money can also may determine the fate of your soul, which is a loaded comment I know but that’s how if you are a believer in the scriptures whether it’s the tree Abraham religions or also to Hinduism, that’s what the scripture says. I went to Al Qaeda and I went to the home for the dying investiture and Mother Theresa and there I found a young teenage and he told me that he was there because of what the scripture teaches, the gospel teaches. 

When I was his age, I was focused on other things. I wasn’t focused on helping lepers and so I went back and read the scriptures and sure enough that the gospel is pretty clear. In the book of Mathew there are eight parables and in eight of the ten parables Jesus is talking about money or wealth, how to use money. He talks about money so often it always makes you feel uncomfortable. Jesus is always giving financial lessons of what to do with money and not to squander it and make sure that your valuing thing that are everlasting. 

Even on the Sermon on the Mount he says, “Lay up your treasures in heaven and not on earth,” and then he goes on to say something very precarious that people had been trying to work out for generations, theologians have been arguing about this. He says essentially, and I don’t want misquote Jesus but he says essentially that the eye of the body, do not darken the eye of your body and then he goes on to talk about money again. 

And the question is like, “What is He talking about with this idea of the lamp and darkening your eye?” Theologians have believed that he was talking about greed. He is talking about greed because greed is something that you cannot see in yourself. You see it in other people and greed is something that darkens your eye meaning that, again, you can’t see it. You can always say, “Oh someone else is making more money or someone else is a better reputation, or someone else has more social media followers.” 

But in fact, there’s a pastor who talks about this who’s been hearing confessionals for 25 years. He says, “You know, I’ve never ever had someone come into the confessional and said, “Forgive me father I have sinned, I am too greedy.” He says, “It just doesn’t happen.” People aren’t concerned about how much money they have but Jesus is putting forward a test that if you want to follow me sell all of your possessions and follow me, detach from money and that’s not something we want to hear because it’s not practical. It’s very difficult. 

If we live according to the scriptures then how you use money at least can be a determinant on the fate of our souls and if we lived and how we use money can determine our character. So I ended my journey, and I wrote about this in my book, at a temple in India and learning about what Hinduism says about money and I thought the advice in Hinduism to be the most practical and nuanced out of the time I spend looking at religion and money. 

Because in Hinduism there is a few goals, that fighting four goals to life. One of the goals is called Artha, which means wealth. It is your job, it is your duty in life to make Artha, to make money because you’ve got to take care of your family, you’ve got to take care of your friends and people are going to look at you for that, Artha. But there’ll come a time in your life when you realize that chasing money and chasing status, you realize it will leave you a little empty inside and that’s when you prepare for the end goal of Hinduism, which is called Moksha or liberation. 

Which is, “Okay I have attained these things. I’ve done it ethically. I’ve got all of these resources. I’ve made money. I made a name for myself and now it’s time to detach from these things,” that is to correspond to periods of your life. So if you are young and you’re listening to this podcast and you’re trying to learn the tips of the Science of Success and try to succeed, that’s awesome. Do it, make Artha, make your money, make your status but as you get older 70’s, 80’s, 90’s and you start to think about leaving the world, you can start relinquishing these things and sart realizing that it’s okay to renounce these things and leave things to other people. 

This can also correspond to period every day which is in the morning you are making money. You are making a name so you decide to go into work but at night you detach from these things and it’s with finding some balance or some harmony in your life and it just shows you that it’s good to go out and make the money but also realize the Moksha or liberation from it’s also determination. It would also focus you on this idea of the soul of money meaning that how you use money arguably, again according to the Scriptures can determine the faith of your soul. 

[0:41:46.4] MB: So for listeners who want some practical actionable steps that they can take to implement some of these findings about money and the history of money, what are some ideas or strategies that you’d recommend for them or what’s maybe one piece, one simple piece of homework that you would give to them?

[0:42:04.1] KS: That’s a good question, I think my book wasn’t so much about how to make money. It was about understanding money and its role in our lives and with your focus on psychology and the science of success, one of the probably easiest places to look if you are in biases and cognitive biases of how we use money, so there’s all kinds of biases. If you hadn’t read Daniel Kahneman’s work Thinking Fast and Slow, but a lot of people have documented these biases. 

One of them is called the availability bias that the more often you can think of something you start to inflate the probability of actually happening. A good case of this is my father, he plays the lottery every week and I say, “Okay why do you play the lottery every week?” He says, “Oh I see it on the news and I could win. I could be there holding that big check,” and I said, “Well you haven’t seen the millions of other people that lost,” and so he’s trying to get to inflate the probability of it actually happening. 

So I would say that if you are looking to try to get smarter or how you use money, start of thinking the biases that you live by. A practical one is if you hear about a stock idea or they hear about a new company you want to invest in, give it three months and let it cool off a little bit. That company is not going to go away. The stocks are still going to be there and because you are familiar with that information, you start to really get excited about it. You start to make an emotional decision. 

I would say start to institute time constraints. Anytime you hear about something you want to buy, put a month. Put two months before you actually buy it because them you are actually cool to the decision and if you still want to do it, then you’ll do it but you’ll be making such an emotional and perhaps irrational decision immediately. 

[0:43:42.4] MB: Where can listeners find you, your books, and your music online? 

[0:43:47.3] KS: You can find me at www.kabir.cc. 

[0:43:53.0] MB: Awesome. Well, we’ll make sure to include that in the show notes so that everybody can find the books and listen to some of your music and explore these topics more deeply. 

Well, Kabir thank you so much for being on the show. It’s been a fascinating conversation and we really appreciate having you on here. 

[0:44:10.1] KS: My pleasure, great to be with you. 

[0:44:12.0] MB: Thank you so much for listening to the Science of Success. Listeners like you are why we do this podcast. The emails and stories we receive from listeners around the globe bring us joy and fuel our mission to unleash human potential. I love hearing from listeners. If you want to reach out, share your story or just say hi, shoot me an email. My email is matt@scienceofsuccess.co. I’d love to hear from you and I read and respond to every single listener email. 

The greatest compliment you can give us is a referral to a friend either live or online. If you’ve enjoyed this episode, please, leave us an awesome review and subscribe on iTunes because that helps more and more people discover the Science of Success. I get a ton of listeners asking, “Matt how do you organize and remember all these information?” Because of that, we created an amazing free guide for all of our listeners and you can get it by texting the word “smarter” to the number 44222, or by going to scienceofsuccess.co and joining our email list. 

If you want to get all of this incredible information, links, transcripts, everything we just talked about, and much more, be sure to check out our show notes. You can get them at scienceofsuccess.co, just hit the show notes button at the top. Thanks again and we’ll see you on the next episode of the Science of Success.

Trading Your House For A Tulip, Your Love Life, And What It All Has To Do With Making Better Financial Decisions with Dr. Daniel Crosby

October 27, 2016 by Lace Gilger in Decision Making, Money & Finance

In this episode we explore how you can learn from dating mistakes to make better financial choices, the most expensive words in investing (and how you can avoid them), why highly qualified experts are wrong more than 94% of the time, the importance of focusing on process vs outcome and much more with Dr. Daniel Crosby.

Dr. Crosby is a psychologist and behavioral finance expert as well the author of New York Times Best-Seller "Personal Benchmark: Integrating Behavioral Finance and Investment Management” as well as “Laws of Wealth: Psychology and the secret to investing success.” He was named named one of the “12 Thinkers to Watch” by Monster.com, a “Financial Blogger You Should Be Reading” by AARP and listed on the Top 40 Under 40 by Investment News.com.

We discuss:

How Daniel works to integrate the messiness of human psychology into fields like economics and finance
How your emotional state colors your perception of risk
How you can learn from dating mistakes to make better financial choices
The most expensive words in investing (and how you can avoid them)
The insane “tulip” craze and what it says about financial markets
Why in our efforts to manage risk we often create the outcomes we are trying to avoid
How you control what matters most (often without realizing it)
The importance of focusing on process vs outcome
Why “you are not special” and how that advice can save you a lot of money!
Why experts are wrong 94% of the time
Why really successful people automate their day and free up their cognitive power for more important tasks
How to be aware of the biases impacting our thinking and get a second opinion
The importance of being “not stupid” instead of being smart
Existential boundary experiences and how they can transform you
How to break out of the glorified business of our daily lives and embrace the inevitability of our own mortality
2 simple and actionable steps you can take right now to improve your personal finance and investment knowledge
And much more!

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions on how to do that).

SHOW NOTES, LINKS, & RESEARCH

[Book] Superforecasting by Philip E. Tetlock and Dan Gardner
[Book] The Dead by James Joyce and Fasano Thomas
[Book List] Irvine Yalom Books
[Reading List] Nocturne Capital Reading List
[Book] Thinking, Fast and Slow by Daniel Kahneman
[Book] Nudge by Richard H. Thaler and Cass R. Sunstein
[Book] A Few Lessons for Investors and Managers From Warren Buffett by Peter Bevelin and Warren Buffett
[Website] Berkshire Hathaway Inc. Shareholder Letters
[Book] The Intelligent Investor by Benjamin Graham, Jason Zweig, & Warren E. Buffett

EPISODE TRANSCRIPT

[00:02:24.2] MB: Today we have another exciting guest on the show, Dr. Daniel Crosby. He is a psychologist and behavioral finance expert as well as the author of the New York Times bestseller, Personal Benchmark: Integrating behavioral finance and investment management, as well as, The Laws of Wealth: Psychology and the secret to investing success. He was named one of the 12 thinkers to watch by monster.com, “A financial blogger you should be reading” by the AARP, and listed on the Top 40 Under 40 by Investmentnews.com. 

Daniel, welcome to the Science of Success. 

[00:02:53.6] DC: Thank you, it’s great to be here. 

[00:02:55.6] MB: Well we’re very excited to have you on. So for listeners who may not be familiar with you, can you tell us a little bit about your background and your story?

[00:03:05.1] DC: Yeah so I have sort of a varied background, I went to school initially to be an investment manager. After a year in school left to go on a mission for my church, so I spent two years in the Philippines. I came back with I think a bigger heart than I left with and decided I wanted to go into a helping profession, so I choose psychology. 

About two or three years into a PhD program in psychology, it was getting a little too heavy for me. I was taking work home with me. It was bumming me out talking to sad people all day and so I said, “You know, I love thinking deeply about why people do the things they do but I think I need to look for a business application of behavioral principles,” and so long story short, I’ve landed in sort of this middle ground of behavioral finance, which is a blend of psychology and decision making and finance. 

[00:03:54.2] MB: That’s fascinating. So for listeners who have never heard that term, behavioral finance, tell us a little bit more about that? 

