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Ep.96 — How to get better at making decisions w/ Jake Taylor (CEO of Farnam Street Investments)
48 segments available
Jake Taylor is the CEO of Farnam Street Investments and author of the book ‘The Rebel Allocator’, a book that help readers make better investment and business decisions. You can find Jake on Twitter at https://twitter.com/farnamjake1 and get his book from https://www.amazon.com/Rebel-Allocator-Jacob-Taylor/dp/173268832X Show Notes: - Iron Law of Economic Survival - Trade-offs between profit and brand - Capturing intangible value - Products as signalling devices - Journalytic — Getting better at decision making - Reducing the friction around journalling - Joseph Campbell's Hero's Journey - Shortening the brain’s feedback loop - The Great Reshuffle - The Thinker and The Prover - Cheng versus Ch'i - Plato’s cave analogy for business decision making - What makes a good decision maker? Books Mentioned: - The Rebel Allocator; by Jake Taylor - The Wealthy Barber; by Dave Chilton - The Nature of Value; by Nick Gogerty - The Genius of the Beast; by Howard Bloom - Happy; by Derren Brown
Segments Timeline
Breaking Infinite Loops
Jim O'Shaughnessy introduces the concept of 'infinite loops' in decision-making and investing. He emphasizes the importance of resetting our thinking to avoid repetitive thought patterns. This segment sets the stage for exploring how to become better investors and nuanced thinkers through diverse perspectives.
"[Music] hi i'm jim o'shaughnessy and welcome to infinite loops sometimes we get caught up in what feel like infinite loops when trying to figure things out markets go up and down research is presented..."
Meet Jake Taylor
Jim welcomes Jake Taylor, CEO of Farnam Street Investments and author of 'The Rebel Allocator.' They discuss the significance of Jake's work in helping individuals understand asset allocation through storytelling, akin to the approach taken by Dave Chilton in 'The Wealthy Barber.' This segment highlights the blend of narrative and education in investment strategies.
"this episode of infinite loops jim o'shaughnessy is chairman and co-chief investment officer of o'shaughnessy asset management where jamie catherwood is an associate all opinions expressed by jim jami..."
The Iron Law of Economics
Jake Taylor explains the 'Iron Law of Economics,' emphasizing that costs must be less than prices, which in turn must be less than the value perceived by customers. He discusses the relationship between cost, price, and value, illustrating how these elements must align for a sustainable business model. This foundational concept is crucial for understanding effective decision-making in business.
"and the author of a book i read before i knew you called the rebel allocator welcome jake thanks jim that's uh it's a real pleasure to be here although i do feel a little bit of nerves given the quali..."
Profit vs. Brand Trade-offs
In this segment, Jake discusses the trade-offs between pursuing profits and building a strong brand. He warns against the dangers of prioritizing short-term profits at the expense of long-term brand value, using examples from industries like cable companies to illustrate how consumer perceptions can impact business sustainability.
"yeah uh that the original framework for that uh came from nick gogherty has this book called the nature of value that has and he showed like that cost and price and value have to be in relation to eac..."
Return on Invested Capital
Jake elaborates on the importance of Return on Invested Capital (ROIC) in evaluating business growth strategies. He explains that chasing growth without a solid ROIC can lead to unsustainable practices. This segment emphasizes the need for businesses to focus on maintaining good financial health before pursuing aggressive expansion.
"trade-offs between the prices that you are charging will either create profit for you or another way of thinking about it actually kind of stored profit in the minds of your customer for later use um ..."
The Nuances of Growth
Jake discusses the complexities of growth in business, particularly in network-driven industries. He highlights that while growth can be beneficial, it must be approached with caution, ensuring that businesses maintain a healthy return on invested capital. This segment provides insights into strategic decision-making for sustainable growth.
"capital um talk to me a little bit about um what are what are the hazards if you're chasing those profits uh at the expense of uh building the brand yeah exactly right so if you imagine the especially..."
Intangible Value in Modern Economy
In this segment, Jake addresses the shift towards an intangible economy, where traditional metrics like price-to-book ratios may no longer be effective. He discusses the challenges of valuing intangible assets, such as brand equity and intellectual property, and the need for new frameworks to assess these assets in investment decisions.
"way to get the network scaled up to a certain size and inertia so it's not quite as simple as like a low return on invested capital equals bad business um but over a long enough period of time we can ..."
