Books I read in 2024

I read the following books in 2024, in addition to others. As in previous years, I read books around the general themes of business and economics. This year, I’m providing a recommendation scale for each book, and summaries immediately below. Any errors are my own.

• Saving Capitalism by Robert Reich (Recommended)
• The Happiness Hack by Ellen Leanse (Mildly Recommended)
• What the CEO Wants You to Know by Ram Charan (Mildly Recommended)
• Who Gets In and Why: A Year Inside College Admissions by Jeffrey Selingo (Recommended)
• The Mom Test by Rob Fitzpatrick (Mildly Recommended)
• The Effective Executive by Peter Drucker (Highly Recommended)
• The Black Swan by Nassim Nicholas Taleb (Highly Recommended)
• Poor Charlie’s Almanack by Charlie Munger (Highly Recommended)

Saving Capitalism

Robert Reich was the Secretary of Labor under Bill Clinton and is a professor at UC Berkeley. He describes in this book the ways in which capitalism, as practiced in the US today, is strongly tilted toward the already rich. The second part of the book is about potential ways in which things can be turned around.

I started the book curious but generally believing that “free markets” work; the book talks about this misconception in the first few pages, and the author goes into great detail about why “free markets” are not really free. I found the book compassionate and engrossing, and it softened my perspective to consider that not everyone can thrive in an economy where it’s just individuals negotiating with powerful large corporations. The second part of the book takes a tangent to talk about what happens when robots take over most jobs, which I found incongruous, but overall this is an deeply researched and well written book. I recommend it.

The book was written in 2015; since then, the fact that the economy “does not work” for many people has become much more of a talking point, and the author was prescient in pointing out that there would be an upsurge of anger if things continued the way they were. However, his predictions for what citizens would do in response were inaccurate; some of the political events that have occurred since then might strike a reader today as ironic.

Summary

The debate of the free market versus government intervention is meaningless; the market is organized through rules made and enforced by governments. Government intervention is necessary to create a market in the first place; markets do not exist in nature. Those who argue for less government are really arguing for different rules by which the market should be organized.

In the US, the rich have gained increasing political power over how the rules of the market are set; this has led to stagnating wages for the majority of Americans and disproportionate benefits accruing to the already rich, in turn leading to increasing inequality. The author calls this a “pre-distribution” of wealth upwards, within the rules of the market. Discussions about reducing inequality typically focus on redistribution of wealth from the rich to the poor, but they typically never discuss the “pre-distribution” of wealth because it happens behind the scenes.

There are five “building blocks” of capitalism: property (what can be owned); monopoly (how much market power is permissible); contract (what can be bought and sold, and on what terms); bankruptcy (what happens when purchasers can’t pay); and enforcement (how to make sure the rules are followed). The government needs to make decisions about each building block; in recent years, the rules have increasingly been changed to favor the rich. These rule changes do not happen through direct bribes to public officials, but rather through campaign contributions and the promise of lucrative private sector jobs to public officials after their term in government.

• The most important form of property in the modern age is intellectual property. The government must balance giving individuals the incentive to create new inventions with the public interest in making those inventions widely available. In the US, large companies’ rights over IP have been repeatedly extended (for example, on Mickey Mouse); drug companies often make only minor changes to their drugs to keep extending their patents on them, leading to high drug prices.
• Large companies such as Comcast, Monsanto and Apple spend large amounts of money each year on maintaining their market dominance (monopoly). The typical approach is to acquire many patents and vigorously defend them. In the late 1800s and early 1900s, antitrust enforcement explicitly aimed to reduce concentration of political influence in individual companies, but today it focuses only on harm to consumers, making the antitrust laws less potent.
• Contracts are the way in which buyers and sellers agree on terms. Large companies can create one-sided agreements (such as terms of service or employment agreements) that the other party has no choice but to sign, because of relative bargaining power.
• Bankruptcy laws have been changed so that employees are low on the priority order when a company goes into bankruptcy, allowing companies to renege on pension agreements or labor contracts by filing for bankruptcy. In contrast, individuals cannot use bankruptcy to wipe out mortgage or student loan debt.
• Decisions about enforcement have to be made continuously, including about what not to enforce; large companies are able to get laws passed that have exemptions that apply to them, or reduce funding for enforcement agencies so that they are effectively toothless.

There is a pervasive “meritocratic myth” in the US that people generally earn what they are worth, but this ignores that the rules are tilted in favor of the rich. For example, because boards of directors are often appointed by CEOs and are CEOs themselves, the ratio of CEO pay to that of an average worker has soared from 20:1 in 1965 to 300:1 in 2015 (as of the book’s writing; in 2023, the ratio of CEO to average worker pay for S&P 500 companies was 268:1). The rise of two additional groups of people, the working poor (people who work full-time but are poor) and the non-working rich are also counter-indicators to the fact that people earn what they are “worth”.

