Brian Keng

  • Lucky or smart?

    When I was young, I was taught one universal truth: do well in school and you’ll be successful.  While it’s a nice simplistic view of the world, it’s not entirely accurate.  Let’s put that aside the fact that there are no universal truths for a second, and focus on the sentiment of the message: studying makes you smart, and smart make you successful.  For anyone who has gone out into the “real” world, you know that the people who studied the most are definitely not the smartest; and that the people who are the most successful are definitely not the smartest.  So where’s the disconnect?  Let’s take a look in more detail.

    To start off with, smarts (or intelligence) is a loaded word.  People who do well in school are generally “book” smart but not necessarily “street” smart, “social” smart, “emotional” smart or the other millions kinds of smart.  So of course this simplistic view of smart doesn’t really capture these subtleties, but may I ask how you are going to explain these subtleties to a ten year old?  The answer is: it’s very difficult.  Which is why I think there is a lot of utility in such a simplistic phrase.  School is something kids know about, doing well in school is a simple proxy for being (all the different kinds of) smart, so telling them to do well in school makes lots of sense.  This is not the main problem I have with this “universal” truth, it’s the second part that I want to discuss.

    Smart equals success [1], doesn’t it?  Well it’s certainly what most successful people (and the media) would want you to believe.  The brilliant billionaire who amassed his fortune with nothing more than his smarts and gratuitous amounts of hard work.  The Nobel laureate who received (arguably) the highest achievement in scholarship using his towering intellect and dedication to research.  The athlete who got was awarded the gold medal at the Olympics through her physical genius and hard work.  In fact, if you were to look at each one of these success stories, you’d see a common pattern: smarts and hard work played a critical role in their success.  The only issue here is that there’s a hidden part that you don’t see; the thousands who were just as smart and who worked just as hard but didn’t achieve the fame and success of these winners.  In other words the idea of survivorship bias: we only see the winners (or those who survived) and not the thousands who didn’t.  So we assume that any qualities that are common in the winners will lead someone to winning, when in fact they are only necessary.  Put another way, if you’re not (at least a bit) smart [2] then you definitely won’t be successful.  If you are smart, then you maybe will be successful.  And the maybe is the part that always seems to be left out.  The part that no one seems to want to acknowledge.  Not the billionaire, not the scientist, and definitely not the athlete.

    So what then does the maybe really mean?  It means that success depends not only on smarts (and hard work) but also on luck.  No matter how hard you work, no matter how smart you are, if you’re unlucky then you won’t be successful.  It may not be fair but that’s how the world works.  That’s not to say smarts isn’t important.  Being smart opens up a lot of opportunities that can lead to “luck”.  So then a more useful model of success is this quote:

    “It’s better to be lucky than smart, but it’s easier to be smart twice than lucky twice.”

    It’s not the simplistic view of the world that you would tell a child but definitely more accurate.

    So, lucky or smart?  Of course, lucky but I wouldn’t bet on it.  Besides, I’ve already been lucky enough so far by living in a country that has a plethora of opportunity, being born into a family with the means to gain smarts, and most importantly having people around me who love and care about me.  With all that luck on my side, I’m afraid I might not have much more left.  That’s okay though because if there’s one thing that I learned as a child it’s that being smart and work hard will lead me to success.

    1. Let’s put aside the philosophical debate on what success means and just use it as a vague concept of “doing well” in life with respect to cultural norms.[↩]
    2. By smart, of course, I mean any of the millions of different kinds of smart[↩]

  • Business

    “Business to me is the form and organization by which people creatively apply their skills and talents to solving problems or serving other people. The more a business serves others, and the more problems they solve, the more profitable they will be and the more an investor in those enterprises should make.”
    – Tom Gayner, President and Chief Investment Officer, Markel Corporation

    When most people think about business, what’s the first thing they think of? That’s easy, money. You know… benjamins, mula, cash, coin, dough, dinero, cheddar, etc. And it’s so easy to think this way because that’s how business is portrayed in popular culture. Businesses think only about the money and making a buck. And while that’s the easiest way to think about it — probably because it’s quantifiable — it’s not the most accurate.

    There’s a simpler, more fundamental way to look at them though: businesses solve problems and provide services. The quote above from Tom Gayner gives a very useful way to look at businesses — not in terms of money, of course — in terms of value. The value they bring when solving someone’s problem; the value they bring when they service someone’s need; and, yes, the value they bring for the investor who has allocated her capital with the company.

