Understanding Incentives

The world is getting progressively (but bumpily) less racist, sexist, homophobic, and classist. We are breaking down barriers, but we still have hierarchy. The concept of people being better and lifting groups of people. The directionality of that is interesting because living a simple life can be a choice. There is a story of Alexander the Great out empire building and he comes across a sage sitting on a rock. The one doing external work. The other doing internal work. The Gini Coefficient measures inequality. A Gini of Zero (0) in a two-person world would mean Alexander and the Yogi had the same. One (1) would mean Alexander had it all. If we shared everything, there would be no incentive to get more because it would immediately be watered down (particularly if it was among the 7.8 billion people on the planet). We want to have a sense of reward for what we do. Conspicuous reward. Well done, here’s a gold star. Here’s some money. That’s how we do incentivization. You do something. You get measured against other people. You do something more. Understanding what we do, starts with understanding what incentivizes us.

Gini Coefficients by Country

Window Shopping

Relativity is one of the biggest obstacles to mental health. When we wish we were in the position of someone else, and judge ourselves through others. When you hear about good fortune of people you know, and it does not make you feel good. When you go visit friends or family in bigger houses, or when you go on holiday, and are constantly aware of the things you do not have. Window shopping into other lives. We only have a small peak. We never see the full picture. We cannot understand their full story. We only see the conspicuous. We do not see the trade-offs. We do not see the challenges. We glimpse a single angle snapshot of another life path.

Letting go of that idea is vital to be able to fully focus our energy on whatever our bits of the puzzle are. Whatever our choices are. Whatever our position is. That is not accepting your role in life. It is letting go of the idea that people are better or worse.

Through an Opening

The Darkness

The challenge we face with politics is that we want it. The most political people I know use phrases like “leave your ego at the door”, and ask “how do we get rid of the politics?” without a hint of irony. The darkness from lack of transparency protects our interests and vulnerabilities. We like positioning ourselves against other people, if we come out on top. We like the sense of superiority. We like getting better. We like progress. We like being incentivised. We like action. We like feeling like we are doing something right, and moving forward.

We create these hierarchies as a way of making sense of the world. As a way of feeling like we are moving. Feeling a sense of life. It is an easy option to measure the world. Money is like salt, fat, and sugar for the taste buds. It is not subtle flavouring.

Nothing Pie

There are a few hard truths about investing. The market is both noisy and irrational, and making good decisions is not the only factor in success. It is not even the main factor. The father of Fundamental Investing (“Security Analysis” Benjamin Graham 1934) only outperformed passive investment by about 2% over his career. Making alpha (outperforming the benchmark) your goal is incredibly dangerous. It opens up an existential crisis where an entire career can factually (by your own definition) have added no value. You cannot eat alpha. Alpha on nothing is nothing. 100% ownership of a 10% alpha generating nothing pie is nothing. Often the conspicuous success of investors is based on (1) inherited wealth, (2) big salaries, (3) sales, and (4) fees. The main factor in wealth creation is saving and reinvestment. Getting money a job. Making sure that job adds value. Reinvesting the money money makes. It is not about you, how smart you are, or whether you see the matrix. I am not Neo. You are not Neo. No one is Neo. The world is complicated, ambiguous, and random. There are no heroes. We are all just doing our best.

Take as much as you like

Not Good Enough

When the default is to work full-time for one company, that becomes the container into which we direct most of our energy. I think you get a maximum 4-6 hours a day of really good quality creativity. Where you dig deep into the unique path that has led you to where you are, and connect interesting dots of the paths that have led everyone else to you. The values of the container matter. Lots of businesses, communities and containers discuss “Values” to create an inspirational glue for team members. Often it is platitudes like Excellence and Accountability. That can be a hubris factory. Creating, and sustaining, the idea that those in the container are better than those outside the container. Schadenfreude in the failure of others, and a lack of genuine self-reflection as you defend the illusion of superiority. It is dangerous to categorise others into “good enough” and “not good enough”. We seldom have a complete picture of the story of others. The ability to see them. Relative thinking and comparison is often just a reflection of the voices in the heads of those doing the judging. The voices telling them they, themselves, are not good enough.

Self-Contained

The Gods Envy Us

One of the challenges with investing is when to admit you were wrong. If your goal as a stock picker is to do better than just investing blindly in everything on offer (an index). History is, at least, compelling enough to know that outperforming in 60% of your decisions will raise you to the status of demigod if people give you the credit. But if you underperform more than 50% of the time? If you underperform the benchmark over an extended period? How long is long enough to take the blame? Performance is noisy, which gives lots of space to hide. Going to Zero ends the discussion, but lots of companies stutter along. Max Plank reminds us that Science progresses one funeral at a time. Death is a feature, not a glitch. So how do we know when it is time to let go of beliefs? How do we ensure that we are not so tied to our stories, that we serve them, rather than them serving us? How do you maintain a sell discipline?