Though productivity has increased, the incomes of the middle class have not; while productivity increased 241% from 1948–2012, average incomes only increased 108%, with a flattening since the mid-1970s. (There have been some gains since the book was written.) This has happened not just due to globalization and technology, but also because companies now see shareholders as the only constituency to please, and because of the decline of unions. Before the 1980s, companies considered their stakeholders to include employees, shareholders, customers, and the broader society.

There needs to be countervailing power for the middle class and poor to balance the power of large corporations, Wall Street and the rich. Without this countervailing power, the fabric of society will unravel as people distrust the system, and will threaten capitalism.

Countervailing power existed in the US through small organizations such as chambers of commerce and citizens’ groups that collectively influenced political parties; starting in the 1980s, however, membership in these organizations declined, reducing this countervailing power. In addition, wealthy individuals and large companies constitute a high and increasing percentage of political contributions, leading to them gaining increasing political influence. Supreme Court decisions in the 2010s affirmed that corporations are people under the First Amendment, and entitled to participate in elections through essentially unlimited financial contributions.

Inequality will continue to increase as technology advances mean that fewer people are needed in general in the economy. The author proposes a basic minimum income to allow all adults to be self-sufficient; this will prevent the creation of a small class of very rich people who “own the robots”, and a large poor underclass who cannot find well paying jobs.

The Happiness Hack

This is a short, visual-filled book about understanding your brain and making yourself happy. I found it mildly informative but with no really new ideas. It’s a quick read and might be interesting if you have not read about meditation or cognition before.

Summary

Understanding more about your brain can help you program your mind for happiness. The brain consists of three major areas: the hindbrain, which controls basic body functions; the limbic system, which stores memories and creates emotions; and the cortex, which processes information. Of this, the prefrontal cortex (PFC) does the most intentional processing (the “System 2” of Daniel Kahneman’s Thinking Fast and Slow), while the other parts of the cortex do fast, intuitive processing (“System 1”).

Mindfulness involves intentionally using the PFC to become aware of your thoughts and direct your thinking; the PFC is much more energy-hungry than other parts of the brain, so this can be tiring. Buddhism calls the force that allows us to watch our own thoughts “The Watcher”; activating the Watcher is tiring and can’t always be done, but it is useful to develop the skill of being able to turn it on when needed.

Various chemicals in our brain modulate how we feel: happiness modulators like dopamine create feelings of enjoyment or thrill, while serotonin is triggered by fulfillment or life satisfaction; stress modulators like endorphins are triggered by exercise, while cortisol is triggered by stress; and bonding modulators like oxytocin (in women) and vasopressin (in men) are triggered by caring and affection.

There are two types of happiness: hedonic happiness, caused by indulgence and temporary pleasures, which cause your brain to release dopamine; and eudaimonic happiness, caused by long-term satisfaction and growth, which cause the release of serotonin. Much of the modern world is targeted to achieve hedonic happiness, but eudaimonic happiness is deeper and longer-lasting.

People need real life social connection. Smiling at people activates mirror neurons in both the smiler and the “smilee” that trigger the release of dopamine, serotonin and endorphins, reducing stress and elevating mood. Similar benefits come from making friendly eye contact with people. A 75-year study of 724 Harvard graduates found that those who looked back on their lives with the most satisfaction were also the most connected to people they loved.

Mastering your mind requires focus, setting aside time for deep work, and minimizing distractions. To create a new habit, follow the “LEARN” approach: label what you want your brain to do; encourage your brain by imagining a positive result of the new habit; associate the new habit with something that you already do (for example, writing your daily priorities while you make coffee); repeat new information across different modes (writing, listening); reinforce what you learnt at nighttime, before you fall asleep.

What the CEO wants you to know

Ram Charan is a well known management guru who was prominent in the 1990s and 2000s, though his fame seems to have dropped off somewhat since then (perhaps just due to his age). This book aims to help readers — presumably junior to midlevel employees — understand how their companies really work by looking at various underlying metrics.

I found the core ideas in the book useful, but thought the book felt padded even though it is fairly slim. This is the sort of book that could be a blog post. If you are able to gather the metrics for your company that this book talks about, you probably do get a better sense of the overall health of the business. It is questionable to me whether the target audience of the book could get access to these numbers for private (and even for many public) companies.

Summary

All businesses have a common set of fundamentals, which are common between the largest and most successful businesses and small businesses run by street vendors. These are the universal laws of business. Everyone should understand these fundamentals to develop their business acumen and widen their knowledge outside of their area of functional competence.