[00:04:00.6] DC: Yes, so behavioral finance is really just trying to integrate the messiness and the irrationality of human decision making into the financial planning and investment management process. It’s hard to believe I think for people who come from the outside but for years and years, hundreds of years economic models were built on this idea of rational man. So built upon this mistaken notion that people are thoughtful and prudent with their money, which I think we can all point to instances in our own lives when that hasn’t been the case. 

So behavioral finance study is basically the mistakes and the fears and the heuristics that drive decision making and tries to incorporate them in and help people make better decisions. Then on the flip side, some of what I do is how do you make better investment decisions, how do you pick better stocks by taking the other side of trades where people are being greedy or fearful? So there’s a lot to it but basically it’s about integrating humanity back into finance. 

[00:05:04.0] MB: I think that’s so important and something that we talk about a lot on the Science of Success is the idea that many fields, and I think economics, finance, etcetera were definitely guilty of this 10 or 15 years ago, really don’t incorporate the actual reality of human psychology into their evaluation of human behavior. 

[00:05:25.2] DC: Yeah, that’s so true and I mean really, this was done frankly not because anyone believed it per say because, like I said, I think it’s fairly simple to think of reasons of why you could contradict a rational man type theory. But really, I think it was done this way to build elegant, beautiful mathematical models. So your math gets a lot harder, the algorithms don’t get as elegant when you have to plug Joe six pack into the equation and so it’s not quite as pretty but it’s maybe a little more realistic. 

[00:06:00.6] MB: So you have a TED Talk where you talk about the concept of understanding money and how people think about money through the lens of love, can you share that idea or explain that? 

[00:06:14.3] DC: Yeah, so I find it to be my life’s mission to make these things more accessible, some of these notions more accessible. Because I have done, I’ll be honest, basically none of the primary research on the things that I write about. It’s been done by people far smarter than me typically in academic settings but what I have done is I’ve taken these ivory tower concepts and have broken them down in a more simplified way that people can understand.

Because I am from Alabama and that’s what we do in Alabama, we make things as simple as possible and so yeah, I have done three TED Talks and one of them was called Sex, Funds, and Rock and Roll and it’s in that TED Talk I compare romantic love, the irrationality of romantic love to the way that you invest or make decisions around your money. Talk about everything from the irrationality of playing the lottery all the way down to things like the way that emotion colors risk perception. 

When you’re in love with someone, the reason we have a 50% divorce rate or whatever is when you’re in love, you’re not very critical. You’re not a very good assessor of risk when you’re in love because our emotional states tend to dictate how much risk we do or don’t see in our environment and so if we’re feeling great, the world looks great and we don’t tend to see much risk in the world around us, and so in investing and in love, maybe we need to be a little more critical and a little more even-headed but it’s certainly easier said than done especially in romantic love. 

[00:07:50.8] MB: And you shared a couple different biases in that talk, one of them was the, as you called it, the “fixer upper bias”. Which is the idea that if you’re dating somebody that you can change or transform them and how that applies to people’s personal finances as well. 

[00:08:03.7] DC: Yes, so the fixe — sort of the analog, I mean I think we are all familiar with the love part of that equation. You know, we’ve all probably had the experience of dating someone with an eye to changing them or hoping that they would become more the person that we need them to be. The way that that plays out in our investment lives is that we tend to over invest in things that are proximal to us. So this takes a couple of turns, right? 

One is called the “home bias” where we find that people dramatically over invest in stocks of their own country and it’s actually less of a problem in the US than elsewhere just for the simple fact not that we do it any less but the US is a bigger part of the world economy than say Greece. But someone, like people in Greece, tend to invest in Greek companies which is only a very, very small part of the world economy. 

Likewise people in the US tend to be overweight the US economy, which accounts for about half of the stocks and half of the market capitalization of stocks globally. So we tend to think things that are closer to home are safer, that’s not always the case. The other way that this applies is that we think that if we work for a company, we can single handedly make it better. So I spoke with someone recently who had $5 million in one stock, all of their money, $5 million was all the money they had and it’s a great deal of money. 

But they had all of the $5 million in one stock because that was the large publicly traded company they worked for and his thought was, “Why would I spread it around? Why would I diversify where here, I can put it in the company where I worked directly?” well of course the irrationality there is your one person. You’re the 372nd accountant in this large multinational corporation. You can’t move the needle all that much, but just like a bad romantic partner, we think that because we’re involved things will get better by virtue of our involvement alone and that’s not the case. 

[00:10:07.3] MB: Another bias you touched on, and I found this one really fascinating, was the idea of “this time it was different”. Or I think another term for it might be the concept of “new era thinking”? 

[00:10:17.6] DC: Yeah, so “this time it’s different”, those words have been called the most expensive words in investing. So “this time is different” with respect to romantic love, I talk about Elizabeth Taylor who was married, I don’t know and I can’t remember, four or five times at least and the thought there is that, “Well yeah, those past guys were bad for XYZ reasons but this time it’s different,” and we’re always just plunging forward never taking the time to look back and see what happened. 

So we see this type of new era thinking and investing as well in every major bubble and crash has had this new era thinking. You know, if you go back to the turn of the century when we had the “dot com” bubble, I think this sort of new era thinking of the day was that traditional metrics, like price to earnings and even sales and profitability didn’t matter because we were in this brave new world where things like eyeball share and clicks and things mattered in this sort of new economy. 

And the thing that’s so tricky about new era thinking is that a lot of times it is characterized by half-truths. Because as we know, the internet was indeed a big deal. I mean it did revolutionize life and business in ways that I think we probably couldn’t have even imagined 15 or 20 years ago. But what isn’t the truth is that traditional metrics like earnings and profitability and things would be out the window, right? So a lot of the danger of bubbles and bad economic decision making is that they are half-truths. 

And if you go back in history, if you go back to Amsterdam hundreds of years ago, there was a point in Dutch history where a single tulip bulb was trading for as much as a town home and that’s because they were engaged in this new era thinking that says, “Hey, we have this scarce commodity. People will never be sick of tulips. They’re going to appreciate forever, and we’re going to be a very wealthy county.” So we have to check ourselves and say, “Look, there are certain laws of the universe and these things tend to come back down to earth and this time may not be so different after all.” 

[00:12:28.5] MB: So in the context of the current financial markets, where do you think that kind of framework applies?

[00:12:35.3] DC: I think we are in a dangerous position right now I think because we’ve got two things going on. For a lot of people, I don’t know how old you are. I am in my mid-30’s, get it creeping towards late 30’s but in my mid-30’s and some of my first experiences of investing were bad. I mean some of my first experience as an investor, having a job and having enough money to put a little aside and then you’re talking 2008-2009. 

So there is that primacy and recency effect, right? So I have an early memory of a very bad time and I think no matter what people’s age, people still are a little gun shy from such a dramatic come down, what is it now? Seven or eight years ago now. But then I think we have the recent past which is seven years of extremely good returns, very little volatility over the last seven years. So people are simultaneously scared because of what happened seven or eight years ago, and spoiled because of seven or eight years past of really nice returns with very little volatility by historic standards.

So I think we’re ripe to be frightened and make really poor decisions the next time the market takes a dip and I mean it will. It will, this is already one of the longest bull markets of all time and it’s really a matter of when and not if and so people need to prepare themselves a bit for the inevitability of that. 

[00:14:08.2] MB: So tell me the story of one of your first consultations as a psychologist? You had a grad student who wanted to become an epidemiologist, and how do we create self-fulfilling prophecies that can create negative outcomes in our lives? 

[00:14:24.2] DC: Yeah, so my very first every client, so my PhD is in clinical psychology even though I work in a very different field now. I had to get thousands of hours of face to face consultations at clinical hours with clients and so my very, very first client was a beautiful college student, very bright, very talented and very intimidating to me as a brand new therapist. So she walks into my room and she brings with her six envelops and says to me, “Look here is the story.” I go, “Well hey, what did you got there?” 

And she says, “Here’s the story. I wanted to be an epidemiologist all my life. I’ve always wanted to go get a PhD in this. I’ve brought you this six envelops because these are the six programs that I have applied to, to get into a PhD program. They have all written back to me and I cannot bring myself to open these letters because if it’s bad news, I’m going to be crushed. I’m going to be just heart broken by this bad news because this is what I wanted since I was very young.” 

And so very inelegantly and articulately I’m sure, we sort of worked around over the course of the next session or two, to the point where I helped her try and understand that often times in life in our very efforts to manage risk and make ourselves safe, we bring about the certainty of the very thing we’re trying to avoid. So in her efforts to spare her feelings and avoid potential bad news, she was running up against a deadline. You of course have to respond to these schools and tell them if you are coming or not. 

She was running up against the deadline that was going to lead her into a certainty of a bad situation, and as a clinician and as a financial adviser, I see that again and again. I very, very commonly saw people who had been hurt in romantic relations say, “Well I am never going to love again because if I never love again, that’s how I keep from being lonely,” right? And it’s of course very paradoxical because in the act of trying to avoid heartache and loneliness, the possibility of heartache and loneliness, you bring about the certainty of those very things. 

And I see the same thing in financial markets. People fail to invest, they fail to take the ride and endure the volatility because they are scared of losing money and it’s very scary and we all work very hard for our money and it is scary but in their failure to do that, they bring about the certainty that they’re not going to be able to retire. We’re losing 3% a year, you’re losing 3% a year on your money if you are not invested just because of inflation. And so in love and in finance, I think people try and manage risk too closely and in their efforts to do so, bring about negative realities that could have been avoided all together. 

[00:17:21.7] MB: So how can we let go a little bit and not manage those risks so closely? 

[00:17:29.9] DC: You know, in The Laws of Wealth, my new book, I talk about a couple of ways I think in the first couple of chapters. I think one thing that people can learn is that the title of chapter one is You Control What Matters Most, and I think that’s an empowering message that’s little understood by the average investor. Just a couple of stats on that, a recent study by a big asset manager, they surveyed financial advisers and then they surveyed their clients. 

So of the financial advisers, 83% of them thought that the best thing that they could do for their clients was manage their behavior, help them manage their emotions, and make good decisions. Not picking stocks, not managing taxes, not doing any of this. Managing behavior and decision making was what financial professionals perceive to be the number one value add and the research, without getting too boring, the research backs that up. 

But then they turn around and asked the clients of these financial advisers, “Is it important to you to get help around behavior and decision making from your adviser?” And only 6% said “yes”, and so the average investor over the past 30 years the market’s given us about eight and a quarter percent a year over the last 30 years and the average investor has only kept 4% of that because they’ve entered and exited the market at exactly the wrong times. 

They’ve bought in when things were expensive, they’ve jumped out when things were cheap and scary, sort of rinse and repeat and so I think if people better understood that, “Hey, I have more control over this process just by virtue of doing a couple of boring things, like putting aside money every month, staying the course, being calm and collected.” I think the average person thinks it’s in the hands of Janet Yellen or Warren Buffett or the European Central Banks or just some far flung, exotic, hard to understand entity. If people understood that they are in more control than they think, I think that would be a positive first step toward them taking back control of their financial lives. 

