Jungle, Munger, Nobel & Sneezing

Firstly, as noted in our quote of the week below from Ted Sullivan of research firm, Lux Research: there’s a massive solar shakeout coming. Efficiency this and dollar per watt that--absent cessation of the laws of economics: all those vaunts vaporize in vacuums—no technology is developed in isolation without competition. The lone jungle tree, (like the lone solar entrepreneur) seeks to grow its stalk taller and leaves wider than all others. But the crowded competition (for sunlight) leaves a twisted tangled thicket—and eventually Mr. Market sees the jungle for the trees and comes marching through with his machete. May the strongest and most adaptable survive…



If I gave a weekly prize, I’d give it this week to a scientist at Sun Microsystems: Ron Ho. Not because of any tech breakthrough, but because of how he spoke with the media. I think it’s irresponsible to give predictions without probabilities and time frames. But this scientist, in describing a silicon photonics effort (to connect chips with light) said, “This is a high-risk program. We expect a 50% chance of failure, but if we win we can have as much as a thousand times increase in performance.” While his assessment of success (1-p) was probably too high and he didn’t give a time frame, he did give an expected outcome. If more politicians and corporate leaders spoke like this, them and their constituents would have better judgment under uncertainty and make better decisions.



On prizes, William James said, “he who refuses to embrace a unique opportunity loses the prize as surely as if he had failed.” Then again comedian Steven Wright said, “I’d kill for a Nobel Peace Prize.”



Speaking of Nobel prizes, a few weeks ago I heard Charlie Munger give a talk (Warren Buffet’s partner at Berkshire Hathaway) while at Caltech. A story was recounted of Nobel Laureate William Shockley (he who co-invented the transistor). Shockley known for outrageous antics allegedly wanted to start a sperm bank of Nobel Prize winners, offering would-be clients prodigy progeny. As he went from fellow Nobel colleague to colleague, one of them said, “Shockley, you’ve got it all wrong. I’m a Nobel Prize winner and both my sons play guitar. What you want is the poor illiterate immigrant tailors like my parents were!”



Speaking of Munger, he’s fond of a phrase capturing a phenomenon called, “lollapalooza”. The first time I heard the word was actually 15 years ago, when I used to go to an annual rock concert called Lollapalooza (eating Red Hot Chili Peppers with Pearl Jam while Raging against the Machine).



But the lollapalooza to which Munger refers isn’t a concert, but instead when all kinds of psychological biases are working in concert. Take global warming hysteria. You’ve got at least three effects I’ve identified; availability bias, social proof and authority bias



1. Availability Bias, arising from the prevalence of a major [and inconvenient] movie and from incentive-caused bias of all kinds of media from cable TV to every magazine’s requisite Green Issue to every advertisement having a “Green” theme—after all, “if it bleeds it leads” has become “if it’s green it’s seen”;



2. Social Proof, arising from information cascades, seeing and imitating others who are imitating others and not wanting to be apart from the tribe. Recall my prior writings on a single individual pointing at nothing in particular on a corner, whereupon a crowd will form and grow exponentially all staring at precisely nothing. Going along with the crowd has been mostly adaptive for most of humanity and failing to do so can lead to being ostracized (or at least lead to fear of being ostracized, an emotionally motivating state to avoid). As Keynes noted begrudgingly, “It is better to fail conventionally than to succeed unconventionally". The tribal imperative is a powerful part of our genetic makeup. It’s the same reason by Brooklyn grandmother used to go temple though she knew not about religion.



3. Authority Bias and Halo Effect, men with Oscars and Nobels are the white lab-coat equivalents of Stanley Milgram’s shock experiment. We revere the rich, famous and infamous. But the faithful flocks have followed many a charlatan, hypocrite or huckster: Jim Jones, Jim Swaggart, Jim Cramer. I started with the J’s but am an equal opportunity quipping and whipping cynic, “On Prancer!…on Spitzer!…on Haggart!…on Clemens!”