The fundamentals of any business are:

• Cash generation: The difference between the cash flowing into the business and the cash flowing out of the business.
• Net profit margin: The money the company makes after paying all expenses, including interest and taxes, expressed as a percentage of sales.
• Velocity of assets: Sales divided by the total assets of the company. Typically, a higher velocity means that the company is able to sell goods more quickly and make better use of its assets.
• Return on assets: Profit margin multiplied by velocity of assets (R = M x V). Generally, the return on assets has to be greater than the cost of borrowing money (from banks and shareholders) — the cost of capital.
• Growth: Whether sales are growing year over year. Growth must be profitable and sustainable.

In addition to making money, companies must create wealth for their shareholders. Money making and wealth creation are linked through the “P-E ratio” — the price (P) of one share of stock, divided by the earnings (E), or profit, that the company made per share. P-E ratios vary by industry and company; generally, higher P-E ratios indicate that investors are more optimistic about the company’s prospects.

Who Gets In and Why: A Year Inside College Admissions

This is a well researched look inside the college admissions process in the US— especially interesting to me with one high schooler and one middle schooler in the house. It follows parallel narrative tracks: the author follows three high school seniors as they make their way through the application process, in addition to shadowing admissions officers at three universities to provide a less-known perspective from the other side. The book is engaging and an easy read, but filled with useful information. I found it a worthwhile investment of my time, and it’s likely valuable to any parents with kids around high school age.

Summary

The author embedded himself with the admissions offices at three colleges during the application season in 2018: the University of Washington, a large public university; Davidson College, a small liberal arts university; and Emory University, a major private research university. The book is about his observations from the experience.

Fall is recruitment season for colleges: colleges spend $10 billion a year on marketing to students. Colleges include personalized links in each direct mailer so that they can track when specific students visit their website and thereby gauge their interest. Gauging interest is important because colleges want to maximize their “yield”, which is the percentage of admitted students who accept. This helps colleges fill their classes with less guessing, and a higher yield makes them look more prestigious.

The author divides colleges into “sellers” and “buyers”: “sellers” are brand name colleges that have low acceptance rates; “buyers” lack brand recognition and have to work hard to recruit enough students to fill their classes.

Financial aid can either be need-based or so-called “merit aid”. One sign of whether a college is a buyer or a seller is how much of their aid budget they spend on merit aid: for sellers, the figure is 7%, compared with 33% for buyers (that is, for a buyer, 33% of their financial aid budget goes to merit aid). The Common Data Set shows both the yield and the percentage of financial aid that a college spends on merit-based aid. Sellers have a higher yield and a lower percentage of merit-based aid; for students, this means that they should apply to a mix of buyers and sellers; applying to buyers is a good way to make college affordable if they don’t qualify for need-based aid (based on family income) at seller colleges.

The author also divides high school students into “drivers” and “passengers”: drivers start their college research process early, while passengers are more passive and wait for information to be given to them, usually late in the application cycle. How privileged a student’s background is is a strong indicator of whether they will be a driver or a passenger.

Most colleges use an approach called “holistic admissions”, which takes into account the entirety of an applicant’s experience. To present well in the holistic admissions process, students should avoid cutting and pasting parts of a master document into different colleges’ applications, which reduces their application’s cohesiveness.

Colleges rate applicants along different criteria (academic rigor, recommendations, intellectual curiosity, extracurriculars, etc), giving them (usually) a numeric score in each category. They also usually review applicants from a group of schools from the same region at the same time, to allow a fairer comparison between students with similar backgrounds and access to the same opportunities. College admissions officers often define “merit” as the ability to keep persevering at difficult tasks, refusing to give up.

Most applications are read over the winter by part-time readers, often graduate students; only a subset are reviewed by full-time admissions officers. Many colleges use a pair reading approach, called Committee-Based Evaluation, to read applications. Most applications are read in eight minutes or less; applications received during Early Decision (ED) may receive a more leisurely reading.

Early Decision applications require students to make a binding application to a single university: if they are accepted, they promise to attend the college. The ED deadline is November 1 and decisions are available by mid-December. Admission rates are up to three times higher for ED applicants as for regular applicants. Early Action (EA) is another way to get an admission decision early, again by December or January, but without a binding commitment to attend. Some selective colleges like Yale restrict EA applicants from also applying EA to other private colleges. Colleges like ED because it increases their yield, and in recent years are filling more and more of their incoming class through ED applicants. A study of fourteen selective colleges found that applying ED increases your chances of admission by 28%, equivalent to scoring 100 additional points on the SAT. It is advisable for students to have backup applications to other schools ready to submit by mid-December, in case their ED application is denied.