[00:19:37.5] MB: So when you say that they have more control than they realize, is that a focus on the process of investing itself instead of the outcomes? 

[00:19:47.0] DC: Yeah, absolutely. I talk a lot about process versus outcomes in the book and there’s this great story that I share in the book by a guy who used to work in the LA Dodgers front office. A guy names Paul DePodesta. He was featured in Money Ball. So he talks about going out with a friend who had had too much to drink and they are playing black jack one night and his friend was drunk and he has a 19 and his friend wants to hit. 

His friends wants another card and so DePodesta is like, “Man, you cannot hit. You are sitting on 19, you can’t hit. Don’t do it, stay put,” and so the friend says, “Get lost. I am doing it, I’m going in.” So he hits and he gets a two and so the friend is ecstatic. He’s jumping up and down because he wins a big hand and he says to DePodesta like, “See? You’re an idiot,” and DePodesta makes the point in his article, you can have a good outcome and still be a moron. 

And that’s what I am trying to help people guard against in the book. I give 10 commandments of investor behavior in The Laws of Wealth to just say, “Look, if you manage the process, if you control the controllable, things are going to come out in your favor overtime,” and the thing about the market is, it is uncertain, it’s unpredictable in the short term. But people who are process oriented and have a behaviorally sound process went out over long terms. So yeah, a lot of people get in trouble in the market because they have early success for the wrong reasons, you know, just getting lucky and they end up chalking that up to skill. 

[00:21:24.7] MB: And being process oriented is something that I am a huge fan of and we actually talked about in previous podcast episodes. We had an interview with an amazing insightful guest, Michael Mauboussin who’s another person actually in the financial world about how you can really be processed focused. So for listeners who are interested, I would definitely recommend checking that episode out. 

One of the 10 commandments that really jumped out of me that I thought was really interesting was the commandment that “you are not special”. Can you tell me about that? 

[00:21:52.1] DC: Yeah, it really goes to being process oriented because I think a lot of people who get into investment management or even retail investors think they have some sort of special edge and you harken back to the gentleman I mentioned earlier with the $5 million dollars. His special edge in his mind is was he had some control over this. I know people who work in tech who invest heavily in tech because they say, “Hey, you know this is my world. I understand it.” 

And being a great investor is about driving out this idea that you have special knowledge or that the rules don’t apply to you because I, again and again, meet people who understand the rules of investing. I mean simple things like diversification, staying the course, dollar cost averaging, which means putting a little money in each month or each year and they just fail to do it because they think that they’re somehow different. 

And this is a very human tendency to be overconfident and in fact, the research shows that you are basically either overconfident or you’re depressed. There is not a whole lot of middle ground unfortunately. So most of us, aside from the sort of clinically sad, have a great deal of overconfidence and I sight research in the book that talks about 94% of men thinking they’re better looking than average and 100% of men thinking they’re more inner personally savvy than average. 

Most of us have a vested interest from an ego and self-esteem standpoint of thinking that we’re better than average. But bring that human tendency to the world of investing is very dangerous. I talk in the book too about our tendency to delegate the dangerous and own the optimistic. Delegate the dangerous, own the optimistic. When we’re asked to rate other people’s likelihood of getting cancer or getting divorced or losing money in the stock market, we can do a very good job. 

But when it comes to rating our own likelihood of getting cancer, of getting divorced, whatever, the numbers get very, very scute because we don’t see ourselves as clearly as we ought to and so this is why I think working with a financial adviser, getting a second opinion, having a partner to check your thinking, I think that’s the reason that all of these things are so important in the world of finance. 

[00:24:18.8] MB: It reminds me of that famous study about drivers, right? It’s the same thing that the majority of drivers think that they are above average. 

[00:24:25.5] DC: Absolutely. 

[00:24:26.8] MB: And it also makes me think of something, I previously used to work on Wall Street and one of the things that I always think when somebody tells me that they think they can beat the market or whatever is, “Do you really think that you can beat these hedge funds that have billions of dollars invested in algorithms and data farms of computer that are micro timing all these trades?” There’s almost no way that you are ever going to actual generate meaningful alpha as a result of what you think is a novel insight that you just saw on CNBC about some company. 

[00:24:58.6] DC: Yeah, I mean it’s a zero sum game and so if hedge funds are winning, someone else is losing by a comparable margin and the odds are it’s you, right? I mean there’s the old saying about “if you get in a card game a few minutes in and you don’t know who the sucker is, it’s you,” right? And I think that the same could be said of investing. 

[00:25:18.6] MB: So you touched on this briefly, but how do we combat that bias or how can we help mitigate some of that overconfidence?

[00:25:26.4] DC: I think that one of the most important ways, one of the things that I advocate for in the book a whole lot is just being rules based. The book is really, I mean it’s called The Laws of Wealth and it really is a book of rules and so there’s fascinating research in the book and I just give the whole book away I guess at this point. Because one of the things that we talk about in the book is how often expert discretion is beaten or mashed by just simple rules. 

One of the studies that I talked about in the book is actually a meta-analysis. So it’s a study of all the studies, it’s a study of over 200 studies on simple rules-based decision making versus human discretion. So like you making your own choice and it studies everything from studies about prison recidivism and parole to stock picking to making a medical diagnosis and it’s found that simple rules beat or match expert, like PhD level discretion, 94% of the time. 

And so following the rules is such a big deal and so what I’ve tried to do in the book is set forth rules for managing money and managing your behavior and just try to put that on autopilot to the extent possible. I like reading about really successful people and one of the hallmarks of really successful people is that they try and automate their day and free up cognitive room for thinking about more important stuff. 

There’s been a lot of talk about President Obama just wearing two types of suits. He just doesn’t want to think about it. He doesn’t want to think about what he’s going to wear, he’s got bigger problems and then I’m from Alabama, so we’ll use Alabama football one. Nick Saban eats the same thing every day. The same thing every day for breakfast, same thing for lunch because he wants his mental energy and his time streamlined and he wants that available to think about other things. 

So I think that investing is one place where the rules be discretion almost all the time and that’s one of the best ways around introducing negative emotion into the process. 

[00:27:32.1] MB: And we talked about, in previous episodes, the importance of meta-analysis studies and how valid they are. One of the things that fascinates me is research by people like Phillip Tetlock who talk about how wrong experts are. Can you dive a little deeper on that topic? 

[00:27:49.9] DC: Yeah, so Tetlock wrote a recent book that everyone should check out called Superforecasting where he refines some of his early studies. But Tetlock’s early work, which really put him on the map showed basically how bad expert judgement intended to be and some of the parts that I like about his original work was he showed that the more popular a pundit was, the less likely they were to be correct. 

So if we think about how a pundit or a talking head comes into notoriety, let’s say in my world of finance and investing, often times it’s by making a dramatic call about sort of an unexpected event. So people who correctly called 2008-2009, if you watched The Big Short, some of those people that profited so dramatically from the housing crisis. So that’s how someone gets famous from making a big improbable call. 

Well probability being what it is, a lot of times those people tend to keep making large improbable calls and then are increasingly off in subsequent years and you saw this with John Paulson, the big hedge fund manager who made the biggest trade of all time, more or less. Made a billion dollars shorting the housing market and then in subsequent years, lost 36% when the market was up double digits. So again, a lot of times people are perma-bullish or perma-bearish. 

They run into one, they run into a nice opportunity where reality coincides with the thing they’ve been saying for five years but then those things tend go away overtime. So yeah, Tetlock found that expert judgment wasn’t all that great. Found that the more famous an expert was, the worst they tended to be, and also found that most experts were very resistant to feedback about how to improve their processes and had lots of excuses like, “I was too early.” Or, this is my favorite, “My prediction actually changed the course of history. You know, I would have been right but because everyone listened to what I said, I actually moved the market or changed history, messed up the space time continuum, as it were.” 

[00:30:03.7] MB: It’s such an important finding because people so often just defer to these experts or authorities, these talking heads, especially in the case of financial news many times and it’s so critical to be aware of your own biases and understand your own thinking to the level where you can see, “Hey, I am clearly falling prey to some serious bias right now.” Like those experts who are coming up with a ridiculous justifications for why they are consistently totally off base. 

[00:30:31.8] DC: Yeah and I think this is where we almost can’t do this ourselves. Chapter two of the book is titled You can’t do this alone and we are programmed not to see our biases. Again, if we think about this optimism bias, that’s in place for a very good reason. I mean we’re happier people because we have this optimism bias and if you think about entrepreneurship, if entrepreneurs correctly assess the probability of having a successful small business, no one would ever start a business, right? It’s only because we have this over-optimism that we see stuff like entrepreneurship because the odds are crummy. 

So what we need to do is enlist an outside view. We talk about the inside and the outside view. So run your idea by that friend of yours that’s such a good friend that he or she can give you critical feedback and it won’t damage the relationship. In the case of finances, I found and I talk in the book about how people who work with financial advisers tend to do two to 3% better per year than those who don’t and it has nothing to do frankly with the financial acumen of those advisers. It has to do with keeping you from doing stupid stuff. So having that trusted outside voice is, I think, the only way. You can educate yourself about the basics of biases but man, it’s awfully hard to white knuckle that when you’re in your own head. 

[00:32:01.9] MB: The idea of not being stupid is something that Charlie Munger, who’s one of my favorite thinkers and Warren Buffett’s business partner. He talks a lot about that both he and Buffett focus on is the idea of that they’re not setting out to be the smartest and greatest investors of all time. They just want to eliminate bias from their thinking and try to be consistently not stupid. 

[00:32:23.3] DC: Yeah. I think that sort of defensive, that first do no harm approach is the hallmark of a good investor and when I look at my own process, the very first thing I do is screen out stocks for risk. I mean that’s the very first thing I do. Because a lot of people don’t see risk in return in finance and elsewhere in life as opposite sides of the same coin. 

So I am wholly on board with this first do no harm, first root out the bad stuff approach to money and to life. I think there is a lot of wisdom there, and like you said, those guys have gotten very rich off what is a decidedly unsexy approach of just buying beaten down every day Staple stocks and it’s worked out extremely well for them clearly. 

[00:33:12.5] MB: Changing gears completely, you wrote a fascinating children’s book called Everyone You Love Will Die, tell me about that? 

[00:33:20.4] DC: So I have three kids. I have a seven year old, a soon to be three year old and then a tiny baby, three months old and so being a dad is the greatest, my favorite thing to do. But one thing I’ve learned with my seven year old is that they start to have tough questions. And so the other day, she’s asking me about God and the nature of life and evil and why do bad things happen to good people and all these different things that her little mind is beginning to take in. 