Speaking of Authority Bias, consider the marketing tactics (now settled in lawsuits) of Airborne—that fashionably packaged over the counter hoax taken on the onset of sneeze. “But”, my friends would say as I cringed at their credulity, “it was created by a school teacher!” And I cringe tighter still knowing nowhere is the appeal to authority more penetratingly persuasive than in venture capital. Cringing upon news of the latest deal priced to the doctor and dentist crowd and groaning in vane as the sheep flock to the haloed shepherds, “But,” they appeal “it was created by a famous rich person!”



And speaking of sneezes, most quietly seethe at the thoughtless brute who doesn’t yield a “bless you” when in the presence of another’s flying germs--or worse yet, fails to offer a “thank you” upon receiving such a salutation—unsolicited though it may be. Why do we bless sneezes, but not coughs—which are far more probable to lead to death (whether from choking or critical pulmonary issues).In the Middle Ages, it was believed one’s breath interrupted could cause death—so a sneeze was believed to be fatal. Like countless others, the cultural anachronism remains.



Back to Munger: What I’ve observed is that Munger has three key factors to his success (not including knowing Buffett): being rational, inverting and collecting inanities. The first requires training and genetic luck to have the right disposition. The second draws from the mathematician Carl Jacobi, “invert, always invert”. And the third from Johnny Carson—who once returned to his high school to give a commencement speech called “How to Guarantee Misery” and tongue-in-cheek instructed listeners to have envy, resentment and ingest chemicals to alter mood and perception.. Anyway: the combination of these factors had me thinking of a corollary to Tolstoy’s famous opening of Anna Karenina ("Happy families are all alike, every unhappy family is unhappy in its own way").



So here’s an inverse corollary in business and politics. There are thousands of ways to fail and far fewer to succeed. Those who fall impale themselves upon the same sharp stakes of folly as those before them. But every ascending icon rich person got rich or lucky (or both) in their own way. The point is this: you can’t read biographies or playbooks and hope to copycat Bill Gates, Larry Ellison, Larry or Sergey, Richard Branson, Barry Diller or Michael Dell. Whatever they did through skill or happened upon by luck at the particular circumstance at that particular time was unique to them—it’s not repeatable. And the laws of capitalism (and profits reverting to the mean) insure that copycatting someone else won’t yield you success. But be sure, if they ever fall from grace it will be for the same fraud or vice or sin as many before them. See: Spitzer, Elliot. As Legg Mason’s Bill Miller quotes of securities, so too with reputations, “Many shall be restored that now are fallen and many shall fall that now are in honor.” It appears that throughout history, though the octaves may change, folly and ruin rhyme and resonate in key. And as someone said, every time history repeats itself, the price goes up.



Munger said he was a collector of inanities: of the foolhardiness and mistakes of others. The newspaper and the gossip pages, though in today’s times they’re indistinguishable are a rolling archive from which to study not for traits of success as much as avoidance of idiocy and failure.

Video: Nanotech's impact on cell phones

Instead of reading my thoughts this week, enjoy the video below from Nokia on nanotech’s impact on their future phone designs. And have a wonderful Easter holiday…

http://youtube.com/watch?v=Zto6aTZM9t0

Doug Adams & The Ages of Sand

This is a long one. And it’s not even my own words. A few years ago I profiled Hewlett-Packard’s nanotech gurus Stan Williams and Phil Kuekes. I remember Phil telling me a favorite book of his was David Deutsch’s ‘Fabric of Reality’. That reminded me of a speech given by the late Douglas Adams (he of Hitchhiker’s Guide to The Galaxy fame) at a conference nearly 10 years ago. I’ve copied an excerpted text of his speech below. It’s about the “four ages of sand”. It’s colloquial and conversational and all the more impressive that he gave it off the cuff. In it he reminds me of Paul Romer’s new growth theory, which says all new growth comes from combinations of existing things. And Douglas Adams speech also reminds me (in fact he basically predicted) of IBM’s manipulation of atoms from an internet connection 3,000 miles away. Here it is:

….The fact that we live at the bottom of a deep gravity well, on the surface of a gas covered planet going around a nuclear fireball 90 million miles away and think this to be normal is obviously some indication of how skewed our perspective tends to be, but we have done various things over intellectual history to slowly correct some of our misapprehensions. Curiously enough, quite a lot of these have come from sand, so let's talk about the four ages of sand.