The Flaws of Traditional Accounting
Jake critiques traditional accounting practices for failing to capture the true economic value of intangible assets. He argues that outdated methods do not reflect the realities of modern businesses, particularly those reliant on technology and innovation. This segment highlights the need for evolving accounting standards to better represent current economic conditions.
"the new data set from from crisp for 1928 through 1964 and you found that it was inverted because another thing low price to book is a proxy for is bankruptcy risk and but there's another problem with..."
Rethinking GDP and Economic Measurement
Jake shares his perspective on the irrelevance of GDP as a measure of economic health, arguing that it fails to account for significant aspects of modern economies. He emphasizes the need for new tools and metrics to evaluate economic performance accurately, particularly in industries driven by intangible assets.
"that accounting has decayed somewhat from economic reality and there's some good reasons for that i mean if you're trying to be as conservative as possible which is one of the the tenets of accounting..."
Jobs to Be Done Framework
Jake introduces the 'Jobs to Be Done' framework, which helps understand consumer behavior and the reasons behind brand loyalty. He explains how this approach can provide insights into why companies like Apple can charge premium prices while maintaining customer loyalty. This segment underscores the importance of aligning products with consumer needs.
"symbol manipulation if you will i call myself a symbol manipulator you're a symbol manipulator and that's where the value is right so so the brilliant people at intel come up with the design for a new..."
Jobs to Be Done Framework
In this segment, Jake discusses the 'Jobs to Be Done' framework introduced by Clayton Christensen. He explains how consumer decisions are driven by subjective needs and desires, emphasizing that the value of products is determined by the jobs they fulfill for consumers, rather than their production costs.
"right right now yeah so when i started it it was higher yeah but um but so i think that that's going to persist and that we're going to need new tools to be able to like make this more choices about a..."
Value vs. Price in Modern Markets
Jake elaborates on the disconnect between value and price in today's market, using the iPhone as an example. He explains how the iPhone consolidates multiple devices into one, creating immense value for users that far exceeds its production cost, illustrating the shift from cost-plus pricing to value-based pricing.
"and then there's the price and the price doesn't necessarily have to do anything with the cost it's the value that's derived so take an apple iphone for instance and you know it replaced a hundred dif..."
Desire vs. Demand
In this insightful discussion, Jake references Howard Bloom's ideas on desire versus demand, explaining how human beings engage in status and signaling games. He highlights that many products initially perceived as frivolous can evolve into essential tools, reshaping consumer behavior and market dynamics.
"yeah and uh you know now we're in rory sutherland land uh who's a good friend of mine um and uh you know i i think he's right uh it is the consumer or the purchaser who determines the value of these p..."
The Evolution of the Printing Press
Jake shares the historical context of the printing press, illustrating how it began as a luxury item for the wealthy before democratizing access to information. He connects this evolution to modern market dynamics, emphasizing the importance of understanding consumer needs and the potential for innovation.
"all of the most useful products started out as frivolities the example he gives is the printing press of all things um and he he tells the story about gutenberg whose day job before he came up with th..."
Status Signaling in Consumer Choices
This segment delves into how products serve as status symbols, particularly in the context of early iPhone adoption. Jake discusses how consumers often purchase items not just for their utility but also to signal identity and social status, highlighting the psychological aspects of consumer behavior.
"investing i'm glad you brought up the status items because one of the the takeaways of jobs to be done is that you do hire a service or a product to signal a status thing so like especially early ipho..."
The Challenge of Modeling Consumer Behavior
Jake reflects on the complexities of modeling consumer behavior in investing, particularly in a rapidly changing market. He discusses the need for new metrics to understand consumer motivations and the challenges posed by unpredictable market dynamics.
"yeah i have a i have a young guy who i've had on the podcast rob henderson who's getting his phd at cambridge um and this is his this is what he is looking at and he came up with a really interesting ..."
Invisible Beliefs and Market Perceptions
In this thought-provoking segment, Jake discusses how historical beliefs shape current market perceptions, using the Forbes 400 list as an example. He emphasizes the importance of recognizing and challenging these invisible beliefs to develop new investment theses.
"efficacious in trying to you know uh grasp these things that are harder and harder to grasp i was talking to a friend last night and you know they've got this show actually not a friend my daughter-in..."
Introducing Journalytic
Jake introduces 'Journalytic,' a new software tool designed to enhance decision-making processes for investors. He explains its purpose in organizing thoughts and improving the quality of investment decisions by leveraging structured frameworks and feedback mechanisms.