So we had a friend passed away and so one of the things that I found useful when talking to my kids about everything from the impermanence of life to marriage equality and everything in between is to write poetry. That’s a way that I can communicate with my kids. So I wrote this poem that’s the basic gist of it was there’s lots of ways, everyone dies so you’re here today and so am I. It sounds like a depressing title, Everyone You Love Will Die and it’s of course meant to be provocative. 

But it is actually a sweet book in practice and the gist of it is look, we’re not here forever so let’s make the most of it and let’s put first things first. Put family first and do what matters first and so I wrote this poem that lists all of these funny ways that people could die and then in the end says, “So hey, let’s spend today together.” So I wrote this poem, I put it on Facebook and a talented friend of mine liked it and sent me all these mocked up drawings of the different humorous ways in which people die in the poem. 

And so she said, “Hey we should make this a book,” and so I said, “Okay, what the heck.” So we put it on Kickstarter. It became the Kickstarter whatever, editors pick of the day and it got funded in 10 hours and we printed a book. So it was very fun. I actually made no money off of it. It’s obviously hard to get a book called Everyone You Love Will Die published by a big publisher but it’s one of the professional things I am most proud of. So thanks for bringing it up. 

[00:35:38.8] MB: You know it is such an important lesson and something that I think is easy to be intellectually aware of but really hard to internalize and live. Which is, for somebody who is listening, how can they snap out of the day to day grind of their life and really embrace that lesson that we only have a fine amount of time here and you really have to live your life fully? 

[00:36:04.6] DC: Well for me, it’s funny for me I know that it’s hard for most people to grasp, I was born on the day that my grandfather died. I am named after him, I look just like him, I never met him, he died two years to the day that I was born. So I feel like because of that, I’ve always had this weirdly more acute sense of impermanence than most people. So for me, the things that work are the following: First of all I try and I really read literature that considers the inevitability of that. 

Maybe that’s a really heavy for most people but I find that the inevitability of death does more to energize my life than just about anything else. So for me, literature, art, movies that speak to that and our fears around that are powerful and then other thing is I don’t know what the layperson’s term for this is but the shrink term for it is an existential boundary experience. So to explain, let’s say you’re driving and someone’s texting and they almost hit you. 

You’re like, “Holy crap! It was almost over for me there,” and you have this moment and maybe it’s half an hour, maybe it’s 10 minutes, you have this moment where death is a little closer to you or maybe it’s a death of a friend. You have this moment where everything comes into focus and you say, “Look if I have been hit by that car today, did I do enough?” Like, “Did I tell the people I love that I love them? Did I spend enough time with my family? Did I prioritize work to the exclusion of things that were more important?” 

And I think in those moments, they’re fleeting because you quickly get back to life and busyness, but in those moments, I think you have to journal, catalog them, write them down, make commitments when those moment happen to say, “Hey, I’m going to do things differently,” and have people hold you to those things. Because you’re right, I mean I think a lot of people — I think we live in a society that glorifies business in maladaptive and unproductive ways. I think a lot of us, unfortunately, just stay busy until we pass away and we live a lot of life on the table. So I think it’s an important thing to think about, like you said. 

[00:38:26.5] MB: What would an example be of one or two pieces of literature or movies or whatever that you think might examine that topic? 

[00:38:34.9] DC: I just finished The Dead which is very on the nose, right? I just finished The Dead which is part of James Joyce’s Dubliners collection of short stories. I’d absolutely recommend that. There’s a gentleman by the name of Irvin Yalom who’s a psychiatrist in California who writes very beautifully about death and existential boundary experiences so those are the two off the top of my head that I think I’ve read most recently that put me in that frame of mind. 

But Yalom is sort of the, in my mind, the Freud or the Jung of our day. He’s probably the best guy doing it right now so he’s who I’d point you to in addition to all the Russian literature and other people who are notoriously good at bumming you out. 

[00:39:26.7] MB: Well we’ll definitely include both The Dead and a few of Yalom’s books in the show notes. Kind of broadening that question out, other than The Laws of Wealth, which is a great book about a lot of the topics we’ve talked about goes much deeper into the research and is an incredibly useful tool. What would you recommend for people who want to do a little bit more research and dig into some of these topics? Where would you suggest they start? 

[00:39:52.2] DC: So I get asked this question all the time. So at the risk of plugging my own thing, I came up with my own reading list. So if people just Google “Nocturne Capital Reading List” I have all my favorite behavioral finance books and I have them categorized by the sub-category they speak to. I think just some of the classics though, just off the top of my head, Daniel Kahneman’s Thinking Fast and Slow is about the best and most comprehensive thing out there. It is a little bit of a heavy read. I mean it is a long book but it is very fascinating. 

Richard Thaler and Cass Sunstein’s book Nudge is about the best around in terms of speaking to policy nudging and pushing behavior in a good direction in everything from kid’s school lunches, to smoking bans, to safe driving, so if you are interested in that. And then in terms of the more financial side, I read some of the classics. I read Ben Graham and The Buffett Letters and things like that but I have a pretty comprehensive list of 15 or 20 if you just look up “Nocturne Capital Reading List”.

[00:41:04.0] MB: Well we’ll definitely include the reading list in the show notes as well. 

[00:41:06.8] DC: Great. 

[00:41:07.9] MB: So for somebody who is listening here, what is one piece of simple actionable homework you would give them to implement that they might be able to use to improve their personal finances? 

[00:41:19.2] DC: I think there’s two. I will double down and give you two there. So I think one would be to pick five of the books off of the list, which will be included in the show notes and read five of those books. The interesting thing about investing is there’s such a quickly diminishing marginal returns on investment knowledge like if you read three, four, five books you will have 90% of all the knowledge you need to be a savvy investor and you can read a hundred more books to get to the next five to 10% of the way. 

Just because I think investing is simple, but not easy. So I think that people would do very well to educate themselves on the fundaments of that and I’ve tried to give a good starter with those books and then the second thing I would say is get a financial adviser and look for someone who charges a reasonable fee who emphasizes planning and handholding and behavioral coaching because the other stuff is honestly a dime a dozen. 

You can get anyone to put you in a well-diversified portfolio, that’s not hard to do. What you really need is someone who’s a good fit and is going help you get that extra 3% a year that the research says you get when you work with an adviser by virtue of them helping you to make better decisions. So those are the two easy pieces of advice. Educate yourself, three to five books, and then find someone to help take you the rest of the way and then read books about more interesting things like The Impermanence of Life. 

[00:42:53.4] MB: Where can people find you online? 

[00:42:55.6] DC: Twitter, @danielcrosby and Nocturne Capita,l with an E like the music, nocturnecapital.com. 

[00:43:04.6] MB: Well Daniel, thank you so much for being on the show. This has been a fascinating discussion and I have learned a tremendous amount and we’ve really enjoyed having you on here. 

[00:43:12.6] DC: Thank you, it’s been my pleasure.

The Psychology Behind Making Better Decisions with Global Financial Strategist Michael J. Mauboussin

June 15, 2016 by Lace Gilger in Best Of, Decision Making, Money & Finance

Do you want to improve your decision-making a build a better mental toolkit? In this episode we explore the psychology behind making better decisions with Michael J. Mauboussin.

Michael is the Head of Global Financial Strategies at Credit Suisse. He is the author of three books, including More Than You Know: Finding Financial Wisdom in Unconventional Places, named in the The 100 Best Business Books of All Time. Michael also serves as an adjunct professor of finance at Columbia Business School.

We discuss the following topics:

The interconnectedness of knowledge across many different disciplines
How to switch to the “outside view” to make better predictions and decisions
How to improve your results without being any smarter or better trained
A fascinating psychology study that demonstrates how we deceive ourselves
The biggest biases that cause investors to make bad decisions (and how to combat them)
Why the right tools aren’t enough to make you a successful investor
Concrete steps to start down the path of better decision-making
How to understand the difference between luck and skill in complex fields like business, investing, and entrepreneurship
How to become “numerate” and understand the physics and mathematics of misjudgment
What statistical base-rates are and how they can improve your decisions
How reversion to the mean really works and why you’ve been misunderstanding it
The power of checklists and other decision-making tools
And much more!

Thank you so much for listening!

Please SUBSCRIBE and LEAVE US A REVIEW on iTunes! (Click here for instructions how to do that!).

SHOW NOTES, LINKS, & RESEARCH

[Book] Peak: Secrets from the New Science of Expertise by Anders Ericsson (see here).
[Book] Tales from Both Sides of the Brain: A Life in Neuroscience by Michael S. Gazzaniga (see here).
[Book] A Curious Mind: The Secret to a Bigger Life by Brian Grazer and Charles Fishman (see here).
Michael Mauboussin Articles on Value Walk (see here)

EPISODE TRANSCRIPT

Today we have another awesome guest on the show: Michael Mauboussin. Michael is the head of Global Financial Strategies at Credit Suisse. He is one of my favorite authors and the author of three books, including, More Than You Know: Finding Financial Wisdom in Unconventional Places, which was named one of the 100 best business books of all time. Michael also serves as an adjunct professor of finance at Columbia Business School and is an expert in decision making, behavioral psychology, and all of those fields applied to the financial markets, especially. Michael, welcome to The Science of Success.

Michael:	Thanks, Matt. Great to be with you today.

Matt:	We are super excited to have you on here. So, to kind of kick things off and get started, tell us a little bit about... For listeners who might not be familiar with some of your books, tell us a little bit about your background, and how did you become so fascinated with the psychological aspects of human decision making, specifically within the context of investing, which you're obviously an expert at, but also, you know, even more broadly.

Michael:	You know, Matt, I think part of it is you mention my association with Columbia Business School, and I started teaching there in the early 1990s and I was thinking a lot about what I was talking about with the students, effectively giving them tools to try to make them successful investors, and sort of had this growing feeling that what made for great investing had less to do with the tools--you know, accounting and financial statement analysis and valuation, although those things are obviously really important--and much more to do with decision making and temperament, especially under stressful situations. So, probably in the mid-1990s, I started to just open up my reading quite a bit. A lot more science, a lot more in the world of psychology, and sort of being exposed to this world as a lightning bolt of recognition that probably what makes for great... not just great investors, but really great in any field, is awareness of a lot of these psychological factors that improves the quality of decision. So, it sort of changed my whole tenor, recognizing that a lot of things we teach, for example, in business schools or actually any kind of school, are just the ante to the game, but the real success has to do with this whole other field of decision making. So, that was sort of my epiphany, was that recognition of where value comes from. The other thing I'll just mention is I was reading widely... You know, I was one of those  guys who was... You know, I'd read something and I'd be like, oh, here's a connection to this, or here's a connection to that, and just sort of this recognition that we live in an extremely rich world, and that there are a lot of interesting connections between different things that may not be superficially obvious but that I think could really make... that could be some really fascinating connections, and I think really helpful connections to allow people to think about the world more effectively.