The most important factors in the initial “rough” sort of applications during reading season are grades, depth and breadth of courses, and SAT/ACT scores. Taking the SAT test multiple times has been shown to improve scores by 50 points; 80% of colleges use the SAT “superscore”, which combines the highest verbal and math scores from different test dates.

After the pandemic, colleges broadly have three policies around standardized testing (SAT and ACT) scores: testing required, the legacy policy still in place at some colleges, like MIT; “test-blind”, where such scores are not considered at all during the admissions process (for example, the University of California); and “test-optional”, which is the policy of most colleges. The author recommends submitting a score at test-optional colleges if a student’s score is within the middle 50% or top 25% of test scores at the college they are applying to, but also recommends comparing with others from their high school who are applying to the same college (since colleges typically compare students from the same high school). He also recommends taking the test at least twice, since repeated attempts improve scores.

The Common App is a single application accepted by nearly 900 colleges across the US.

In late February and early March, colleges perform the exercise of “shaping a class”, where they take another look at students close to the line and make final decisions about who to admit. Students can be denied, accepted or put on the waitlist at this stage; at most selective colleges, there is a low chance that someone on the waitlist will eventually be accepted. Decisions are typically released to students in mid to late March; students then have till May 1 to accept or decline. In April, colleges host open houses for admitted students hoping to increase their yield.

Financial need is a factor that can come into play when shaping a class, even at so-called “need-blind” colleges, which do not use financial need when making admission decisions; at “need-aware” colleges, it is an even stronger factor since the college has a budget for the total amount of financial aid it can give out. Colleges also know that students with large financial aid packages are more likely to attend. Most colleges use sophisticated statistical models to determine exactly how much aid they should give out to maximize their yield while staying within their budget. Financial aid letters are released to admitted students after the admission decisions are communicated, so students only have about a month before the May 1 deadline to understand their financial options and choose a college. Because college is getting increasingly expensive, fewer families are paying the full cost: less than 28% today, compared with 39% of students who paid the entire cost in 2006–2007.

While many people believe that where you go to college matters, studies have shown that students with comparable scores who went to colleges with different selectivity have similar outcomes years after graduation: that is, two students with similar SAT scores who were both accepted by a selective college, but where one eventually went to a less selective college, were earning the same amount several years after graduation. What seems to matter more than the brand of the college, and even the major, is specific skills and experiences that are valuable; once in college, students should focus on getting internships or research opportunities that allow them to develop those skills. Fewer than a third of college graduates work in jobs related to their majors.

The author offers the following advice for students when picking colleges: (1) find those that are a good fit academically — they will pull you along without washing you out; (2) find colleges where you will find professors who will take an interest in you, and you will find your “tribe” of like-minded students; (3) search for colleges that provide internships or hands-on experience; (4) calculate the return on your investment, and don’t be blinded by just the prestige of a college brand.

The Mom Test

This is a short book about validating startup ideas through customer conversations — sometimes called “customer discovery” in the Lean Startup philosophy popularized by Eric Ries and Steve Blank. I found the tips in the book solid, if sometimes unsurprising. I think in general more startups (and even larger companies) can do what the author talks about, which is to validate ideas by engaging deeply with customers and understanding their world. This is a good refresher on the basic principles of customer development conversations if you are founding, or work in, a startup.

Summary

“The Mom Test” is a set of rules for conducting customer conversations that you can use to determine if your business idea is a good one. It’s called “The Mom Test” because using these rules can help you get good data about your business idea from even your mom, who is otherwise predisposed to lie to you to spare your feelings.

“The Mom Test” consists of the following rules:

• Talk about their life instead of your idea
• Ask about specifics in the past instead of generalities about the future
• Talk less and listen more

Bad data from customer conversations can come from compliments (which you should deflect), fluffy statements like “I would…” (which you should anchor back to specific actions in the past), or feature ideas (which you should dig into to understand the underlying need).

Customer conversations should always include questions that make you uncomfortable, because they may uncover something that invalidates your entire business idea. Pre-plan a list of 3 important questions you want to answer before each customer conversation (they need not be the same ones for each customer).

Keep conversations casual, rather than formally scheduled meetings; you can learn a lot from short, casual conversations, and you can have many more of them in a given time.

Good customer conversations result either in commitment (getting something of value from the customer, such as money), or advancement (moving to the next step of the funnel). Even a clear intent not to advance is useful. Customer conversations that do none of these (for example, end in a vague compliment) are failures.

If you do need to set up meetings with customers, use the “VFWPA” framework when writing them an email: start with the Vision, then Frame expectations, then show Weakness and give them a chance to help; put them on a Pedestal (why you value their input), and then explicitly Ask for help.

Segment your customers; mixing customer segments will likely give you muddled, confusing data.