From sand we make glass, from glass we make lenses and from lenses we make telescopes. When the great early astronomers, Copernicus, Galileo and others turned their telescopes on the heavens and discovered that the Universe was an astonishingly different place than we expected and that, far from the world being most of the Universe, with just a few little bright lights going around it, it turned out - and this took a long, long, long time to sink in - that it is just one tiny little speck going round a little nuclear fireball, which is one of millions and millions and millions that make up this particular galaxy and our galaxy is one of millions or billions that make up the Universe and that then we are also faced with the possibility that there may be billions of universes, that applied a little bit of a corrective to the perspective that the Universe was ours.

I rather love that notion and, as I was discussing with someone earlier today, there's a book I thoroughly enjoyed recently by David Deutsch, who is an advocate of the multiple universe view of the Universe, called 'The Fabric of Reality', in which he explores the notion of a quantum multiple universe view of the Universe. This came from the famous wave particle dichotomy about the behavior of light - that you couldn't measure it as a wave when it behaves as a wave, or as a particle when it behaves as a particle. How does this come to be? David Deutsch points out that if you imagine that our Universe is simply one layer and that there is an infinite multiplicity of universes spreading out on either side, not only does it solve the problem, but the problem simply goes away. This is exactly how you expect light to behave under those circumstances. Quantum mechanics has claims to be predicated on the notion that the Universe behaves as if there was a multiplicity of universes, but it rather strains our credulity to think that there actually would be.

This goes straight back to Galileo and the Vatican. In fact, what the Vatican said to Galileo was, “We don't dispute your readings, we just dispute the explanation you put on them. It's all very well for you to say that the planets sort of do that as they go round and it is as if we were a planet and those planets were all going round the sun; it's alright to say it's as if that were happening, but you're not allowed to say that's what is happening, because we have a total lock hold on universal truth and also it simply strains our personal credulity. Just so, I think that the idea that there are multiple universes currently strains our credulity but it may well be that it's simply one more strain that we have to learn to live with, just as we've had to learn to live with a whole bunch of them in the past.

The other thing that comes out of that vision of the Universe is that it turns out to be composed almost entirely and rather worryingly, of nothing. Wherever you look there is nothing, with occasional tiny, tiny little specks of rock or light. But nevertheless, by watching the way these tiny little specks behave in the vast nothingness, we begin to divine certain principles, certain laws, like gravity and so forth. So that was, if you like, the macroscopic view of the universe, which came from the first age of sand.

The next age of sand is the microscopic one. We put glass lenses into microscopes and started to look down at the microscopic view of the Universe. Then we began to understand that when we get down to the sub-atomic level, the solid world we live in also consists, again rather worryingly, of almost nothing and that wherever we do find something it turns out not to be actually something, but only the probability that there may be something there.

One way or another, this is a deeply misleading Universe. Wherever we look it's beginning to be extremely alarming and extremely upsetting to our sense of who we are - great, strapping, physical people living in a Universe that exists almost entirely for us - that it just isn't the case. At this point we are still divining from this all sorts of fundamental principles, recognizing the way that gravity works, the way that strong and weak nuclear forces work, recognizing the nature of matter, the nature of particles and so on, but having got those fundamentals, we're still not very good at figuring out how it works, because the math is really rather tricky.

So, we tend to come up with almost a clockwork view of the way it all works, because that's the best our math can manage. I don't mean in any way to disparage Newton, because I guess he was the first person who saw that there were principles at work that were different from anything we actually saw around us. His first law of motion - that something will remain in its position of either rest or motion until some other force works on it - is something that none of us, living in a gravity well, in a gas envelope, had ever seen, because everything we move comes to a halt. It was only through very, very careful watching and observing and measuring and divining the principles underlying what we could all see happening that he came up with the principles that we all know and recognize as being the laws of motion, but nevertheless it is by modern terms, still a somewhat clockwork view of the Universe. As I say, I don't mean that to sound disparaging in any way at all, because his achievements, as we all know, were absolutely monumental, but it still kind of doesn't make sense to us.

