I was recently interviewed in Forbes.
Shane Parrish is on a mission to make you think, and think better. With over 30,000 subscribers — and that number growing quickly — Shane runs Farnam Street, an intellectual hub of curated “interestingness” that covers topics like human misjudgment, decision making, strategy, and philosophy. He exposes his readers to big ideas from multiple disciplines, adding tools to their problem-solving toolbox that improve decision making.
As an avid reader of FS myself, I recently caught up with Shane to discuss its genesis, how he works through a problem, why he was frustrated with his education, and, of course, Justin Bieber.
Here are two excerpts, in particular, I think you’ll enjoy.
The first is on my experiences doing an MBA.
Beshore: What was the core problem with your MBA program?
Parrish: There is a big difference between knowing what something is called and understanding. My MBA was all about vocabulary. For me, it was too much memorizing and regurgitating. …
The second one focuses on incorporating mental models into your thinking.
Beshore: How can we use these mental models to improve our decision making?
Parrish: When you come across a difficult decision, you really want to have a double filter that shifts your mind from reactive to rational. The first filter is running through your mental models and determining the factors that govern the situation. If I look at this through the lens of evolution, what do I see? What about supply and demand? What are the incentives?
The second filter is how you might be fooling yourself. What’s happening subconsciously? Am I only looking at a small subset of data? Am I in love with my solution? Am I biased by authority?
One of the added benefits of this approach is that when you make a bad decision, and you will, you now have a mental framework where you can account for your mistake in the future. If you failed to consider something you should have, you can easily identify it and account for it. So you’re always getting incrementally better and, over a long life, those increments will make a huge difference.
Beshore: Can you give a hypothetical example of how this system of thinking might play out?
Parrish: Looking at problems through a single discipline often leads to the wrong conclusion. For example, let’s say you’re the CFO of a textile company. The industry is not profitable and plagued with overcapacity, with only one company posting profits in the last 12 months. Your board is pressing you to demonstrate a credible path to profits.
A salesman shows up at your door one day, offering new processing equipment that is 50 percent more efficient. It will save your company a ton of money, improve margins, and pay for itself within only a few years. You verify his claims and determine that by purchasing this equipment, you’d get a 20 percent pre-tax return on your investment. Should you do it? Most people would say yes, but I’d say no.
If you only look through a financial lens, it seems to make sense. But that’s not going far enough. The second question is, “Where will the savings go?” What will likely happen is you’ll install this machine and either keep prices the same (to improve margins) or lower prices (to gain market share). But the salesman is already on the way to your competitors. Only now, he can say they must install this to stay competitive. The salesman points to your increasing market share or big margins, ensuring your competitor purchases the same equipment. Eventually, everyone has the same equipment, plummeting prices. Things go back to the way they were, only now you have more capital invested in the business. But that salesman will be back next year with a newer, improved version.
So from a mental model perspective, we can just list some of the ones at play: incentives (the salesman is not your friend), game theory, and The Red Queen Effect (where you need to put continuously more money in to keep your same position). Of course, I didn’t come up with this myself. Warren Buffett faced a similar dilemma in the early 1980s with Berkshire Hathaway’s unprofitable textile business.