"They envy us because we're mortal, because any moment may be our last. Everything is more beautiful because we're doomed."

Where You Are

Stilling the waves of money anxiety is not about having more. In the same way, competitive yoga makes no sense. Although, being people, we have created ways to weigh and measure people in conspicuous progress there too. You are as “advanced a yogi” on day one, as you will be after years of practice. The starting point, is always the same. Where you are. It is also the destination. You are already enough. Despite feelings of inadequacy and manufactured discontent. That realisation does not absolve you of action. It just means the key is not in comparison. Deal with the cards you are dealt. Money anxiety stills through the relationship between what comes in (however big) and what goes out (smaller than the in). Through building a buffer for the unexpected (however big) and an Engine of reserves to reduce your reduction to being a productive asset. Letting go of your judgement of yourself. Letting go of others judgement of you. Price is not value. Salary is not worth. You are not your job. Life is not a competition.

Waves of What If

“Win-Win” was the biggest insight Adam Smith offered the world. With central decision makers trapped in Nation State gun boat diplomacy, and global pissing contests between birth-based containers competitively colonising the world… he suggested a different course. His bold idea was that people were best placed to make their own decisions, and that when two people agreed on an exchange with full transparency… both won. Agreement building. Trade. Generous problem solving. The problem with Zero-Sum thinking is you are wishing ill on your competitors. Things you don’t do become haunting waves of what if. Letting go of and wishing well alternative histories, paths, choices, and options allows you to focus simply on the problems you are working on. Not on the way you will be judged. It allows you to genuinely celebrate other people’s success, rather than seeing it as confirmation of your inadequacy.

Alternative Histories

Competitive Wiring

I don’t want what I am supposed to want. I have a competitive wiring, so people who have known me in previous incarnations will have seen my crazy eye when I choose to go for it. Even when my skills, knowledge or ability aren’t 100% up to the task. We back the underdog over meritocracy, or we would be wired to roll over and play dead. A school buddy teases me about shouting, “we can still win this” at 78(ish)-0 playing Maritzburg College. We lost 111-0. But when I am the me I like, I try find ways to wiggle out of the nonsense. I don’t want to play in a world where we are constantly weighing and measuring each other. In a way that stops us seeing each other. Where the quality of our lives is determined through regular sortings and divisions. Where we cut each other loose like gangrenous limbs when we can’t reach common cause. I want more than that. Part of that comes from acceptance. I know. I am trying to work out what I can and what I can’t accept.

Competitive Wiring

Securing your Basket

Choices are made in baskets. Once one is made, the set of options changes. There are both intended and unintended consequences. To explore, Economists simplify this pesky problem with an assumption. “Ceteris Paribus” meaning with other conditions remaining the same. All else equal. The world is complicated, ambiguous, and random. We see only a slice of it, and we see based on how we have seen before. We see only what is meaningful to us. We see only when we notice the change/contrast. We have limits. Our worlds bump into each other, and in the past we lived in bubbles with shared baskets and constraints. Now it is difficult to navigate the lack of shared context that stands in the way of staying in touch with other worlds. Our messages to each other arrive as foreigners. We are constantly unpacking and unpicking. Through the chaos, a foundation becomes more essential. A base. Secure space to retreat to and to advance from. Where conditions remain the same.

Sport, Players and Teams

As part of Continuing Professional Development (CPD), I used to go to the Actuarial Conferences in South Africa each year. It was a quick way to get all the required annual CPD points. More than that, it felt like I was connected to something bigger than my company. My second role in the Corporate world was as a Marketing Actuary. That involved Competitor Comparison. It could get quite nasty listing the pros and cons of the competitors (who were all trying to provide for clients). It becomes a little like sport. Gradually you see players transfer. Senior members moving to other companies. Companies treating employees badly. A little like patriotism. I leaned deep into Rainbow Nation South African patriotism till the 2008 Xenophobic attacks. You don’t owe your company any loyalty. “They” won’t show it to you. Your team will change. You will develop loyalty with certain individuals and beef with others. Take the countries and companies we are a part of with a pinch of salt. There is something bigger we are all a part of. Institutions serve us, not the other way around.

Players Move

Free Rider

An Engine is Capital that can earn money on your behalf, so that you can focus on value that is hard to monetise. Income is the lazy man’s way of comparing the incomparable. We don’t have the capacity to understand each other’s worlds without concerted effort. We are mostly too busy on our own stuff to try. We don’t appreciate Free Riders and Lazy Eaters. The base assumption is if you aren’t earning coin, you are leeching. It is a terrible assumption. A symptom of our societal obsession with weighing and measuring each other, rather than seeing the person. Not all ideas are good business ideas. Not all business ideas are good ideas. Most of my time is spent on things that don’t make money, because I “front loaded” my earning. I didn’t spend it all, but instead got it a job. It still earns money. That enables me to do unpaid work. To explore. To get lost in the grass. To appear lost, because I don’t have a big pay-check to print on my shirt. I don’t have a boss to justify myself to. I am cool with that. The world mostly isn’t.

