Optimism and The Base Rate Fallacy

Some people get a reputation for optimism. Others are labelled as pessimists. And it’s often confused me because I’ve had both seemingly contradictory criticisms directed at me.

Whether the vast body of research into the subject agrees with me or not, it seems that the specific label that you apply to another can only be subjective. Whether you view someone as optimistic or pessimistic depends on a huge range of factors. What specific area of their life are you commenting on? Are you comparing their attitude to a cohort who are living similar lives – or are you simply comparing them to you?

And are the two entirely unrelated in any event? Just think of the advice: “Hope for the best but prepare for the worst”. Or read any biography of a successful repeat entrepreneur: the story’s usually pretty clear, a tale of someone who takes chances, sometimes huge, but at the same time works consistently on minimising any downside risk. Or the best investment advice: think of a Buffett/Munger warning against anything that doing anything that could potentially totally wipe you out.

When it comes to the question of why people provide me with different assessments of my character, I often wonder how much my legal training plays a role. I might not have been the best lawyer in the world (to say the least) – but I did spend close to two decades (combining law school, training and practice) being paid to think of the risks. Whether that was a good use of my time is another post altogether…

All of which leads me to a tangental point: how often are pessimists simply people who hold more information? It’s nothing to do with intelligence. Or even conscientiousness. It’s just a question of ‘being realistic’.

Daniel Kahneman speaks of something called the ‘Base Rate Fallacy‘ in his amazing book ‘Thinking Fast, and Slow’. It’s another of those inbuilt, unconscious biases that we all, to a greater or lesser extent, fall prey to. There’s a great post on Albert Wenger’s Continuations blog that explains the issue:-

“The classic example… is guessing which job someone has based on a description of their characteristics: “Steven wears glasses and has a meek demeanour. Is Steven more likely to be a librarian or a truck driver?”

“Our story telling brain wants to jump to the conclusion that Steven seems to fit our stereotype of a librarian much more than that of a truck driver. But in the US there are 3.5 million truck drivers and only 170 thousand librarians. So the base rate is that Steven is 20x as likely to be a truck driver than a librarian! It is therefore quite unlikely that the information about glasses and his demeanour is enough to suggest that Steven is actually more likely to be a librarian.”

The fallacy is responsible for launching thousands of misleading – or just plain wrong – news headlines every year.

Could it be the case that sometimes the so-called optimist is simply blundering ahead blindly with wildly incorrect assumptions (i.e. believing Steven is a librarian)? Whereas the so-called pessimist has a stronger understanding of the reality (i.e. how many lorry drivers there actually are)? That would certainly seem to tie in with evidence shown repeatedly by Nassim Nicholas Taleb that the vast majority of people simply don’t understand the way that statistics work.

So provided it doesn’t prevent you from taking action in the first place, perhaps a healthy dose of pessimism is actually just what the doctor ordered after all.

Excuses

A quote I’m pondering today:

““Ninety-nine percent of the failures come from people who have the habit of making excuses” — George Washington Carver

Often excuses start out as well-intentioned statements of fact – ‘most people doing X end up experiencing Y’. But the problem is that you are very rarely ‘most people’.

No one else has your experiences or talents. No one else has walked in your shoes. And if you’re motivated to do something (think: gun to the head), given a the right timescale, it’s hard to prevent someone achieving a result.

Everybody has a choice: you either get good at excuses – or you get good at getting things done.

It’s one or the other. Not both.

Different Crypto Camps

I think this tweet sums up the current state of Crypto very well.

As is common in the early days of any significant development in society or culture, a shiny new trend can represent many things to new people. Sometimes that shimmer comes from a lack of substance. Composed of hype, the excitement rapidly fades after you start to scratch properly beneath the surface.

But then, far less often, we discover a rich new technology seam that promises huge things. And it turns out that the potential can be backed up in practice (albeit often in ways that often weren’t envisaged at the outset).