Now there are all sorts of entities we are also aware of, as well as particles, forces, tables, chairs, rocks and so on, that are almost invisible to science; almost invisible, because science has almost nothing to say about them whatsoever. I'm talking about dogs and cats and cows and each other. We living things are, so far, beyond the purview of anything science can actually say, almost beyond even recognizing ourselves as things that science might be expected to have something to say about.

I can imagine Newton sitting down and working out his laws of motion and figuring out the way the Universe works and with him, a cat wandering around. The reason we had no idea how cats worked was because, since Newton, we had proceeded by the very simple principle that essentially, to see how things work, we took them apart. If you try and take a cat apart to see how it works, the first thing you have in your hands is a non-working cat. Life is a level of complexity that almost lies outside our vision; is so far beyond anything we have any means of understanding that we just think of it as a different class of object, a different class of matter; 'life', something that had a mysterious essence about it, was god given - and that's the only explanation we had.

The bombshell comes in 1859 when Darwin publishes 'On the Origin of Species'. It takes a long time before we really get to grips with this and begin to understand it, because not only does it seem incredible and thoroughly demeaning to us, but it's yet another shock to our system to discover that not only are we not the centre of the Universe and we're not made of anything, but we started out as some kind of slime and got to where we are via being a monkey. It just doesn't read well. But also, we have no opportunity to see this stuff at work. In a sense Darwin was like Newton, in that he was the first person to see underlying principles, that really were not at all obvious, from the everyday world in which he lived. We had to think very hard to understand the nature of what was happening around us and we had no clear, obvious everyday examples of evolution to point to. Even today that persists as a slightly tricky problem if you're trying to persuade somebody who doesn't believe in all this evolution stuff and wants you to show him an example - they are hard to find in terms of everyday observation.

So we come to the third age of sand. In the third age of sand we discover something else we can make out of sand - silicon. We make the silicon chip - and suddenly, what opens up to us is a Universe not of fundamental particles and fundamental forces, but of the things that were missing in that picture that told us how they work; what the silicon chip revealed to us was the process. The silicon chip enables us to do mathematics tremendously fast, to model the, as it turns out, very very simple processes that are analogous to life in terms of their simplicity; iteration, looping, branching, the feedback loop which lies at the heart of everything you do on a computer and at the heart of everything that happens in evolution - that is, the output stage of one generation becomes the input stage of the next. Suddenly we have a working model, not for a while because early machines are terribly slow and clunky, but gradually we accumulate a working model of this thing that previously we could only guess at or deduce - and you had to be a pretty sharp and a pretty clear thinker even to divine it happening when it was far from obvious and indeed counter-intuitive, particularly to as proud a species as we.

The computer forms a third age of perspective, because suddenly it enables us to see how life works. Now that is an extraordinarily important point because it becomes self-evident that life, that all forms of complexity, do not flow downwards, they flow upwards and there's a whole grammar that anybody who is used to using computers is now familiar with, which means that evolution is no longer a particular thing, because anybody who's ever looked at the way a computer program works, knows that very, very simple iterative pieces of code, each line of which is tremendously straightforward, give rise to enormously complex phenomena in a computer - and by enormously complex phenomena, I mean a word processing program just as much as I mean Tierra or Creatures.

I can remember the first time I ever read a programming manual, many many years ago. I'd first started to encounter computers about 1983 and I wanted to know a little bit more about them, so I decided to learn something about programming. I bought a C manual and I read through the first two or three chapters, which took me about a week. At the end it said 'Congratulations, you have now written the letter A on the screen!' I thought, 'Well, I must have misunderstood something here, because it was a huge, huge amount of work to do that, so what if I now want to write a B?' The process of programming, the speed and the means by which enormous simplicity gives rise to enormously complex results, was not part of my mental grammar at that point. It is now - and it is increasingly part of all our mental grammars, because we are used to the way computers work.