Matt:	And that's essentially the concept of the idea of multi-disciplinary thinking, that Charlie Munger is a huge proponent of, and I know you're a huge proponent of, and something actually we touched on a little bit with one of our previous guests, Shane Parrish of Farnam Street. Can you explain a little bit more about, and maybe even provide some examples of, how different disciplines can impact each other or how maybe psychology can underpin finance, or something like that?

Michael:	Yeah, absolutely. The way I like to think about this is that it's like a toolbox, the metaphor of a toolbox, right. You might have the best hammer or the best screwdriver of anybody, but what you really want to do when you're thinking about the world is to have the right tool to apply to the right problem. And so, I think the Munger approach... And I do. I give huge credit for my thinking to Charlie Munger, who I think is the most articulate. I'd also mention another book, which many of your listeners may be aware of, by E.O. Wilson called Consilience, and these ideas that many of the vexing problems in our worlds are at the intersection of disciplines and we need a sort of full toolbox to try to tackle them. So, to me, this is the way to think about the world. The other thing I'll just say is another quick comment, is that we've made huge strides in science over the last, let's say, 400, 500 years through reductionism, which is to say basically breaking things down into its fundamental components, and it's been extraordinary, and I think a lot of the things we take for granted in life, advancements, are the result of that amazing work. But I think increasingly, we're bumping into areas where we're dealing with systems that are complex, where reductionism really doesn't work, where, in a very real sense, the whole is greater than the sum of the parts. And that requires a very different way of thinking about the world. Now, if you think about academia in general, you get paid for specialization. You get paid for being narrow. But a lot of the problems in the world are kind of going the opposite direction, where it's important to think about things from different perspectives. So, one example I would give you, and I think is also a very powerful mental model in and of itself, and for me was another big eye-opening moment, is just thinking about markets as complex, adaptive systems. The stock market, right. So, if you say to an academic or a really traditional economist, "How should we think about how people behave?" they'll typically say, "Well, we've got these models of agents who are rational and they understand their different... They have information that comes in and they understand their preferences and they have utility functions, and then they make decisions on the basis of this. You know, we've known for a long time that empirically, that's not how the world works. So, if you try to extrapolate that into a model of markets, it just doesn't fit the facts all that well. Complex adaptive systems, by contrast, come at the world as thinking about the interaction of heterogeneous parts or agents, right, and you can think about other examples like ants in an ant colony, right? Absolutely fascinating, because the colony itself is almost an organism. It has a life cycle and is sometimes aggressive, sometimes passive, but every individual ant is really basically clueless. They're sort of bumbling little agents within this total. So, I think that's a much, much richer way... And by the way, your consciousness, for example, neurons in your brain, you can think about example after example, people that live in New York City are components of a complex system. And when we take that sort of set of tools and that way of thinking to the world of markets, it just opens up, again, new ways of thinking about things gives you good reason to understand why markets are generally hard to beat, but it also gives you some insight as to why markets go periodically haywire. So, to me, this whole mental models thing is just a really, really powerful way to think about the world. Now, let's talk about the pros and cons. The pros is, I think, that if you do understand big concepts from various disciplines, gives you a huge leg up in life. The con is it requires constant--basically--reading and thinking and learning. So, if you're going to get into this world, it ends up being sort of a commitment to perpetual learning. Now, that's not everybody's cup of tea, but if it is, I just think it's a really fun, exciting, and I think ultimately a great way to find success.

Matt:	I love the idea that the traditional education or business school or whatever it might be is sort of the ante to get into the game, but if you really want to win, if you really want to compete at the highest level, you need to have a much richer and much deeper toolkit to really understand reality.

Michael:	Yeah, and I really think that's the case. The other thing I'll just say is that's certainly true. I also think that there are gaps now in our education. Especially, for example, in high school and college students. I'll give you one example, and I don't mean... This is sort of a negative example, but I don't mean to be too negative. One of my sons went to a really terrific high school and they decided to develop a leadership center for the kids, which is great, right. So, they were working on things communication, cultural awareness, a lot of things you would say are really important. But what struck me as fascinating about it is there was actually no segment or module on decision making or on psychology. So, I went to the guy that ran the program and I said, "This is really interesting, because at the end of the day, our future leaders are really people that need to be equipped in understanding how to make decisions, understanding being [INAUDIBLE 00:10:39], or understanding the scientific method and what science tells us. These are actually very essential elements in the future, and we're just basically not teaching those things. So, that, to me, is another area that we should be spending... And by the way, I'm about to go back to one of my college reunions, and when I went to college, the kinds of things, the decision making courses--they're now much more common--didn't exist at all. So, if you're someone of my age and you're in your forties or fifties, chances are you didn't have any access to it in school. So, there's more of it now, but certainly not enough of it, in my opinion. So, yeah, I think you have to supplement a lot of what your curriculum has been in order to become a more well-rounded individual.

Matt:	So, if you're somebody that's listening to this podcast, what are some easy steps or maybe some first steps they could take on the path towards starting to build this toolkit or starting to maybe understand human decision making more effectively, or make better decisions?

Michael:	Yeah, Matt, and I think that you know my answer, which is probably to start, whether you can read or certainly listen to audiobooks or something, but there are a handful of books that'll probably get you off and running. One book that I always loved, and I'm sure you're fan of as well, is Bob Cialdini's book Influence: The Psychology of Persuasion. It's an easy book to read. It's got six big models about how you could influence people and their decision making, or you can also see or reflect how those things influence you and your decision making. So, that's a great starting point. Another great one, of course, is Danny Kahneman's book, Thinking, Fast and Slow. It's probably a little bit more of a challenge, but so rich in terms of its content. So, that would be another thing I would say, is people reading that and just really, I mean, the degree to which you're willing to wade into the, for example, the psychology literature is fantastic. So, that's one set of things. The second set of things is if you have an appetite to do so, it's really great to try to hang out with people who are different than you. And that might be if you're a finance person, hang out with artists or people who are into literature. You know, there was a very famous essay many years ago about the two cultures, sort of the literary culture and the scientific culture, and the argument was these cultures really didn't meld with one another, and I think those people who really tried to reach out, to understand different points of view, have diverse thoughts, I think that really just forces you into being actively open-minded about the world and, I think, really gives you a leg up in a lot of circumstances. So, I don't know if that's a gentle entry in, but probably the first thing I would say is to start to read some of these things and think about, be introspective about how they're influencing you or how your decision making processes work, and then just make an effort to reach out to people who are different. You know, is Brian Grazer the guy who wrote a book on creativity recently? Do you know that book?

Matt:	I do not.

Michael:	The Hollywood guy. So, the Hollywood guy.

Matt:	We'll put it in the show notes.

Michael:	[Laughs] Yeah, exactly. So, we'll track down the exact book, but I think it's just called Creativity. And he had this sort of extraordinary story, which I absolutely love, and he said he just made a point, is when he read an article... He's a pretty famous producer now, but he'd read an article about somebody, he would just say, "I want to meet that person," and he would call them up out of nowhere and say, "I'd love to have a cup of coffee with you. Can we make that happen?" And he'd reach out to people where it'd take six months, 12 months, 18 months to schedule something, but he was just reaching, going all over the place. One week he'd be talking to a lead athlete. Next week he'd be talking to an astronaut. Then he'd be talking to a Navy SEAL. Then he'd talk to a police commissioner. I mean, this incredible, fascinating array of people, and he just made it part of what he was about, and I think he argues that really helped stoke his own personal creativity and mindset.

Matt:	That's fascinating. And that makes me think of two kind of quick notes for people who are listening. One is we actually did a whole... We did a six part series called Weapons of Influence where we basically... On the podcast, where we basically broke down each of the major pillars of influence and kind of dove deep into the research studies and the findings behind it. So, for people who want to kind of take that first step that Michael's recommending, that's a great way to get started. And the other thing, briefly, we also did a really cool episode recently on creativity, so, to kind of drill into some of this neuroscience behind that and how to spark your own creativity, for people who are listening.

Michael:	Super cool. Super cool.

Matt:	So, one of the things you touched on briefly was the idea of being numerate, and another way that I think Peter Bevelin called that in the book Seeking Wisdom is the physics and mathematics of misjudgment, and I know Munger did an amazing job in his speech about human misjudgment, kind of nailing all the different psychological factors. But two of the things I think that you've done an incredible job of really studying and explaining, Michael, are the concept of base rates and the concept of reversion to the mean, and I'd love to drill into talking about both of those, and I know there's a lot to unpack in each one of those, but in a way that we could kind of explain them to a layperson that's never heard of either of those concepts why they're important and what they are.