To me, crypto is almost the archetypal example of such a paradigm shift. A new technology, that means so many different things to so many people. Confusingly, many of them use the same words to talk about different concepts; most of them have different goals that they’re striving towards; and, with monetary value built into the foundations of the system, people are often incentivised to disparage alternative views. Cue plenty of conflicting discussions, Twitter polemic and basic misunderstandings. But the forwards trend is now, I believe, undeniable.

I enjoyed this article by @caseykcaruso which points out the different camps that are evolving with the scene we loving call ‘Crypto’ (incorrectly, in most cases). You can argue with the definitions of the camps, and even about which projects make up each one – but overall, it’s a great starting point for someone who wonders what all the fuss is about!

1. The Sound Money Camp
Achieving financial self-sovereignty for the people of the world (e.g. Bitcoin)

2. The Payments Camp
Destroying those expensive middlemen like Visa who charge for services that could be provided digitally with micropayments and stable coins (e.g. Bitcoin Cash, Stellar, ZuckBucks)

3. The Open Finance Camp
Building open, accessible financial infrastructure that can compete directly with the traditional financial institutions (e.g. ICO fundraising – good and worse)

4. The Web3 Camp
Decentralising the institutions who control the internet and user’s data (e.g. SAFE Network, IPFS etc).

5. The Decentralised Ledger Tech Camp
Using the functions of transparency and immutability from blockchain tech in order to improve supply chains and backend efficiency in general – a technological, rather than philosophical, revolution (e.g. Corda, Hyperledger).

So, to sum it up: the distinctions are important because behind each one stands a broad church of people, many of whom have different motivations. So if you ever wonder why the scene seems to be moving so quickly (in terms of discussion, even if not in actual practical application), it’s worth remembering that you’re probably reading things by all manner of different people. And most of them are disagreeing.

And, what’s more, that’s a good thing.

Saturday Snippet

Another reason why reading daily is so important from an interview with Head Ted Honcho Chris Anderson. It’s not a direct quote but hey, I’m writing it that way because that’s how I remember it:

“A lot of ideas can only be developed over a long period of time. So failing consistently to take the time to read consistently means you’ll never get there – because for some concepts, it takes far longer to physically (neurologically) rewire your brain. “

The Power of Unlearning & Confirmation Bias

When we think about learning, it’s mostly as an additive process. And, it can be argued that’s correct at times. You’re building a collection of new pieces of knowledge, perhaps about different areas in life. And, for the most part, once you’ve got that bug, it feels good doing it.

Yet there’s another type of learning that is far more uncomfortable. But it’s far more powerful. It’s called unlearning. It’s where you actively replace displace your existing knowledge with more accurate information. That could be thanks to a very basic correction – where you somehow picked up the wrong details in the first place. For example, you thought that 2+2 was 5. The moment you realised your error, the new, accurate knowledge entirely replaces your original beliefs.

But then there’s also a second type of unlearning. Here, you uncover far more detail around a subject than you ever knew existed. The context changes and so  your understanding evolves alongside this. So perhaps it’s not the case that all people who do X get Y – it depends on their location, history, biology – whatever.

This concept of unlearning is important to understand because as humans we all suffer from a number of biases. One of these in particular is the Confirmation Bias. The Scottish moral philosopher and economist Adam Smith described it well in The Theory of Moral Sentiments:-

“The opinion which we entertain of our own character depends entirely on our judgments concerning our past conduct. It is so disagreeable to think ill of ourselves, that we often purposely turn away our view from those circumstances which might render that judgment unfavourable.”

Confirmation Bias makes it harder for us to unlearn what we previously believed because we each have an inherent desire to be seen as consistent. Generally, we believe that people who change their minds are displaying a weakness of character. So if someone presents you with information that totally contradicts your existing knowledge or worldview, it often feels like an attack – and we are likely to respond negatively. Just take a look at the echo chamber of social media or, increasingly, academia to see this in action on a daily basis. We fight hard to repel any evidence that shows we’ve been wrong in the past as a result of our constant desire to present a robust, consistent image to the outside world.