So, suddenly, evolution ceases to be such a real problem to get hold of. It's rather like this: imagine, if you will, the following scenario. One Tuesday, a person is spotted in a street in London, doing something criminal. Two detectives are investigating, trying to work out what happened. One of them is a 20th Century detective and the other, by the marvels of science fiction, is a 19th Century detective. The problem is this: the person who was clearly seen and identified on the street in London on Tuesday was seen by someone else, an equally reliable witness, on the street in Santa Fe on the same Tuesday - how could that possibly be? The 19th Century detective could only think it was by some sort of magical intervention. Now the 20th Century detective may not be able to say, He took BA flight this and then United flight that - he may not be able to figure out exactly which way he did it, or by which route he traveled, but it's not a problem. It doesn't bother him; he just says, 'He got there by plane. I don't know which plane and it may be a little tricky to find out, but there's no essential mystery.' We're used to the idea of jet travel. We don't know whether the criminal flew BA 178, or UA270, or whatever, but we know roughly how it was done. I suspect that as we become more and more conversant with the role a computer plays and the way in which the computer models the process of enormously simple elements giving rise to enormously complex results, then the idea of life being an emergent phenomenon will become easier and easier to swallow. We may never know precisely what steps life took in the very early stages of this planet, but it's not a mystery.

So what we have arrived at here - and although the first shock wave of this arrival was in 1859, it's really the arrival of the computer that demonstrates it unarguably to us - is 'Is there really a Universe that is not designed from the top downwards but from the bottom upwards? Can complexity emerge from lower levels of simplicity?' It really isn't a very good answer, but a bottom-up solution, on the other hand, which rests on the incredibly powerful tautology of anything that happens, happens, clearly gives you a very simple and powerful answer that needs no other explanation whatsoever.

What is the fourth age of sand?

Let me back up for a minute and talk about the way we communicate. Traditionally, we have a bunch of different ways in which we communicate with each other. One way is one-to-one; we talk to each other, have a conversation. Another is one-to-many, which I'm doing at the moment, or someone could stand up and sing a song, or announce we've got to go to war. Then we have many-to-one communication; we have a pretty patchy, clunky, not-really-working version we call democracy, but in a more primitive state I would stand up and say, 'OK, we're going to go to war' and some may shout back 'No we're not!' - and then we have many-to-many communication in the argument that breaks out afterwards!

But the fourth, the many-to-many, we didn't have at all before the coming of the Internet, which, of course, runs on fibre-optics. It's communication between us that forms the fourth age of sand. Take what I said earlier about the world not reacting to us when we react to it; I remember the first moment, a few years ago, at which I began to take the Internet seriously. It was a very, very silly thing. There was a guy, a computer research student at Carnegie Mellon, who liked to drink Dr Pepper Light. There was a drinks machine a couple of stories away from him, where he used to regularly go and get his Dr Pepper, but the machine was often out of stock, so he had quite a few wasted journeys. Eventually he figured out, 'Hang on, there's a chip in there and I'm on a computer and there's a network running around the building, so why don't I just put the drinks machine on the network, then I can poll it from my terminal whenever I want and tell if I'm going to have a wasted journey or not?' So he connected the machine to the local network, but the local net was part of the Internet - so suddenly anyone in the world could see what was happening with this drinks machine. Now that may not be vital information but it turned out to be curiously fascinating; everyone started to know what was happening with the drinks machine. It began to develop, because in the chip in the machine didn't just say, 'The slot which has Dr Pepper Light is empty' but had all sorts of information; it said, 'There are 7 Cokes and 3 Diet Cokes, the temperature they are stored at is this and the last time they were loaded was that'. There was a lot of information in there, and there was one really fabulous piece of information: it turned out that if someone had put their 50 cents in and not pressed the button, i.e. if the machine was pregnant, then you could, from your computer terminal wherever you were in the world, log on to the drinks machine and drop that can! Somebody could be walking down the corridor when suddenly, 'bang!' - there was a Coca-Cola can! What caused that? - well obviously somebody 5,000 miles away! Now that was a very, very silly, but fascinating, story and what it said to me was that this was the first time that we could reach back into the world. It may not be terribly important that from 5,000 miles away you can reach into a University corridor and drop a Coca-Cola can but it's the first shot in the war of bringing to us a whole new way of communicating. So that, I think, is the fourth age of sand.