    But money isn’t really the central idea here — it’s actually just the scorecard. How does a business really know if it’s actually solving someone’s problem or providing a valuable service? When someone’s willing to pay for it. If more people are willing to pay for it, then the service is more valuable. It’s a crude measure, yes, but quite effective in aggregate.

    This idea that money is nothing but a (crude) scorecard is an important one. It works whether you’re making money or just spending it. On the money making side, getting someone to pay you (like at your job) is really about trading your skills, talent and time for money. In other words, you provide value, you get paid. What a useful model to use when you want to get a raise. Want a $5,000 raise? Easy, just provide at least $5,000 (preferably more) in value. Want a $50,000 raise? Provide at least $50,000 more in value  [1].

    On the spending side, it’s the reverse. For every dollar you let go, you had better be getting back (at least) a dollar in value. Now, of course, value is measured differently for everyone. That’s why a $4 latte is both a great deal or a ripoff depending on who you ask. The important part is that the value it provides is greater than what you’re paying. Remember this quote from Warren Buffett: “Price is what you pay, value is what you get.”

    This difference between value and money is probably the main reason why value is talked about so much less than money. Value isn’t always quantifiable like money. It’s not something you can plug into an equation. It’s subjective by nature. And that means that you’re going to have to figure out for yourself if something is valuable.  It’s not something your mom, your friend or even your professor can tell you.  It’s something you decide.  Just like you’ll have to decide the value of this post.  All I can hope for is that the price is right.

    1. [1] Of course, it’s not that easy. For one, the value you provide is a function of competition, which we all know nowadays is fierce.[↩]

  • Hypothesis Testing

    Lately I’ve been reading up a bit on what management consultants do.  Here are a group of people who go into Fortune 500 companies to advise senior management on how to deal with strategic or organizational issues — and get paid lots of money to do it.  Judging how much money they make, they must be providing some level of strategic value.  It turns out these consulting firms hire some of the best and brightest (think MBAs from Harvard), which is one reason why they provide value.  But it turns out that just having smart people come in to tell you what to do isn’t worth that much.  In fact, that’s only a small part of the value they provide.  One of the most important things they do is help identify, analyze and recommend solutions for strategic problems primarily using time tested methods such as problem solving frameworks.

    This idea of frameworks is incredibly powerful.  One can imagine the diverse set of different problems that these consultants must encounter jumping from one industry (not just company) to another.  Yet somehow they are still able to provide useful recommendations that their clients are happy with.  This means that they must be doing something right.  One important framework that I’ve read about is this idea of hypothesis testing.

    Now this idea is not new; it’s been around since the 17th century more commonly known (as least to scientists) as the scientific method.  The concept is extremely simple: you do not want to bias your investigation with your own preconceptions, instead let reality speak for itself.  Of course it’s easier said than done, but here are the main points:

    1. Formulate Question: The question outlines the initial problem.  It’s important to ensure that the question effectively addresses the problem.  Figuring out if you’re asking the right questions is a whole different story though (and a separate post).
    2. Hypothesis: An initial tentative answer based on known facts or experience (not just the first thing that pops into your mind).  Sometimes it can be based on a hunch, but reflects your best understanding of the situation and reality.  An important property of a hypothesis is that one is able to definitively support or reject them.
    3. Predictions (or assertions): Based on your hypothesis a series of logical conclusions will follow.  Here it’s useful to systematically break down the hypothesis and assertions into what consultants refer to as Mutually Exclusive and Completely Exhaustive (MECE) conditions.  In other words, each statement in the hypothesis (and assertions) should not overlap or depend on each other, and they should sufficiently cover all aspects of the initial situation or problem.  This aspect is important for consultants where the hypothesis needs to be credible.
    4. Testing (and analysis): This is where you determine if the hypothesis is true.  Using known facts or experiments, see if any of the statements in the hypothesis or assertions are contradicted.  If a convincing number of supporting statements or experiments match your initial hypothesis, it probably represents reality fairly accurately.  Otherwise, your hypothesis is false, which is equally important because it allows you to refine your model of reality (and go through the entire process again).

    Now everything that I’ve written so far is probably not new to you (at least if you remember what you learned in science class).  However, what I find fascinating about consultants is that they use this framework every time they approach a problem (at least with regards to their client).  This is an important because I think everyone knows that they should do hypothesis testing when running a science experiment, but what about when finding how much the market is willing to pay?  Or whether a stock is any good to buy?  Or whether you should even be following this advice?