Of course, it’s one thing when such biases affect individuals who are making personal decisions. But the reality is that this behaviour absolutely translates (and I believe arguably is made far worse) when you have a group of individuals in aggregate all making decisions together – for example, in an institution. That’s then exacerbated by other factors, such as groupthink.

For me, political parties are the epitomy of such failures of learning.

So, lessons to take away? Seek knowledge that contradicts your own. Become more self-aware and practice leaving your biases at the door. And most importantly, don’t ever be afraid to change your mind. So you told the world you were going to be a multimillionaire entrepreneur by the age of 25? When six months later you wake up hating the lifestyle, and leave to join a circus – don’t feel guilty when people call you a flake. Maybe you’re putting smiles on people’s faces. And maybe you’ve just unlearned the most important lesson in life – how to move closer to what you actually want.

 

The Underground (Map) Is Not The Territory

If you’ve ever been on the Tube in London, you’ll have used the Tube Map. Initially, it might seem pretty confusing. Then, after you’ve been using it for a while, you realise one day that you don’t actually need to use it too often. But what you might not have realised during that initial period of learning is that it’s actually a deceptively simple representation that takes a number of liberties with the geography.

As this post explains, the Tube was borne out of a number of independent railways that merged into a single system. But at the point that the first map of the full Underground was published (in1908), it quickly became clear that there was an issue. Due to a confusing mix of geography and spread – with many of the most important central stations all squashed together in an illegible mess in the centre off the map in order to show the full system on one page – the map was pretty much useless.

1932

That changed when Fred Stingemore decided to take a more creative approach to the image in 1926. He made a significant change by removing the strict correlation between geography and detail. No longer did the lines correspond to the natural landmarks on the streets above. But, all of sudden, details could be explored that were simply missing before    

One of the most fascinating outcomes here wasn’t purely for the user experience. The post notes that the revised imagery also arguably had a social function as it displayed stations from the outskirts as being close to the centre, helping to build closer community ties between both.

And then came along Harry Beck who pushed things even further in 1931 by publishing the tube map that we all know today. His innovation? “Straightening the lines, experimenting with diagonals and evening out the distance between stations”.

2016

Whilst the Tube Map today has gone through a few iterations, the significant shift had already occurred. And an interesting example of precisely how accuracy is sometimes precisely the opposite to what you need. There’s a saying that I might have mentioned before: “The Map is Not the Territory”. The point here is that a map is by definition a simplification: if it contained the same detail as reality then that piece of paper would be exactly the same size as the land it purports to cover.

Of course, this doesn’t mean that maps aren’t useful. It’s just important to understand that they’re flawed. To use the words of George Box:

“All models are wrong but some are useful”

Something you might remember the next time you’re zooming around under the city of London, avoiding everybody’s gaze whilst firmly wedged between a rucksack and another commuter’s eye-watering B.O….

The Library of Mistakes

Quite a few years ago, I remember coming up with an idea for a new conference. It would be one that celebrated failures – specifically in business, but I thought it could be expanded to cover multiple areas of both work and just life in general.

It started as an idea around entrepreneurship , where learning not to repeat the mistakes made by those that got there before you can be the difference between a highly stressful period of being not-dead (the realistic best-case scenario for an early stage business) and simply sinking beneath the surface, never to be seen again. The whole point of such an event was, in fact, that you would be seen again. Or at least heard from.

Like many ideas, it never came to fruition. At least not from me. Plenty of other people have since had the same idea – which proves that other great truth of entrepreneurship: ideas are irrelevant. It’s all about execution. So now you’ll know why that well-known novelist didn’t bite off your hand when presented with your kind offer to supply her with an amazing story idea you had in return for which you’ll accept a very equitable 50/50 share of the profits….

So you can probably imagine then that I’m a big fan of the Library of Mistakes in Edinburgh. It’s a niche library set up in the aftermath of the financial crash which has the goal of collecting all the material possible about the financial system and how it has failed in the past.