To run the customer conversation process effectively, prep before the meeting and research the customer; take written notes and review them with the team after the meeting; and try not to have more than two people from the company in the interview, while trying to include a diverse set of people over time.

The Effective Executive

This is an excellent, practical book by Peter Drucker, one of the most influential thinkers in the world on management methods in the 1900s. Though written in the 1960s, I was surprised that most of the book still feels fresh and relevant; the notable exceptions are the sections on computer technology, which are understandably obsolete.

The book is relentless in its focus on practicality and elimination of almost all jargon, the sign in my opinion of someone who deeply understands a topic — it is plainly written and packs many interesting ideas into its limited pages. I highly recommend this book.

Summary

The author defines an executive as anyone in an organization who has the ability, by virtue of position or knowledge, to affect the company’s ability to achieve results. Almost all knowledge workers are covered by this definition, including managers and non-managers.

“Effectiveness” is the ability to get the right things done; this is as opposed to “efficiency”, which is simply doing things right.

Effectiveness can be learned; it is a mix of practices. Effective executives follow five practices: (1) knowing where their time goes; (2) focusing on outward contribution; (3) building on strengths; (4) focusing on a few areas of most impact; (5) making effective decisions.

Time management:

• Executives must measure where their time goes. They must manage their time so that they can devote blocks of time to the most impactful activities. This includes meeting with people, which should not be broken into small slivers of time; instead, the length of meetings with individuals should allow for unhurried conversation.
• Executives devote the appropriate amount of time to each task; it is no use dedicating two one-hour blocks to a task that should take two uninterrupted hours.
• When tracking time, log your time for 3–4 weeks at a stretch twice a year.
• To save time, find activities that are unnecessary or can be delegated; also find activities where you are wasting other people’s time. Identify things that are recurring crises and make them routine; identify overstaffing or too many meetings, which are often examples of poor organizational design that lead to wasted time. Finally, identify areas where lack of information transparency is leading to wasted time.

Outward contribution:

• Effective executives are focused “outward” on goals rather than “inward” on effort.
• A person who focuses on efforts and stresses his downward authority is a subordinate no matter his title. But even a junior person who focuses on contribution and takes responsibility for results is “top management” in the literal sense of the phrase.
• The focus on contribution turns the executive’s focus outward, toward the performance of the whole, helping them think through how their work fits into the bigger picture.
• An executive’s focus on contribution itself is a powerful force in raising standards of their organization, since people adjust to the level of demands made on them. A shared focus on contribution helps build stronger relationships across organizations.

Building on strengths:

• Effective executives build on strength rather than focusing on weakness; they make staffing decisions to maximize strength, not minimize weaknesses. Strong people have strong weaknesses; effective executives set up organizations of strong people so that their weaknesses are filled in by others.
• Because effective executives structure teams based on what people can do and not on personal likes and dislikes, they are not always close to the people on their teams, maintaining an impersonal distance.
• Effective executives focus on the strengths, rather than the weaknesses, of their superiors. This is the core of effectively managing upward. Similarly, making yourself effective means focusing on your own strengths rather than your weaknesses.

Focusing on what’s important:

• Effective executives do first things first and focus on one thing at a time. Focusing on one thing at a time is related to managing time effectively, ensuring that executives have big chunks of time available for effective contribution.
• Effective executives regularly review all programs in which their organization is involved, dropping those that are no longer important.
• Effective executives must create a list, not just of priorities, but of “posteriorities” — things that are not important or should be postponed. Making such a list is hard, and it is tempting to do a little bit of everything, which means that nothing gets done.

Making effective decisions:

• Decision-making is the core executive function. Effective executives make effective decisions.
• Effective executives make only a few decisions, and make decisions following a structured “decision process”: (1) Determining general principles or rules underlying the decision; (2) Determining the “boundary conditions” or specifications that the decision has to satisfy; (3) Thinking of the ideal solution that will satisfy the boundary conditions, without considering compromises that will be needed in reality; (4) Building an action plan into the decision — for example, assigning to someone the task of carrying it out; (5) A feedback loop to test whether the decision was effective, by looking at what actually happened; this has to be done on a continuous basis since decisions can become obsolete.

To make effective decisions, we must start with opinions, not facts; opinions are untested hypotheses, and we must define a “criterion of relevance” against which an opinion can be tested before it can be considered a fact. Determining the right criterion of relevance is therefore key; it is likely that the old ways of measurement are no longer valid and new ways are needed (or else a decision would not need to be made). Effective executives insist on multiple alternative measurement techniques, so they can choose between them.

Effective executives push for disagreement within their team, rather than consensus, to surface key issues underlying the decision. They also focus on understanding competing arguments, including those of their opponents; this is necessary to avoid only hearing what they want to hear.