"is because it also shows that we are often trapped by these invisible beliefs that we don't even know we have like so forbes 400 who's mrs astor what the hell you know this is bizarre yeah right and a..."
Navigating Wicked Learning Environments
In this segment, Jake discusses the concept of 'wicked learning environments' in investing, where feedback is often delayed and outcomes unpredictable. He emphasizes the need for adaptive strategies and frameworks to navigate these complexities effectively.
"it it started with uh you know being an investor and more discretionary like everybody read the checklist manifesto and uh you know like oh yeah checklist that's a good idea like i know i can only sto..."
The Power of Journaling
Jake Taylor advocates for journaling as a method to improve decision-making. He explains how recording thoughts, feelings, and predictions can help individuals understand their confidence versus competence, ultimately leading to better investment outcomes.
"one of the ways around that is to start journaling about what you're thinking what you're feeling record your decisions record your predictions and actually like assign some probabilities to them so t..."
Building Better Decision-Making Habits
Taylor shares insights on how journaling can enhance decision-making skills. He discusses the importance of creating a structured approach to journaling that includes analytics and feedback loops, allowing investors to learn from their decisions more effectively.
"and i'm incredibly excited to be able to help people in that way and using uh it myself now kind of a very rudimentary version for more than a year now like it's it's been a game changer for me and li..."
Overcoming Barriers to Journaling
In this segment, Taylor addresses the challenges of getting people to maintain a journaling habit. He compares it to going to the gym and discusses strategies for lowering activation energy, such as gamification and building small habits.
"narrators um you know mother nature and evolution think that it's doing us a kindness by updating our memories to what we believe now let me ask you a question though about journalistic um are are you..."
The Hero's Journey in Decision-Making
Taylor connects the concept of Joseph Campbell's Hero's Journey to the process of decision-making. He emphasizes the importance of making the user the hero of their own journey, showcasing how journaling can lead to personal growth and improved investment skills.
"i we are looking at ways to to create some fun gamification around it and hopefully gamification in the way that is good for you like i don't want to be gamification with like confetti uh because you'..."
Leveraging Technology for Better Decisions
This segment explores how technology can assist in decision-making by providing tools that enhance cognitive processes. Taylor discusses the need for digital tools that help minimize surprises and improve feedback loops in investment contexts.
"another part of the jobs to be done framework is it actually gets into like joseph campbell's hero's journey where you're you're taking the customer and making them the hero of the journey and that's ..."
Navigating Non-Linearity in Investments
Taylor and his co-host discuss the shift from linear to non-linear behavior in investment decision-making. They highlight the importance of understanding variance amplification in the digital age and how it affects investment strategies, emphasizing the need for adaptability.
"to get the horse to go the direction you want if he's already going that way right right if if we can build tech tools that allow us to leverage um our thinking leverage our own brains our own style u..."
The Importance of Deleting Beliefs
In this thought-provoking segment, Jake Taylor emphasizes the necessity of deleting outdated beliefs that no longer serve us. He discusses how this practice can lead to better decision-making and personal growth, particularly in a rapidly changing world. The conversation touches on the challenges of overcoming ingrained beliefs and the role of journaling in this process.
"doing the series to try to help people understand what's going on and give them kind of ideas about okay this is what you might want to learn about because all that old stuff that you know you gonna h..."
The Risks of Social Hierarchies in Decision Making
Jake Taylor shares insights on the dangers of hierarchical structures in organizations, particularly how they can distort information flow. He uses historical examples, such as McNamara during the Vietnam War, to illustrate how subservience within hierarchies can lead to catastrophic decision-making failures. This segment underscores the importance of fostering open communication and truth in decision-making processes.
"much uh in support of say uh universal basic income or the citizens dividend these are not new ideas you know and by the way they've been promoted by both the right and the left so it seems to me and ..."
Cultural Barriers to Effective Communication
In this segment, Jake discusses the cultural barriers that can hinder effective communication in organizations, particularly in high-stakes environments like aviation. He highlights the importance of training and cultural awareness to ensure that critical information is communicated effectively, preventing disasters caused by hierarchical constraints.
"so far until they get the pitchforks and um i think that the elites of today this is a different subject i think we'll maybe stay off of it they just don't really they really don't have a clue um and ..."
Understanding Human Behavior in Decision Making
Jake Taylor reflects on his fascination with human behavior and the common mistakes people make in decision-making. He discusses the concept of the 'Thinker and the Prover,' explaining how our beliefs shape our perceptions and decisions. This segment emphasizes the need for awareness of cognitive biases and the importance of questioning our assumptions.