Michael:	Yeah. So, great. Great question. The base rate, it really comes from the work of Kahneman and Tversky, so Danny Kahneman, Amos Tversky. They were examining how people... Well, actually, the ideas precede that by many decades, but they sort of codified this to some degree. And the idea is that there are two ways of making forecasts of the world, what they called the inside versus the outside view. So, the inside view--and Matt, this is how you and I typically operate, right. You know, if I give you a problem, you give me a problem, our classic way to solve it is to gather a bunch of information, right, combine it with our own inputs, and then project into the future, right. So, if you go to a college student and you say, "Hey, when will you be done with your term paper?" they sort of think about what their calendar looks like, how hard the paper is, and so forth, and they make some sort of projection. So, that's the natural way to think. The outside view, by contrast, we're calling the base rates, says, you know what? I'm going to think about my problem as an instance of a larger reference class. Basically, in plain words, I'm going to ask the question, what happened when other people were in this situation? Right, and it's a very unnatural way to think for two reasons. Number one is you have to leave aside your own information, this cherished information that you have, and second is you have to find and ultimately appeal to this base rate. So, for example, in our term paper example, instead of saying, "Hey, when will you finish your term paper?" and the student thinking about their own schedule and the difficulty of the paper, you basically ask a question of all the students who had a term paper due a certain day, when did they actually complete it? It's a very different question, and it turns out that what we see in the decision making literature is the introduction of base rates actually massively sharpens the quality of forecasts. So, we've applied it very specifically, for example, in the world of business to things like sales growth rates for companies. So, you might say, you know, hey, here's a company that has 10 billion dollars in sales. What's the sales growth rate going to be for the next three years or five years or ten years? So, you could model it. Again, bottom up. Sort of say, "Here's what they do. Here's how many new units they'll sell," and so forth. Or you can ask the question of companies of that same size over time, "What's the distribution of growth rate?" So, they're not mutually exclusive. Both of them go together, but that's the idea of base rates. And so, once you start to think about base rates, you start to see them, they're basically everywhere. But certainly realms like sports, realms like business, we have really good data on base rates and I think they can be really, really helpful. Reversion to the mean is another concept that is really important, and I think very, actually, quite tricky. So, reversion to the mean formally says that outcomes that are far from average will be followed by outcomes with an expected value closer to the average. So, the classic example of that is heights of people, right. Heights of fathers and sons, for example, specifically. So, what we know is that very tall fathers have tall sons, but the heights of the sons are closer to the average of all the sons. And likewise, short fathers have short sons, but again, the heights of the sons are closer to the average. So, there's sort of a squishing back toward the middle. So, that's an effect that happens, right, and it's just a statistical artifact. By the way, on the height thing, for instance, that sort of has to be true, if you think about it for a second, because otherwise there'd be people walking around who are 20 feet tall and two feet tall. That doesn't happen, right. So, here's an interesting way to think about the reversion to the mean, how powerful the force will be. So, if the correlation from one event to the next event is basically zero, then you should expect very, very rapid reversion to the mean. Let me give you one really concrete example from the markets. It turns out if you look at the standard [INAUDIBLE 00:19:52]500s. They're the most popular index in the U.S., and you look at the results from year to year. So, you take on X axis t=0, like what it did last year, and then on the Y axis, t plus one, what it does in the subsequent year, and you plot that going back to the 1920s. The correlation is basically zero. In other words, what happened last year tells you absolutely nothing about what's going to happen the subsequent year. So, as a result, the best estimate of what's going to happen next is some measure of the average, right. Reversion to the mean. And so, your best estimate for the market is basically the historical average. On the other extreme, if the correlation is perfect, very high, you expect no reversion to the mean at all. So, Matt, if you and I ran a sprint against Usain Bolt, he's going to win, right. And when we run again, he's going to win again. It's going to be perfectly correlated that he's going to win every single time, and there is no reversion to the mean. So, how we finished in prior races or how he finished in prior races doesn't really make a difference. He's going to win every single time. So, this idea of reversion to the mean, you can think about how correlated outcomes are over time. That also gives you an idea of how rapidly that idea of reversion to the mean takes effect. So, super powerful, super important, and often really overlooked. Even people who do this for a living--for example, sports executives--somehow get tripped up and don't fully take into account reversion to the mean.

Matt:	And one of the things that I really struggled with, and I've read your chapters, and a bunch of Kahneman's stuff over and over again. I've read your chapters in The Success Equation five or six times, trying to really drill that concept into my head as the relationship between correlation and reversion to the mean. And also, you know, kind of going back to the simplest example is flipping a coin, and when people think about reversion to the mean, sometimes if a coin comes up heads four times in a row, people think, oh, I'm due a tails, right. But that's actually a completely incorrect way to think about and really understand how reversion to the mean actually functions.

Michael:	Yeah, exactly, and I think that... Look, one of the reasons it's so challenging is because we have intuitions about how all this stuff works, but if we want to be slightly more formal, exactly what you said. So, when correlations are low, reversion to the mean is very, very powerful, and that's my stock market example. When correlation is very high, reversion to the mean is not a powerful force. In other words, what had happened before is, for the most part, a pretty good estimate of what's going to happen next. And yeah, no. By the way, that little heuristic, that's one of our tools in our toolbox. That's a mental model. It's an incredibly powerful mental model and, remarkably, very few people get it. The other thing, you know, Kahneman talks about this, but one of the other reasons that reversion to the mean is difficult is because our minds are wired to seek causality. If I give you an effect, some sort of an outcome, your mind is going to try to come up with a cause to explain it. And reversion to the mean is a concept that really has no cause and effect. And I'll give you an example that I always find to be fascinating. It turns out I mentioned before that the heights of fathers and sons, tall fathers have tall sons, but the heights are closer to the average of all the sons. But it turns out, and this is somewhat counter-intuitive, that if you plot the heights of the sons, it turns out very tall sons have tall fathers, but the heights of the fathers are closer to the average of all the fathers. And we know that sons don't cause father's, right. So, it gives you pause. You sort of say... So, in other words, the reversion to the mean has no arrow of time, and the notion of causality really doesn't apply. It's just it applies any time you have two series that are not perfectly correlated with one another. And by the way, the heights of fathers and sons, the correlation's almost exactly .5. So, in other words, if you're six inches above average, the best estimate of your son's height would be three inches above average, half the distance between your height and the height of everybody else. So interesting, right. So, I applaud you for going back to the concept. I did the same thing many, many times, going back to it, and there are some other people besides Kahneman who talked about it effectively. I just think it's a really hard concept to get your head wrapped around and it also is worthy of a lot of study.

Matt:	I think the trickiest part is the very counter-intuitive notion that there's no cause and effect. That's what people think that it means, that there's some kind of cause that it's going to happen, cause something to happen, when in reality there's no arrow of time, there's no causality at all.

Michael:	Yeah. So, I would say, Matt, to be a little bit more careful about it, it doesn't mean the causality isn't part of it. It just doesn't require causality, right.

Matt:	Yeah, that's definitely a better way to say it.

Michael:	So, the example I give that also... Well, I'll give you a quick story on this. I was presenting to... it was actually an academic conference, and it was on behavioral strategy. Super interesting. So, these are professors of strategy, corporate strategy, who have a behavioral bend. Super interesting topic. So, I was doing a presentation a little bit on luck and skill stuff, and I showed them a very classic, well-known picture where, if you take, say, 100--I'm just making this up--take 100 companies and you rank them in quintiles, so from top to bottom, and then you follow those cohorts, the highest returns on capital I'd say specifically to lowest returns on capital, and you follow those cohorts over time. What you'll see is the high return on capital returns go down and the low ones go up, which is exactly what reversion to the mean would indicate. So, I show that slide, and everyone's sort of, you know, amening and hi-fiving, and they all get that, right. But then I flip the data and I started with 2014 and I went backwards. So, I went from 2014 back to 2005. And again, what you do is you rank the companies on 2014 return on capital, again, highest to lowest, and then you follow those cohorts back in time. And what you find is the same picture. 

Matt:	That's wow.

Michael:	So, it's clear for example that competition... So, you say, why would returns on capital go down over time? And the classic answer in economics is competition, right. So, if you're earning very high returns, maybe I'll come in and try to take part of your business away. That makes total sense. But clearly, competition can't work backward, right. So, it's the same idea that it's flummoxing, right, because competition is such a satisfactory answer as to why returns go down, but it doesn't really explain what we're after. Only partially explains what we're after. It's a really interesting point.

Matt:	And I think that the mind invents the reasons why it's happening. Often it's just a statistical artifact.

Michael:	Yeah. And that's the work... And that's another thing I would recommend. I find this to be almost infinitely fascinating, but the work by Michael Gazzaniga, who is famous for his work on split brain patients, so these are people that have suffered typically epilepsy and, to address these severe seizures, they sever the corpus callosum, the bundle of nerves between the two hemispheres of the brain. And what that opened up for Gazzaniga, Roger Sperry before him, was this opportunity to study modularity in the brain, and what Gazzaniga found was in the left hemisphere, where our language resides for most people, that there's a module they've now dubbed the interpreter, and the primary job of the interpreter is to find causes for every effect. So, it's a sort of cause and effect closing machine. And to your point, often in life, cause and effect are clear. You throw the rock at the window and it smashes. That's cause and effect, right. But the point is that if there's randomness, there's luck, going back to your coin tossing example, there's some sort of stochastic process, your mind is just going to make up a cause. It's fabricated, right, because it wants to close the cause and effect loop, and what Gazzaniga was able to show so brilliantly and so poignantly is that, with these experiments with these split brain patients, they could really isolate where this is happening and come up with these really fascinating results. And Gazzaniga wrote a book last year and he makes this point where... quite powerful, where he sort of makes this claim where he thinks that that module, that cause and effect connection, is the thing that distinguishes humans from other species most fundamentally, which is really interesting if it's true. So, I think that's a really important thing to keep in mind, too, is that our minds are constantly closing the cause and effect loops and it's not above any of us. We all do it and we just have to be very, very mindful of the stories that we're telling ourselves, because sometimes they're true and sometimes they're not.

Matt:	And I don't know the specifics of those studies, but essentially, what they were doing, they had them open a door or something, right, and then the other hemisphere of the brain would invent a reason why they had done it or something, right?

Michael:	Yeah, totally. Exactly. So, I mean, there are lots of different examples. They would show pictures or whatever it is, but one simple example, yeah, would be something just like that. They would flash some words to the left visual field, where it goes to the right hemisphere. Something that'll say, the patient sitting down will say "Stand up." So, the left visual hemisphere sees it. Right hemisphere connects. The patient stands up. So, it's interesting. Of course, the left hemisphere, the person knows that they're standing up. They have no access to that cue, but now the researcher will say, you know, "Patient, why are you standing up?" And the research is almost humorous. It's because these people would fabricate these sort of elaborate, crazy stories. You know, my left knee is sore and I want a stretch, or something like that, right. They would fabricate something that would sort of hold the whole thing together. But obviously, it was completely contrived. So, again, you get these chuckles as you see these things that these people are saying, but the more serious and fundamental point is that we're all doing it all the time and we're just not mindful of it. So, this is just shining a spotlight on something that we're all doing all the time. So, it's a really hard thing to do, but it's discipline to say, am I fabricating a narrative here or is this a luck-laden activity or a luck-laden field? Am I simply just capturing luck here and I'm making up a story to try to make for a cohesive world?

Matt:	I think that's the critical point, is that just because... It's happening in the research, but the reality is it's happening every single day to everyone who's listened to this podcast, and both of us.

Michael:	Precisely. Absolutely.

Matt:	Well, I think that's a good segue into the idea of cognitive biases, and I know that's something you're very knowledgeable about. What are some of the most insidious or even some of the most common cognitive biases that you see people suffering from? And maybe specifically in the context of investing, or even broadly?

Michael:	Yeah. So, there are really two things that I would mention in investing. There are many more. One of them, which is extremely difficult to sidestep, is confirmation bias. This is this idea that even if you struggle to make a decision--let's say buy an investment, buy a stock or what have you--even if you sort of struggle to come to that conclusion, once you've made a decision, we all have a natural tendency to seek information that confirms out point of view and to dismiss or disavow or discount disconfirming points of view. And one of the things we've learned, you know, certainly, and I think a lot of what we've been seeing in computer science the last 25 or 30 years has been strongly reinforcing, is this idea of updating information as new information comes in. So, it's a Bayes' theorem. So, you have a prior... you have a point of view of how the world works. New information comes in and, really, if you're doing your job properly, you should be updating your view, updating your prior, given this new information. And, unfortunately, the confirmation bias is this sort of huge brick wall that prevents new information from finding its way into your mind or finding its way into your decision making. So, that's the first one that's a really big one. The second one is probably overconfidence, and this is very trivial to demonstrate if you get a group of people. People tend to be very overconfident about topics that are a little bit away from their own bailiwick. So, if I give you questions that you know a lot about, you'll do fine, but things that are just a little bit on the margin from that, you'll tend to be overconfident. And the way that tends to manifest in an investing setting, for sure, is people tend to project ranges of outcomes that are too narrow. In other words, they think they understand the future better than they actually do, and they fail to consider possibilities, whether they're really good possibilities or really bad possibilities, and that's, I think, the more pernicious component of overconfidence. So, those are two that come to mind, but boy, you know, things like... We could go on and on. Loss aversion. So, we suffer losses more than we enjoy comparable-sized gains. That's a really big one that looms large in a lot of our decisions. So, there's a long list of them, but those two probably, confirmation bias and overconfidence, are probably the one-two that I would list first.