Finally, a decision should be made only if it must be made — for example, if there will be significant harm from not making it; if the problem can be solved through application of existing principles, that should be done instead.

Effectiveness can help balance organizational goals and individual needs, by helping knowledge workers gain fulfillment and self-development through their work in an organization.

The Black Swan

This is the famous book that made its author, Nicholas Nassim Taleb, a celebrity during the Global Financial Crisis in the late 2000s. The book is overflowing with ideas and the author’s writing style is rich, with a mix of technical detail, historical background and cultural context; while reading the book, I found myself feeling two opposing emotions: (1) to slow down and re-read sections in order to understand the dense concepts better; and (2) to read ahead just for the pleasure of immersing myself in the text. It’s rare that books are worth reading for the language alone, but I think this is one of them.

The core idea of the book is well known by now, but the author goes into many tangents around it; some of these tangents can feel self-indulgent, and the author can come across in many cases as arrogant and overly critical of others (and conversely, overly pleased with himself). Nevertheless, this is a book worth investing the time to read.

Summary

A Black Swan is an event with the following characteristics:

• It is an outlier; it lies outside the realm of regular expectations
• It carries extreme impact
• Despite its outlier status, people tend to concoct causal explanations for its occurrence after the fact

The author’s core thesis is that a small number of Black Swans explain almost everything about the world, from historical events to details of individual lives.

Black Swans are observer-dependent: they may be Black Swans to certain people because of incomplete knowledge, but not to others. For example, the terrorist attacks of September 11, 2001, were a Black Swan to most people, but not to the terrorists who planned them.

The author distinguishes between epistemic uncertainty — uncertainty caused by lack of knowledge — and ontic uncertainty — intrinsic (unknowable) uncertainty; in practice, this is no real difference between the two. It is a “distinction without a difference”. Black Swans can be caused by epistemic or ontic uncertainty.

Nonscalable professions are those where income is limited by effort (for example, dentists whose income is proportional to the number of hours a day they work); scalable professions are those where more income can be generated without proportional increase in effort (for example, quantitative traders who can make more money through larger trades). Scalable professions tend to be more risky and are highly unequal, with a small number of winners making most of the income.

The same scalable/nonscalable distinction applies to other areas. The author introduces two new terms:

• Mediocristan (Type 1 randomness) is the set of phenomena with nonscalable characteristics, such as height or weight — the range of heights across all people is fairly narrow, and the average cannot be dominated by a single data point.
• Extremistan (Type 2 randomness) is the set of phenomena with nonscalable characteristics. Wealth is nonscalable; it can vary wildly across the population, and the average wealth across a sample of people can be heavily influenced by a single person’s wealth. Most social phenomena (for example, stock markets or sizes of companies) belong to Extremistan.

While it is tempting to act as though we live in Mediocristan (we understand the range of possible events), in reality we live in Extremistan. In Extremistan, it is unwise to extrapolate from data, because a single unexpected data point that has never shown up historically can occur, and have a disproportionate impact. This means that people, even professionals, are bad at predicting things like future stock market prices that are in Extremistan.

The ludic fallacy is the belief that the sort of bounded randomness in games of chance is actually Extremistan-style randomness. It is not; the range of possible outcomes for a casino game is actually quite bounded, and belongs to Mediocristan; this is why the true Extremistan-style danger for a casino is not someone winning a very large amount of money or even cheating (which overall averages out), but completely unexpected events such as a disgruntled employee.

The world is becoming more extreme (more like Extremistan) because of cumulative-advantage effects (people are more attracted to things that are already popular) that are exacerbated by the Web. The flip side of this is that there is a long tail of potential contenders who can find a niche audience and eventually topple the companies and institutions in the top spots: there is high turnover in the list of the largest American companies because of this effect.

The Gaussian bell curve can only be used in Mediocristan, for nonscalable phenomena; it has the characteristic that the probabilities of occurrence drop faster and faster as you move away from the mean. Since most phenomena (for example, wealth) are actually scalable and belong to Extremistan, we cannot use bell curves to model them — for example, a bell curve cannot be used to model the distribution of wealth. Instead, phenomena in Extremistan have properties of Mandelbrotian fractalness (from the French mathematician Benoit Mandelbrot), where the characteristics of the curve are the same at different scales. For example, the ratio between the number of people with wealth of $X and $2X is roughly the same, no matter what X you choose. In practice, this ratio, or exponent, for fractal phenomena is hard or impossible to compute, and even small changes in the exponent can result in very different curves; this is one reason that Black Swans (caused by phenomena that follow fractal curves) are fundamentally unpredictable, because the probability of the occurrence of extreme values can vary wildly based on the (unknowable) exponent.