Choice, Doors & Soccer

Luck accounts for far more than we think. But all success, in life and investing, not derived from luck—derives from rational judgment and decision making under conditions of uncertainty. Last week two interesting articles ran in the New York Times on decision making.

In soccer, during a penalty shot, there’s a split second from when the ball is kicked to when the goalie chooses to leap left or right to make a save. Goalies rarely stand still in the middle to make a save. As with investors, there’s a bias to action.

We prefer action over inaction. When there’s an economic downturn, officials are more likely to decide to ‘do something’—even if the consequences of action might make things worse than inaction. They want to avoid the criticism of having ‘done nothing’.

Entrepreneurs and investors with a chosen process (strategy) and disappointing outcomes (results) are often at a crossroads and must choose ‘stay the course’ or ‘switch strategies’. If staying the course works, they may save their role or their company. If it doesn’t they’re more likely to be canned for not ‘doing something’. It’s the same reason most investors sell their stocks as soon as prices move against them, focusing on outcomes instead of determining if the facts have changed and if their process is still sound.

As the article points out, it’s why goalkeepers are more likely to leap left or right than stand still. With tenths of a second to respond the goalie must size up the kicker and choose to jump and which way, without complete information (that is: seeing the kicked ball in trajectory). 80% of all kicks get past goalies. That’s an interesting number when you consider a similar percentage of fund managers underperforms the market.

The scientists studying the odds of goalies stopping kicks concluded that a goalie’s best strategy was to stay in the center (33% of the time) versus 14% to the left and 13% to the right. Based on today’s data, the goalies only stood still 6% of the time. Of course strategy can be a complex adaptive system and if kickers or their coaches read this and they know that goalies are more likely to adopt this new strategy and stand in the center, then the kickers are better off kicking left or right, unless they think the goalies think they think that. Ad infinitum.

The article also notes Kahneman and Tversky’s oft covered findings that people who lost money because they chose to act, have much more regret than people who lost money but left it untouched. They may psychologically blame the “market” instead of themselves for “acting”.

Yet this study showed the opposite: “Not acting would make someone feel a deeper emotional pang…The result is an unconscious bias toward action.”

Other researchers have found: “a bias toward action or inaction often depends on whether a previous result was good or bad. After a team has a big loss, for example, the expectation is that the coach should replace the starting players, whereas after winning, leaving the lineup unchanged is considered the normal response.”

In a separate article by John Tierney on choice, an experiment was conducted that gave people an option of picking a reward behind multiple doors. Each volunteer was given 100 clicks to invest to maximize their gain. Each door had an uncertain reward but once opened would allow the volunteers to click away to reap reward. Volunteers could click on other doors but it would cost them clicks that got used up and yielded nothing.

A twist was thrown in. Some of the doors that went untouched would start to shrink and eventually disappear unless clicked on. Sure enough: the thought of losing a possible opportunity (even if unused) had volunteers wasting their clicks trying to just preserve some of their options.

In some situations in life and investing the best strategy is to focus in and quickly determine what matters and shed other distractions which can be taxing (cognitively, emotionally and financially). As consistent with loss aversion theory: we are innately willing to pay a price to avoid the loss of an option. It’s why people pay extra money on higher end models of consumer products (like cameras or computers or TVs) with features they will never use. And why we exhaustively deliberate over tough choices. Here’s the article quoting the scientist: “Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss” Even the scientist was human, “…When he was trying to decide between job offers from M.I.T. and Stanford, he recalls, within a week or two it was clear that he and his family would be more or less equally happy in either place. But he dragged out the process for months because he became so obsessed with weighing the options.”

All this reminds me of a quote from Eugene Kleiner as recounted by Tom Perkins (the two of the eponymous venture firm Kleiner Perkins): if a decision is incredibly difficult, it doesn’t matter what you choose.