Matt:	And what do you think are some ways that people can combat each of those?

Michael:	So, confirmation bias is just really, the key is to be as open-minded as possible. Jonathan Baron at University of Pennsylvania's got this beautiful phrase. He called it actively open-minded, and this idea of really, truly trying to be as open as you can to new information or new input. And the second thing, I think it's very few people are going to be formal about doing something like Bayes' theorem, but understanding behind Bayes' theorem, which is, you have a point of view. New information comes in. Are you revising your view, both directionally the correct amount and the magnitude of the correct amount? So, those would be some ways to try to do that. Overconfidence, the key is to just... and we can go back to our discussion a few moments ago about Bayes rates, is just to continue to compel yourself to think about alternatives, right. I'll give you one example that's a very simple one. I joke with my students at Columbia Business School, often when there are stock recommendations, you know, you see someone on CNBC or something, or they recommend a stock for purchase, they'll often say, "Well, the upside is 30% and the downside is 10%." Something like that, so it sounds like three to one. Pretty good, right? But if you think about, just statistically for a moment, the standard deviation of the stock market, right, so how fat the bell shape is of the distribution of returns. It's about 20% standard deviation in the last 85 years or so. So, that's a diverse five portfolio, of course. So, the standard deviation of an individual stock is going to be higher than that. Let me just pick 30% just to make the numbers easy. So, the average stock, let's say roughly speaking, would be up about 10%, mean return, average, with a 30 standard deviation. So, just translate that into statistics. That would say that about 68% of the time, it's going to be between up 40%, right, 10% mean plus 30 standard deviation, to down 20%. So, 10% mean minus 30%. So, 40 to -20. So, I just joked about this 10 to 30 percent upside, 10% down. You know, just one standard deviation is wider than most analysts are willing to accept, and certainly going on two standard deviations, it's vastly wider. So, imposing this discipline on yourself to understand what the underlying distributions look like and to recognize, try to think about having ranges of the future that are wide enough. And then there are other techniques, which we could talk about, and I think you probably have covered some of these in some of your prior podcasts, but things like pre-mortems. So, these sort of structured ways to get people to think about different points of view are also some nice techniques to allow to do that.

Matt:	You know, we actually use pre-mortems in our business, but it's not something that I've talked about at all on the podcast. I'd love for you to kind of extrapolate on that concept.

Michael:	Sure. I mean, so most people know about post-mortems, right? So, in other words, the patient has died or something adverse has happened to the patient and we sit around as a medical community and say, given the facts that we had at the time and our technology, what could we or should we have done differently to get to a better outcome? And we're also very familiar with scenario forecasting. So, we sit here in the present. We peer into the future and say, "Here are the possibilities we should consider as we make a decision." A pre-mortem, as you've already gathered from the name, is a very different exercise. It actually effectively launches yourself into the future and you look back to the present. So, now it's June, for example, 2017 and we look back to today, June 2016. This was developed by a social psychologist named Gary Klein, and so, just to give props to him, he's the guy that developed this. And so, we can tie together two ideas here. So, here's the classic way to do this. You say, "Let's sit down. We'll meet in our conference room." I suspect this is what you guys do in your business. And you say, "We're going to think about making a particular decision." Let's say it's an investment decision or a business decision to expand or what have you. And what we're going to imagine, then, each of us, is that this decision turned out to be a fiasco. Total disaster. We're all embarrassed about it. But now it's June 2017, so it's a year from now. So, each of us is going to write a little narrative, write a little 200-word essay about why this decision turned south. And it's very important to do it independently, and it's very important to do it from the point of view of the future looking back to today, right. So, you might say, and then you combine the different inputs, and it turns out that that exercise tends to generate substantially more alternatives or scenarios than simply standing in the present looking to the future. And by the way, is that consistent, Matt, with your own experience in your own company?

Matt:	Oh, yeah. Absolutely.

Michael:	Yeah. And so, let's tie this back to the idea of the interpreter. You might say, "Well, hey, I'm looking at scenarios. I'm thinking about this already. Why is a pre-mortem adding value?" And the answer, I believe, is by launching yourself into the future, assuming that this particular outcome has occurred, what that does is it wakes up your interpreter, right. This little module in your brain, you've now given it a fact and you're saying, "Hey, interpreter, why did this go bad?" And the interpreter's like, "I'm up to this task," and starts generating particular causes for it, right? So, in a sense, your scenario planning, standing in the present, future, the thing isn't done. So, you're not really thinking about causes in a very rich sense. And the second, the pre-mortem, you're basically recruiting your interpreter, in a sense, to help you understand scenarios more richly. Isn't that cool? So, I think that's part of the psychological reason why pre-mortems, I think, can be more effective than simply scenarios. And, you know, my experience is very consistent with yours, that organizations that have adopted, embraced pre-mortems tend to report that they have much richer discussions, much more heated debates, and ultimately probably make better decisions as a consequence of going through the exercise.

Matt:	Another related concept that we've used a number of times is something from the military called a Red Team. Have you ever heard of that?

Michael:	Yep, absolutely. So, we wrote a piece about decision making, and we talked about different things. So, we talk about Red Team, Blue Team very specifically. And, you know, you may have mentioned this before, but red team typically is attacker, blue team is defender. I think today, one of the good... it's from military strategy, of course, but today, one great example, very relevant example is cybersecurity. So, you might say, "Hey, chief technology officer, are we protected from cyber-threats?" And he or she may say yes, but you might hire a hacker to be your red team, so to challenge yourself to see where your vulnerabilities lie. And so, red team... And, by the way, this was my prior job. If we had a particular investment that wasn't working out well or a thesis that didn't seem to be unfolding, we actually would do this, that you'd assign some people to go off and develop the counter case, the devil's advocate case. You'd have people defending the point of view of the firm and we just let people sit across from each other at a conference room, and everybody else would be judge and jury and we'd let them go at it, which was great. I'll tell you the one thing that I learned. A couple of things that I would just add onto that. One is that in Red Team, Blue Team, I think it's really important to distinguish between facts and opinion, and I think a lot of our discussions in general, by the way, we tend to not distinguish as carefully as we should or could between facts and opinion. So, this is a really interesting exercise I'd recommend all the listeners to do, if they have a few minutes, is to pull out an article. For example, something you either really agree with or something you really disagree with, right. So, something that's really polarizing for you. And then take two different color highlighters, say blue and yellow, and with one color, highlight what you would deem to be facts and then another color what you would deem to be opinion, and then simply step back from the document, and whether you agree with it or disagree with it, try to have a balanced assessment as to whether you're being persuaded or not persuaded by fact or opinion. That's super cool. The second thing I'll mention, which was a new thing for me, is that Adam Grant's a great professor at University of Pennsylvania, and he wrote a book called The Originals. I don't know if you guys talked about that. There's some stuff on creativity in there, as well.

Matt:	Have not.

Michael:	But Adam talked about Red Team, Blue Team, and he actually made a point that I didn't appreciate fully until I read it. And he said, "If you're assigning red team responsibility in your organization, what you want to find is someone who really doesn't believe in the thesis." You don't want to just say, "Hey, can you be the devil's advocate?" You want someone who actually doesn't believe in the thesis, someone who really is the devil's advocate, and he just says that enriches the dialogue greatly, versus having someone that's sort of an innocent bystander, grab them by the collar and say, "Go tell us why you're against this." So, that was another little wrinkle that I just learned about, which I think could add a little value in the process. 

Matt:	And another tool that I know you're a big advocate of our checklists. Can you talk a little bit about that, how important they are and how they can improve decision making?

Michael:	Yeah, absolutely. You know, I was really inspired, and I think many others, originally, by Atul Gawande's article in The New Yorker, which ended up being a book, The Checklist Manifesto. But the protagonist of that original New Yorker article, and to a large degree, the book, is a guy named Peter Pronovost, who's a doctor at Johns Hopkins. And, actually, we had a conference a number of years ago where he invited Pronovost to come in. And the story's nothing less than astounding, where Pronovost basically... And by the way, he had lost his father to a medical error, so it was very real and very personal for him. Where Pronovost basically introduced a very simple five-step checklist for putting tubes in, intravenous tubes, and found that they could massively reduce infection rates, saved lots and lots of lies, and I think Gawande in the book argues that Pronovost may have saved more lives in the United States than any other person in the last ten years or so. So, this sort of informs us that... By the way, doctors, if you ask them what they need to do before putting a tube in, they know what to do. It's not like their lack of knowledge. It's really a lack of execution. And so, I think the point that Gawande makes in the book that I think is so powerful is that in every field where this has been studied, be it aviation, medicine, construction, a faithful... First of all, coming up with a good checklist and a faithful use of the checklist has led to better results, and this is without making the underlying users any smarter or any better trained. So, it's just hewing to the process more accurately, which is really fascinating. So, I think a lot about this in the context of investing. Now, investing is a little bit of art and a little bit of science, and I think where the checklists really do apply very effectively is in a lot of the process-oriented stuff. So, how to do certain types of calculations. Basically, it's sort of the fundamental components of investing analysis. Now, the art part comes into some other elements of interpretation, but I would just say if you have components of whatever job you do, and I think almost all of us do have components that are somewhat algorithmic, where consistency and accuracy are really, really helpful, you should be thinking about, if you're not doing it already, developing and applying checklists. Gawande's book is fantastic. Pronovost, by the way, himself, wrote a book about this topic, and maybe the last thing I'll say that came out of Pronovost's book, which I think is very important, is that he said one of the keys to checklists succeeding is actually gathering and analyzing data. In other words, being scientific about this, not sort of just a nice idea of having a checklist, and I think that was one of the keys to Pronovost's original wild success as a Johns Hopkins, was not just that they developed a proper checklist but they figured out ways to get the doctors to use it, and then they really kept track of it and gave the doctors feedback. And so, this idea of data collection and feedback is also a really, really key element to this whole thing.