It has a great motto as well: mundum mutatu errore singillatim – which as I’m sure you’ve already guessed means ‘changing the world one mistake at a time’.

I’m a big believer that the financial system today is too complex for anyone to understand. And anyone who claims that they do – from economists, to central bankers, to politicians – whoever – is either lying or (even worse) doesn’t realise the limits of their knowledge. But however impossible it might be to understand how the financial system will evolve and react in the future to certain actions, it can’t hurt to be constantly reminded of just how many times in the past people thought they’d understood the system – before going on to in fact prove (mostly with other people’s money) that they didn’t.   

Advice For Students

I enjoyed the post put up by Richard Koch on his blog today (‘Ten Commandments For Students’). It’s worthwhile reading – but if you’re too lazy to do that (which, let’s be honest, isn’t a great sign to start with…), here’s a quick outline:

1. Do your own thing.

Don’t follow that traditional / expected / boring career path. If you’re looking for exceptional results, by definition you need to be doing things differently (or you’ll just end up with the same results as everyone else).

2. Deliver Exceptional Results

That doesn’t mean the highest marks of anyone. It means the highest marks using your approach that only you are capable of achieving.

3. Take Your Time

Take your time, experiment and learn from failures. Never be afraid to spend time thinking and preparing – and building you.

As Abraham Lincoln used to say: “If I must chop down a tree in four hours, I’ll spend the first three hours sharpening the axe.”

4. Get Ideas from People

Meet lots of different people from lots of cultures. See what results they’re applying – and then adapt those ideas to your circumstances.

5. Get ideas from books

Pretty obvious. Don’t spend your time with magazines or online. Read real, physical books. With paper you can mark up and scribble your notes on for future use.

And remember: usually the oldest books are the best (the Lindy Effect).

6. Enjoy Your Work

Without enjoyment and/or passion, you’ll never stand out from the pack. And never do anything you don’t enjoy – regardless of pay.

7. Learn to Collaborate

Choose people who have skills that you don’t to increase the chances that so that the end result will be stronger than what you could have ever achieved alone.

8 . If something isn’t working, quit

Don’t be a martyr. Life’s too short.

9 . Thrive on Failure

Or should that be: strive to expose yourself regularly to situations that you can learn from.

10. Be Generous and Warm-Hearted

You get what you put in. Pay it forward – and help others with no expectation of reward. You’ll never know when one of those seeds from years ago will bear fruit for you in a big way in the future.

 

Sybil The Fake

In the project that takes up most of my time, Sybil resistance is a big thing. The name comes from a well-known attack vector in computer science whereby an attempt is made to gain control of a distributed peer-to-peer network by someone who maliciously creates many nodes in order to take control of the system overall.

I first discovered the concept when I stumbled across the Bitcoin White Paper all those years ago. I spent many hours solidly reading, researching and re-reading that paper repeatedly as I was struck by a growing belief about just how seismic the repercussions of those eight pages could be. And in true Bitcoin fashion, this area was simply yet another that was touched upon in passing (Proof of Work in Bitcoin makes Sybil attacks much more expensive as it increases the costs and difficulties substantially for anyone who’s trying to take over the network), rather than the full story.

Preventing Sybil attacks is a challenge that must be faced by every open, permissionless network – and solved. But you might wonder where the name originally came from in the first place.

The answer is a 1973 book called ‘Sybil’ which recounted a case study of an individual who suffered from dissociative identity disorder (i.e. multiple personalities). Her psychiatrist Dr. Cornelia Wilbur and the book’s author, Flora Schreiber ended up rich from the book’s success. But it turns out that Shirley Ardell Mason‘s 16 different identities may in fact have have been fabricated. Partly because the patient was administered strong drugs over a long period of time, some of which were well-known to produce hallucinations.

If you’re interested, there’s a book that explains the story in much greater detail. But you have to admit, it’s somewhat ironic that a term which is used today as a shorthand for malicious activities in a networked society is in fact based on dishonesty at its core – albeit not the creation of pseudonymous personalities after all.