Black Swan blindness arises because of limitations in human psychology:

• Confirmation bias makes us use selected parts of the data to extrapolate to the unknown, generally in a way that corroborates what we think we know
• The narrative fallacy makes us fit easy-to-understand, but untrue, stories to the data in order to explain what we see (generated by the “System 1” of Daniel Kahneman and Amos Tversky, and described in Thinking, Fast and Slow)

Human evolution is not well suited to an Extremistan-style environment where there can be long stretches of no progress and then nonlinear success.

The problem of silent evidence means that we fixate on the available data, and do not adequately consider data that may be equally meaningful but absent (survivorship bias).

Tips for what to do in an Extremistan-dominated world:

• Avoid unnecessary dependence on large-scale predictions, such as economic forecasters or government plans
• Embrace volatility, including in your career; it makes you more fit to weather all eventualities
• Have a “barbell” investment strategy, where you put a large percentage (the author recommends 85–90%) of your investments in very safe Treasury bills, and the rest of hyper-aggressive, speculative investments
• Be in businesses that are exposed to positive Black Swans (for example, making movies, where your downside is capped but your upside is unlimited) rather than negative Black Swans (for example, catastrophe insurance)
• Seize opportunities when they come up; embrace serendipity

A core principle for dealing with Black Swans is to focus on the consequences of one occurring (which can be estimated), not the probability of it occurring (which is unknowable); for example, you can insure your portfolio against a loss more than you are willing to bear, or put that portion into very safe investments.

Poor Charlie’s Almanack

This book is a collection of speeches by Charlie Munger, Warren Buffett’s business partner through most of the history of Berkshire Hathaway (Munger died just before his 100th birthday right around the time this book came out). I really enjoyed reading this book: the style of the speeches is homely wisdom, and there are many interesting ideas.

Most of the speeches are to audiences who were listening to Munger for general life advice, and so most of the advice follows a few common themes — how to live a happy life, the importance of understanding the basics of many different fields, “lollapalooza” effects — but this repetition in the book has the effect of reinforcing key ideas rather than feeling redundant. Many of the speeches in the book are available for free online, including the compendium chapter “The Psychology of Human Misjudgment” that ties together some of the book’s overall themes; I found the hardcover version of the book easier to read than reading online.

I highly recommend this book.

Summary

Prescriptions for living a happy life (inverted to make them easier to understand from the text, which is about “prescriptions for a miserable life”):

• Do not ingest chemicals in an attempt to alter mood or perception
• Do not give in to envy and resentment
• Always be reliable — do what you say you will do
• Learn from the mistakes of others, not just your own
• Bounce back from reversals
• Invert problems to see if there is an easier solution (for example, see what will result in the opposite of the outcome you want, and avoid that)
• “Maximize objectivity” and keep an open mind — pay particular attention to evidence that may disconfirm your theories

Worldly wisdom comes not from knowing a bunch of isolated facts, but by having a “latticework of mental models” from different academic disciplines to which you can attach facts and experiences. Some useful areas to know about are:

• Mathematics: compound interest, permutations and combinations
• Accounting: double-entry bookkeeping
• Basic psychology, such as knowing that people are more likely to comply with a directive if you tell them the “why”; cognitive shortcuts that cause humans to make misjudgments; social proof
• Statistics is slightly less important, but it is useful to understand the Gaussian bell curve
• Ideas from engineering and “hard” sciences, such as the ideas of redundancy and cost-benefit analysis
• Some ideas from microeconomics, such as thinking of the economy as an ecosystem (in the Darwinian sense); the benefits of specialization, and economies of scale

Efficient market theory is not accurate; it is more helpful to think of the stock market as a “pari-mutuel” system (a system followed in betting where winners divide winnings by the proportion that they originally wagered) — the odds (stock prices) change based on what has been bet (what other investors think about a stock), so it is not always clear which stock is the best investment. The way to win in such a system is: (1) to keep your costs low, to reduce the overhead on your winnings; (2) to only make a few bets, and only when the stock is a clear winner; (3) but when you do decide to bet, to bet big. Most of Berkshire Hathaway’s returns have come from a handful of big bets, around 10, in high quality businesses.

Munger provides the following tips for solving problems. He uses these methods to solve a hypothetical problem: starting a company like Coca-Cola in 1885 and growing it to a $2 trillion valuation over 150 years.