    Simple ideas are powerful and can produce extraordinary results.  And hypothesis testing is definitely simple and extremely powerful.  It’s something that we should all remember when trying to form a model of reality.  To quote Charlie Munger:

    “Take a simple idea and take it seriously.“

     

  • Multi-Level Thinking

    In poker, there is a concept called leveling or multi-level thinking.  The basic idea is that you consider the consequences (and consequences of consequences, and consequences of consequences of consequences, and so on) of what your opponents are thinking.  Here’s the basic idea from a poker site:

    • Level 0: What do I have?
    • Level 1: What does my opponent have?
    • Level 2: What does my opponent think I have?
    • Level 3: What does my opponent think I think he has?
    • Level 4: What does my opponent think I think he thinks I have?

    On one hand, Poker is an interesting game because there are so many concepts that resemble real-life problems such as probabilities, deceit and bluffing, betting, folding, equity, and I’m sure numerous others.  On the other hand, it is a greatly simplified compared to more realistic problems.  For example, when do you ever know the exact probabilities of things?  When do you have such strict rules for betting/folding?  When can you be assured that the rules aren’t every going to change?  You get the idea.

    Despite all these simplifications, some of the ideas can be transferable to real-world problems.  And the one I mentioned above is a great example.  Not employing multi-level thinking is a classic misjudgement when humans are confronted with complex systems (i.e. everything around us).  Actions have consequences.  Consequences have consequences.  Consequences of consequences have consequences.  You get the picture.  Here is an example of this misjudgement applied to some fictional (and simplified) scenario that I read about in Seeking Wisdom: From Darwin to Munger by Peter Bevelin.

    Rats have infested campus buildings and the university is implementing a solution whereby any student who turns in a dead rat receives $1.

    This worked extremely well at first — until it didn’t.  Can you think of what could possibly go wrong with this scenario?  Let’s apply some multi-level thinking:

    • Level 0: Implement policy to remove rats by paying $1 for each dead rat.
    • Level 1: Students start killing rats, rats population shrinks.
    • Level 2: Poor students want more money, start breeding rats and not killing ones roaming around campus.
    • Level 3: University still has a rat problem, is out thousands of dollars, and now has rat farms all over campus.

    It’s not always possible to consider every consequence of our actions, but with a few extra steps you can prevent some really stupid decisions.

    A product is about to be released to the market with little penetration.  The company increases the price of the product and sales volume skyrocketed.

    This scenario is from a speech by Charlie Munger.  This is a clear example where misguided thinking might lead you into the wrong direction.  In this case, the consequence of the price increase isn’t limited to the classic micro economic explanation (increase price, lower volume).  The trick here is that even when thinking at Level 1, there are multiple possibilities.  Why could the sales have suddenly increased when the price of the product rose?  Higher price sometimes signals higher quality (e.g. luxury goods), leading to greater sales.  My favourite answer though is Charlie’s follow up, where he uses an idea from even higher level thinking: bribes.  Use some of the extra margin you make on the product to give commission to the sales guy.  He’ll push the product more (since it makes more money from him) and at the same time making more money for you.  This is a classic strategy used by Coca Cola and its distributors, as well as mutual funds and its sales reps.

    Now that I’ve written about this, you might think that I’ve thought about how you’re going to perceive what I have written…  but you’d be wrong.  Instead, I’m still stuck at level 0 trying to figure out what I’m going to eat for lunch (and the consequences of it!)

  • Another riddle: How do you turn $5 into $500 in two hours?

    Here’s a hint: Don’t use the $5.

    This is essentially the first idea Tina Seelig discusses in her book What I Wish I Knew When I Was 20.  I highly recommend this book because it talks about a lot of ideas that you don’t learn in school (like the above riddle).

    Getting back to the riddle, in the book Tina discusses how she gave this question as an assignment to one of her classes at Standford University.  The first responses from students were get “rich quick schemes” such as buying a lottery ticket, or going to Vegas.  Then the typical responses ensued (which I must admit, is all I could muster) such as a car wash, or lemonade stand.  However, the surprising thing is that some groups were able to make $500 despite (or in spite) of only having $5 in start-up capital.

    The hint is pointing you in the direction of “thinking outside the box”.  The big idea here is that you should realize that $5 is just as good as nothing, so re-phasing the question as “How do you make $500 in two hours starting from absolutely nothing?” gives us a significant shift in mentality.  This allowed all the groups to get very creative beyond what they could have done with the $5.  I’ll leave it as an exercise to either think about how to do it, or just buy the book.

    But… along those same lines of thinking, here’s another riddle: I have a degree in X, how can I get to Y in five years?  Here’s a hint: you don’t necessarily need to use X.

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