Free to Wonder

Lightbulb Moment

Relative comparison can become destructive. We celebrate outliers because they expand our boundaries of knowledge and experience. Edison didn’t believe he had failed numerous times, “The light bulb was an invention with 1,000 steps.” Each of those steps were connected. They all shone in the resulting light. With individuals, we raise our heroes and not all those who also tried but failed. As we cumulatively take more steps, the heroes get compounded praise. But we already have light bulbs. We don’t always have to think outside the box. To have a “Unique Selling Point”. At some point, we need to start appreciating the strong foundations we have, if we are willing to see and embrace them. Think inside the box. Remember why the light was necessary in the first place. Remember the path it was lighting.

Thinking in Contrasts

We think in contrasts. Things become what they are in our minds because of how they are different. That is where Benchmarks become useful. They allow a form of score-keeping because you have an idea of the alternative if what you are offering is not available. Like sugar, fat, and salt, they are also dangerous. The goal isn’t to beat the Benchmark. The goal is the goal. In “The Art of Learning”, Josh Waitzkin discusses the principle of “numbers to leave numbers, form to leave form”. The goal isn’t the numbers. The goal isn’t the form. They are simply learning tools in the way a Benchmark is. What matters in investing is (1) being a good custodian of the Capital, (2) the creativity that that Capital empowers. Alpha is the term for how much an investor has “beaten their Benchmark”. You can’t eat Alpha. Eventually you let go of the contrasts and engage directly with what it is that matters.

"The Garden of Earthly Delights"

Hieronymous Bosch

Still the Waves

Spending decisions always require trade-offs. Economics is the study of scarcity. It is a Social Science. Value is determined at an individual and community level and can’t be reduced to numbers. That doesn’t stop people trying, but all the quantifying and modeling are, are attempts to simplify incredibly fuzzy comparisons, moods, desires, beliefs and relationships. One of the biggest obstacles to building Capital is that there are always things that shout and scream for attention. Often unplanned expenses that insist they are more important NOW than building a theoretical Engine. We are natural-born consumers, and the idea of becoming custodians fights with clear and present dangers. That is why Capital building starts with a Buffer. Something to still the financial waves. An Emergency Fund that can be repaired when the unexpected bites at it, so that the Engine can be built unmolested. Start with a Buffer. Start with space to breathe.

Calm in Context

Most people's financial decisions are probably made for them. Instead of awareness of the options, and conscious decision making, they just take the next step on the ladder. Depending on the bubble they are born into, the people who surround them, and the menu they are offered. Busyness is part of the problem. Taking the time and making the mental space often requires a big catalyst. A death, a baby, a broken relationship, a move, a lost job, or some wake-up call that makes you look wider. Daniel Kahneman talks of Narrow vs Broad Framing. There is a level of calm to knowing each decision we make is just one of several. There is calm in context. There is calm in listening to other people's full stories. In not comparing yourself as "not good enough" in oversimplified I am here, and you are there, contrasts. The struggle isn't necessarily not knowing the answers. It is in being aware of the right questions. Orientating yourself so that you know where you are to start with.

Expectation Management

In my post-work world, many of my colleagues are coaches and motivational speakers. Before that in my 'work world', a big chunk of my job was almost the opposite. Expectation Management. Warren Buffett talks about how the average investor would do much better by just accepting average returns. Average returns can be achieved at below average costs. The key ingredients are not chasing better returns, not panicking, patience, and delayed gratification. So, ironically, accepting average returns in advance will give you above average returns. In the world of money, I am increasingly becoming a believer in 'thinking inside the box'. Do what works. Find something that works (i.e. pays) that you can do well. Do that. Don't let that define you. Have a plan to build an engine so that you can be free of those constraints. In the post-work world, nothing is impossible. In the world of money, Mermaids and Unicorns can land you on the rocks.

Half the Picture

It is deeply empowering to accept that the world owes you nothing. Stoically assuming the very worst. Face, and accept, anything that could possibly happen. Expect nothing. Then everything that happens will be positive. What sounds like an incredibly negative world view, can result in being permanently either content, or happy. If happiness is the relationship between expectation, and reality. The heart of this idea is that you are on your own. Your strength comes from within. But in weakness, and in vulnerability, there is a world of beauty that opens to those who are prepared to be disappointed. The beauty that comes from owing, and being owed, everything. Content or happy is half the picture.