• Simplify problems by deciding the big no-brainer questions upfront
• You need to have numerical fluency, since math is necessary to think through many problems
• Think through the problem not just forward but also in reverse (what to avoid in addition to what you want to have happen)
• Think in a multidisciplinary manner, using ideas from many different academic disciplines (as listed earlier) — Munger especially emphasizes understanding basic psychology, which he believes is not adequately integrated into the teaching of other disciplines
• Be aware of the existence of “lollapalooza” effects, where multiple factors interact with each other to produce a surprisingly large outcome

Educational institutions are not doing a good job of imparting the right multidisciplinary education to their students. Soft sciences would do well to imbibe the fundamental “organizing ethos” of the hard sciences, which involves understanding and testing for fluency a wide range of topics across a range of disciplines: math, physics, chemistry and engineering. Similarly, students of the soft sciences should learn and be tested on concepts from a wide range of disciplines.

Investing officers at charitable foundations would do well to either invest in index funds, or invest in a handful of high quality companies, rather than paying layers of consultants to give them investment advice on a variety of exotic investments. Berkshire Hathaway, for example, invests in only a few stocks. This reduces complexity and keeps costs low. In some cases, it may even make sense for a foundation to be 90% concentrated in a single stock, and Munger hopes that his own family foundation will follow that approach.

Extreme success can come from one or more of the following factors:

• Extreme maximization or minimization of one or more factors (for example, low prices with a wide selection)
• Multiple success factors that lead to nonlinear (“lollapalooza”) effects
• Extreme good performance over multiple factors (for example, the Les Schwab tire chain that got big by mastering many different aspects of the business)
• Catching and riding a big wave (for example, technology changes)

Talking to a graduating class of law students, Munger advises them to keep in mind that better than a lot of process is a “seamless, non-bureaucratic web of deserved trust.” Totally reliable people trusting one another is how things work in many high-functioning environments, such as an operating room at the Mayo Clinic.

Human psychology has certain systemic limitations due to the way humans have evolved. These limitations result in tendencies that, while generally useful, often lead to misjudgment. It is useful to be aware of these tendencies in our own and in others’ behavior. The tendencies are:

• Reward- and punishment-superresponse tendency: Incentives, both positive and negative, are “superpowers”: strong drivers of human behavior.
• Liking/loving tendency: People like those who like them. They are willing to overlook many flaws in people they like, and will favor things that are associated with the object of their affection.
• Disliking/hating tendency: The reverse of the previous tendency, this makes people ignore the virtues of anything they dislike, distort facts to fit their dislike, and dislike objects merely associated with their object of dislike.
• Doubt-avoidance tendency: People tend to jump to conclusions as a way to quickly eliminate doubt (“System 1” in the terminology by Daniel Kahneman).
• Inconsistency-avoidance tendency: People are reluctant to change habits or beliefs once formed; only some people are able to counteract this tendency, for example, Charles Darwin took special interest in disconfirming evidence for his theories.
• Curiosity tendency: People are naturally curious, and curiosity is enhanced by good educational practices.
• Kantian fairness tendency: People generally expect fair behavior from those around them.
• Envy/jealousy tendency: People are envious of those who have more than them.
• Reciprocation tendency: People have a strong desire to reciprocate both favors and disfavors; doing people a small favor can be used to manipulate them (unethically) into making a bigger concession.
• Influence-from-mere-association tendency: People assign positive and negative value to things just based on their association with other things (for example, assuming that the highest priced item is always also the highest quality).
• Pain-avoiding psychological denial: People distort distressing facts to avoid facing the pain of them.
• Excessive self-regard tendency: People tend to overestimate their own abilities, and also the value of their own possessions (the “endowment effect”); this also tends to make people prefer people like themselves.
• Overoptimism tendency: People generally tend to display an excess of optimism.
• Deprival-superreaction tendency: The loss of an amount hurts more than gaining the same amount (formalized in “prospect theory” by Daniel Kahneman and Amos Tversky).
• Social-proof tendency: People are highly influenced by the opinions of people around them.
• Contrast-misreaction tendency: People judge something not in absolute values but in comparison to other things (for example, buying an overpriced option for a car, because the price of the option seems small in comparison to the cost of the car).
• Stress-influence tendency: Stress can cause significant changes in people’s behavior, ranging from amplifying social-proof tendency, to causing improved performance (for light stress), to having them change existing modes of behavior.
• Availability-misweighting tendency: People overweight facts that are most easily recalled; an antidote to this is to use checklists, which force the consideration of many more facts than come easily to mind.
• Use-it-or-lose-it tendency: Skills wither away with disuse; to counter this, skills need to be practiced. Skills in which people are fluent decay more slowly and come back quicker with practice.
• Senescence-misinfluence tendency: People naturally suffer age-related cognitive decline, though continuous thinking and learning can delay it.
• Authority-misinfluence tendency: People tend to follow leaders, which means that the wrong leaders can do much damage. It’s important for leaders to make sure their instructions are not misunderstood.
• Reason-respecting tendency: People follow instructions more when you include the “why”.
• Lollapalooza tendency: Many psychological tendencies can work together to result in nonlinear effects.