"that's the question i want answered what do we have wrong what was it uh darwin who like if within 30 minutes he didn't if he found just confirming evidence of something that he believed he'd write it..."
The Role of Mental Models in Magic and Decision Making
In a captivating analogy, Jake Taylor connects the art of magic to decision-making by discussing how magicians manipulate mental models to surprise their audience. He explores the parallels between creating expectations and the importance of understanding human psychology in both magic and business. This segment highlights the significance of surprise and prediction in effective decision-making.
"like i wrote a thing for uh a thread on twitter that actually turned out to be really popular called the thinker and the proverb and like it basically says hey you can think about anything you want to..."
The Challenge of Changing Beliefs
Jake Taylor discusses the difficulty of changing deeply held beliefs and the cognitive dissonance that arises when confronted with contradictory evidence. He emphasizes the importance of capturing erroneous beliefs and using them as learning opportunities. This segment provides insights into the psychological barriers to change and the necessity of adaptability in decision-making.
"and and one of the things about uh really capturing the um the erroneous belief or the data that shows that you're wrong i cannot tell you how much that has saved me in my life like i do the same thin..."
Pushing Decision Making Down the Hierarchy
In this segment, Jake Taylor advocates for decentralizing decision-making within organizations, pushing it down to those closest to the action. He shares personal experiences from his career to illustrate the benefits of empowering individuals to make decisions based on real-time information. This approach is framed as essential for effective management and responsiveness in dynamic environments.
"i was going to ask you speaking of twitter jim the uh one of my favorite threads that you had is your when you were a magician and seeing the old pictures and it actually got me thinking about you kno..."
The Need for Truth in Decision Making
Jake Taylor concludes with a discussion on the importance of grounding decisions in the 'capital T truth' of reality. He draws parallels to Plato's allegory of the cave, emphasizing the need for organizations to seek out and confront the truth to make informed decisions. This segment reinforces the idea that understanding reality is crucial for effective leadership and decision-making.
"pattern for them you're turning on all these these things in their brain that say i know what's next right because our brains are always making those predictions yep and meanwhile they don't see the c..."
The Information Decay in Organizations
Jake Taylor discusses the phenomenon of information decay within organizations, where valuable insights become distorted as they travel up the hierarchy. He uses the example of McNamara during the Vietnam War and the cultural challenges faced by Korean pilots, highlighting how social hierarchies can prevent critical information from reaching decision-makers, ultimately leading to disastrous outcomes.
"great reason to um to read your book pushing it down but here's a little catch that i want to ask you about i also have a theory that as companies or organization doesn't have to be a company uh organ..."
Plato's Cave and Decision Making
In this segment, Jake Taylor draws parallels between organizational decision-making and Plato's allegory of the cave. He explains how organizations often operate under misconceptions, interpreting shadows of reality rather than the truth. The discussion emphasizes the importance of pushing decision-making closer to the source of information to enhance accuracy and responsiveness.
"for for how like could mcnamara have used something else i have kind of an idea but i'd like to hear your idea saving all the easy ones for me jim yeah absolutely absolutely i thought layups you know ..."
Empowering Frontline Decision Makers
Jake Taylor advocates for empowering frontline employees to make decisions that directly impact customer satisfaction. He argues that those closest to the customer have the best insights and can respond more effectively than distant executives. This segment highlights the need for organizations to shorten feedback loops and decentralize decision-making to align with customer needs.
"so the more that you can push it down in a business context the whole point of a business is to delight the customer and the closer that the person is to the actual customer and can see what is workin..."
Lessons from Military Strategy
In this segment, Jake Taylor compares business decision-making to military strategies, particularly the blitzkrieg approach. He emphasizes the importance of giving frontline teams clear objectives while allowing them the autonomy to execute tactics based on real-time information. This approach fosters agility and responsiveness in both business and military contexts.
"uh in a war context with uh and granted like of course the the aims that they were going for were horrific and disgusting and like no one's saying this you know pro nazis or anything but like the blit..."
The Role of Trust in Decision Making
Jake Taylor discusses the critical role of trust in effective decision-making within organizations. He references Warren Buffett's approach at Berkshire Hathaway, where a high level of trust allows for decentralized decision-making. This segment underscores how trust enables organizations to operate efficiently and empowers employees to take initiative.