Matt:	Changing directions a little bit, I'd love to dig into some of the stuff you talked about in The Success Equation, kind of untangling luck from skill and the concept of the luck-skill continuum. One of the tools or mental models that you use to describe that phenomenon was the two jars model, which I found to be extremely helpful. I'd love for you to kind of explain that a little bit.

Michael:	Sure. So, you know, and by the way, luck, skill, the whole topic of The Success Equation, it had been sort of lurking in the shadows for me for many, many years. I played sports in college and high school and a sports fan. Clearly a big deal in the world of investing, and also if you look at corporate performance, it's almost everywhere you look, this idea of luck was sort of there, but hard to pin down. And I read Fooled by Randomness by Nassim Taleb in 2001. That certainly got me thinking more about that, and I think Taleb does an incredibly effective job in that book of sort of underscoring the role of luck, but didn't really do much to help us quantify a lot of this. So, the cornerstone of the book, as you point out, is called the luck-skill continuum, and the way to think about this is that you just draw a line and on the far left you put activities that are pure luck, right. So, roulette wheels or lotteries, where really, there's no skill whatsoever. And on the far right, you might put pure skill activities. And things like maybe... a lot of things. Pure skill, but running races, or chess is probably over there. And then, just thinking about arraying activities between those two extremes. So, where does a basketball game fit on that? Where does bowling? Whatever it is, right. So, that in and of itself, the methodological approaches to trying to do that was really, really interesting. But, as I got into this, as you point out, I was trying to think about conceptualized the so-called two jar model. So, the idea is that your outcome for whatever activity is going to be the result of drawing a number from a jar filled with numbers for skill, and then drawing a number from a jar that's got luck. Right, so you're going to pull two numbers out, add them together, and that'll be your outcome. Now, if you're on the pure luck side of the continuum, for example, you'll have a luck distribution. You can envision it as a bell-shaped distribution, is fine. And your skill jar is filled with zeroes, right. So, only luck will make a different. If it's on the pure skill side, you know, you have a skill distribution and you're drawing zeroes from luck, so only skill matters, but almost everything in life is sort of these two rich distributions colliding with one another. And the question is, how much is each contributing? So, I just think that's... And by the way, one of the really nice things about the two jar model is it allows us to understand to some degree things like reversion to the mean, which we spoke about before. It allows us to appreciate the fact that great outliers--for example, streaks in sports of consecutive hits in a baseball game or consecutive shots made by a basketball player--are always, and almost by definition, going to combine great skill and great luck. Because, if you think about it for a second, that has to be true, right. Not all skillful players have the streaks in sports, but all the streaks are held by skillful players, right, because skill is the prerequisite and luck comes on top. So, to me, it's just a very, very vibrant way to think about a lot of things in life, and the key point of The Success Equation is not just thinking about these topics, but hopefully providing some people with some ways to think about the concrete, how they have to deal with the world differently concretely, as a consequence of understanding the role of luck.

Matt:	And one of the things that I'm really fascinated with is the concept of deliberate practice, and you touch on that and how it relates to and applies more specifically in skill-dominated systems. But I'm curious, you know, how would you think about applying something like deliberate practice, or maybe the core lessons behind deliberate practice, to a field like investing or business or entrepreneurship?

Michael:	Yeah. Super interesting. And so, deliberate... I don't know if you've... There's a brand new book by Anders Eriksson called Peak, on this...

Matt:	I have not heard of it. I'll have to read that.

Michael:	Okay, yeah. Check it out. So, Anders Eriksson just wrote a book called Peak, just as it sounds, which I just read a couple of weeks ago. So, that is his... you know, talking about deliberate practice, just to reiterate for all the listeners, deliberate practice is this idea of practicing that is at the cusp of your ability, so a little bit at or right beyond your ability, often where you have a teacher or coach, someone who can give you instruction, and you're getting quality feedback. So, you're proving at the cusp of your skill level. So, as he points out, a lot of us practice things, or we do things that's like we practice. We do things over and over, or even we practice but we don't really satisfy the requirements of deliberate practice. It's usually not beyond our or at the edge of our capability. We often don't have coaches. We often don't get the quality feedback. And, as Eriksson expresses it, deliberate practice is not a whole lot of fun, right. It's actually very tiring, because you're constantly pressing yourself. So, I wrote a piece about this actual topic of deliberate practice and 10,000 hours back in 2004. It came before Gladwell's book and so forth, and I've struggled since that moment of writing that piece about what deliberate practice means. What is this idea of working beyond our boundaries and getting feedback and so forth? So, I don't know that there's a perfectly good example of that, so maybe I can make two points. One is what I argued in The Success Equation, is skill improvement or skill development through deliberate practice is absolutely valid in fields where your output is an accurate reflection of your skill. So, what kinds of things would that be true? It would be, you know, music, if you're a musician. Athletics, it would be true. Chess playing, it would be true. So, there's certain fields where the output is an accurate indicator. There's very little luck that's filtering out the outcomes, right. So, that's where deliberate practice really is good. As you slide over to the luck side of the continuum, what happens is the connection between your skill and the outcome is colored greatly by luck. So, for the example I gave Matt that's a trivial one is, if you're a blackjack player and you enjoy playing blackjack and you go to Atlantic City, you may play properly with standard strategy and lose badly for a few hands, or you may play very foolishly and win for a few hands, right? So, this connection between your skill and the outcome are broken. And when that's the case, what I argue is you should focus almost exclusively on process. And process, it's got elements of deliberate practice, but process is going to have three components, as I would argue for it. One is an analytical component. That is both trying to find situations where you have an advantage and also how do you bet, given your advantage. I'm going to call the second component behavioral, and this covers a lot of what we've been talking about today, but are you aware of managing and mitigating the behavioral biases that we all fall prey to? And the third I'm going to call organizational, which is we all work for companies or parts of organizations or parts of teams. None of them are perfect. Agency cost can be a very big deal. What are we all doing collectively to minimize those organizational drags, right. So, to me, it becomes very process-oriented, and I think if you look at the elite performers, whether it is in sports betting or even sports team management or investing, you get a very common thread, that those folks are almost always and almost exclusively focused on process in the faith, the full faith that a good process leads to good outcomes over time.

Matt:	I think that's great advice and that's something that I've struggled with a lot, is kind of how to reconcile that or how to deal with the challenge of getting whether it's accurate feedback or whatever else it might be in systems where there's a very fuzzy relationship between skill and outcome.

Michael:	Exactly.

Matt:	So, you've touched on this a little bit, but if you had to kind of distill it, what would one piece of homework be that you would give to the listeners of this episode?

Michael:	Read. [Laughs] Read is probably the main thing, is to... And I actually say that I think working with people like you or following people like you is a great place to help curate some of this stuff, but I think it probably helps to have some thoughtful people. Shane Parrish, you mentioned, was fantastic.

Matt:	He's great.

Michael:	And Shane's another guy who can help you curate that stuff. But I think starting to just...making sure that you commit a substantial percent of your day to learning, continual learning, and, again, being diverse in what you're reading and thinking about; and forcing yourself, compelling yourself to have the stance of being actively open-minded, so making sure that you're considering different points of view, you're exposing yourself to different types of people. So, that maybe not. That's maybe a tall order, but, to me, that would be the first thing I would say. And, you know, I do find a lot of people struggle to find time--or at least they perceive they struggle to find time--to read, and the main thing I would just say is that life is about tradeoffs. So, the question is: Are there things that you're doing today in your moment to moment that you could trade off, that you could do less of, that would allow you to do more reading? Because I do think the return on investment is really, really... The return on time and the return on investment is really high for reading.

Matt:	You know, there's a really funny study that Zig Ziglar talks about in some of his old speeches. And I think the study was in the '50s or '60s, but they basically looked at...they looked at a factory and they started with everybody from the factory workers up to the line managers, up to the office managers, up to the president, and they looked at how many hours a week they each spent watching TV. And there was sort of a relationship where, you know, it's like the factory worker spent 20 hours a week watching TV, all the way up to where the president spent half an hour a week watching TV or something. So, that's a great point, is that there's always a way to find time to read if you make it a priority.

Michael:	That's right. Exactly. And I love that. And, again, it's maybe not everybody's cup of tea, but for people who are probably listening to this, it is going to be something that they'll find interesting and I would just jump in. And I would also encourage... Especially for young people it's a great thing to get going on. When you can work it into your habits when you're young, it's just a huge leg up through the years, for sure.

Matt:	I mean, obviously you're a very active reader. Do you have any kind of methodology that you use to keep track of all of your kind of book notes or to keep...to sort of categorize everything that you've read and all the knowledge that you've accumulated?

Michael:	[Laughs] So, Matt, I wish I had a good answer to this question. The answer is no, not so much. But I guess I...

Matt:	I struggle with that, too. That's why I'm asking -- for myself, in this case.

Michael:	[Laughs] But I benefit from a couple things, which are sort of offshoots of the way my career works. So, I have the fortune of being able to write a fair bit for my job and not just book stuff or just day-to-day stuff, and so that allows me to weave in a lot of the stuff that I read and implement it, and I think teaching and writing are two really powerful mechanisms to help consolidate thinking and consolidate ideas. So, that helps a lot. And, beyond that, it's just... Now, a lot of it is cumulative, right? So, it's just trying to make sure that whatever I'm reading clicks into place. I mentioned this Anders Ericsson book and, you know, I've been reading about... I think I have probably a half dozen books or more on expertise. Many of them were edited by Anders Ericsson. So, that was just adding onto something that I had a little bit of a foundation in. So, yeah, there's not much method to my madness, but I'm not sure that... Yeah, I'm not sure... I think just jumping in is probably the first and foremost thing to do.

Matt:	Where can people find you and some of your works online?

Michael:	So, probably the easiest thing to do is go to michaelmauboussin.com. So, that's a website that mostly highlights the books that you mentioned at the outset. The Success Equation, our skill lookbook, also has its own website, which is success-equation.com. Success-equation.com is also kind of fun because there are some interesting little simulations that you can play around with, including the two jar model you talked about. There's also some fun stuff on the Colonel Blotto game, which is a game theory model, and a little mind reader algorithm. So, there are some fun things to do there as well. And then it's harder... My professional writing is difficult to get access to through formal channels, but if you've got some fingers in Google, you can tend to find a lot of the stuff on there. So, I would just google it. [Laughs]

Matt:	And I think valuewalk.com has a great list of a lot of your...a lot of your pieces.

Michael:	Yeah. So, ValueWalk's a good example. Yeah, exactly. And Hurricane Capital's done a great job. So, a couple of these sites, those guys do a nice job of recapturing a lot of the stuff we do.

Matt:	Well, Michael, thank you so much for being on The Science of Success. It's been great to have you and it's been an enlightening conversation.

Michael:	Matt, it's been my pleasure the whole time, so thank you for having me.