"a thousand miles back to you at headquarters and then you send something out to them like okay well here's the next thing you should do like they already know what the general goal is and they're just..."
Characteristics of Effective Decision Makers
In this segment, Jake Taylor outlines three essential qualities for effective decision-makers: energy, integrity, and aptitude. He emphasizes that these traits are crucial for fostering a culture of trust and collaboration within organizations, enabling better decision-making processes and outcomes.
"advantage if you can figure out how to do it creatively totally uh that quote by the way is from lao tzu the dowdy jing and he says the greatest of leaders uh leaves his people thinking we've done it ..."
The Importance of Action on Ideas
Jake Taylor stresses the necessity of taking action on ideas to achieve success. He critiques the tendency to overvalue ideas without execution, highlighting that knowledge combined with action is essential for making a meaningful impact. This segment encourages listeners to not only generate ideas but also to actively pursue them.
"work right and and you know that's right so prices convey information in a in an economy and so that's how supply and demand finds its level and it's so amazing to think that i have this little list i..."
Building Networks and Collaboration
In this segment, Jake Taylor discusses the significance of building networks and collaborating with like-minded individuals. He highlights the ease of finding and connecting with others who share similar goals in today's interconnected world, emphasizing the potential for collective action and innovation.
"uh we'll have to have you back on but um you know one of the one of the things that you say uh both in your book and in in other uh endeavors is like if if you're really going to be looking for um you..."
Navigating Challenges in a Complex World
Jake Taylor reflects on the challenges facing humanity, such as economic and political strife, while also recognizing the opportunities that arise from these complexities. He encourages a positive outlook, suggesting that despite difficulties, there are always avenues for growth and collaboration.
"especially nowadays in in complex systems trust is actually one of the like key ingredients of any of those systems uh and i think that's actually why berkshire has been so successful and been able to..."
The Great Reshuffle and Its Implications
In this concluding segment, Jake Taylor introduces the concept of 'The Great Reshuffle,' discussing how changes in time, space, and geography are reshaping the landscape of decision-making and organizational dynamics. He emphasizes the importance of adaptability and responsiveness in navigating these shifts.
"the front lines uh just like a good general would in a blitz creek so it all ties together it's funny how all these threads you know just run through the exact same stuff but i think it gets to that's..."
The Great Reshuffle: Implications of Change
Jake introduces the concept of 'The Great Reshuffle,' explaining how time, space, and geography have collapsed in today's society. He illustrates how this shift enables individuals to find their 'tribe' regardless of location, facilitating faster feedback and iterative processes that enhance decision-making and innovation.
"alive i think and you know there's you can get you can paint lots of negative pictures in macro environments you look at federal debt levels and expensive markets and uh you know political strife and ..."
Empowering Growth Mindset and Agency
In this thought-provoking segment, Jake shares his vision for empowering individuals with a growth mindset and a sense of agency. He believes that everyone has the potential to improve their circumstances and that fostering this belief can lead to significant societal benefits. He emphasizes the importance of personal responsibility and the ability to overcome challenges.
"i just think it's like i i too feel just amazingly lucky to be around at this particular period in time and people think i'm crazy when i say that but it's like oh just wait wait and see well listen t..."
Capitalism as a Force for Good
Jake articulates his belief that when practiced correctly, capitalism can benefit all stakeholders involved—employees, customers, and communities. He argues for a long-term perspective in business that fosters win-win relationships, highlighting the potential of capitalism to drive positive change in society.
"world i think the the first one would be it has to be something around growth mindset and that that and a sense of agency that if i want tomorrow to be better than it is today i can do that it's avail..."
Balancing Angels and Demons in Business
In this segment, Jake discusses the duality of capitalism and government control, likening them to angels and demons battling for our societal direction. He advocates for recognizing the benefits of well-practiced capitalism while addressing its shortcomings, emphasizing the need for a balanced approach to foster innovation and societal progress.
"that we uh we probably are i i kind of have a little bias that actually like we're sort of like there's these angels and demons on our shoulders where one angel is like capitalism done right i'm not s..."
The Free Market's Role in Advancing Humanity
Jake concludes by reflecting on the historical impact of the free market in improving living standards and advancing human society. He acknowledges the challenges that exist but maintains that the free market remains the best system for alleviating poverty and enhancing quality of life, urging listeners to appreciate its potential.
"i i love both of those and you know again stealing from the author i've uh told you about uh you know he opens his book by saying you know um if you look at all of the religions all of the societies a..."