The Hazards of Talking to Strangers

“So, guys, how did the trip to Japan go? Did you get the software installed?”

“It was great! The clients loved us and are super happy about the installation! The boss even took us out for dinner the last night and we stayed out later with some of the younger guys on the team who showed us around the Ginza District. They are super happy!”

The project was a dismal failure.

The Japanese clients could not properly read the fonts that were selected for them by the young engineers from Silicon Valley. And that was the tip of the iceberg. The system simply did not offer the functionality that the client had in their old system, to say nothing of the improvements they were hoping for.

Somewhere along the line, signals were crossed and the strangers from two vastly different cultures could not find a way to communicate effectively. Even worse, both sides did not realize that they were not communicating effectively. The American team thought that the Japanese clients were happy. The Japanese clients thought that the American team understood that the project had failed.

Why is it that we often seem to misread people we don’t know well, even when we share the same culture and background? The implications of this question are far reaching and go well beyond committing a minor faux pas at a party or the failure of a software installation project. Misreading others has often been the cause of military conflicts costing thousands of human lives. Given the high stakes involved, psychologists have long searched for answers regarding how humans communicate and the pitfalls that can occur when signals are crossed and communication fails. Malcolm Gladwell, who is perhaps best known for his previous bestselling book, Outliers, has written a new book in search of answers to these vexing questions. Talking to Strangers is Gladwell’s attempt to survey the field and come up with answers, starting with the case that seems to have haunted him the most: The arrest and subsequent suicide of Sandra Bland.

The Black Lives Matter movement is only about six years old but has become a rallying cry for those who believe that our society is not acting quickly enough to address systemic racism. Gladwell opens his book with a description of what took place in Prairie View, Texas between Bland, a young African American woman, and Brian Encinia, a young Hispanic police officer. After pulling Bland over for a minor traffic violation, the situation spirals out of control when Encinia responds to Bland’s irritated demeanor by ordering her out of her vehicle. Bland resists, a physical altercation ensues, and Bland is arrested and jailed. Three days later, Bland committed suicide in jail.

Gladwell is clearly haunted by this episode and its implications. All of the stories and examples he covers in the book, from examining how longtime spies could permeate American intelligence agencies to how Neville Chamberlain could so badly misread Adolf Hitler to how Bernie Madoff could defraud investors for decades, seem to lead up to his concluding chapter revisiting the Sandra Bland tragedy.

Truth-Default Mode

One of the core insights Gladwell asserts early on is that people are not good at detecting when others are telling the truth. The core problem seems to be that we assume a greater level of transparency in other human beings than we see in ourselves:

“We think we can easily see into the hearts of others based on the flimsiest of clues. We jump at the chance to judge strangers. We would never do that to ourselves, of course. We are nuanced and complex and enigmatic. But the stranger is easy. If I can convince you of one thing in this book, let it be this: Strangers are not easy.”

But isn’t this obvious? Who thinks that strangers are easy? Very few of us, especially those of us involved in the investing field, would characterize ourselves as gullible about the intentions of others. However, Gladwell makes convincing arguments that even those who are trained to be skeptical are often lulled into a false sense of security by what he refers to as the “Default to Truth”.

The case of Ana Montes provides good evidence that most of us are likely to have serious blind spots. Montes was a longtime spy for Cuba and worked as an analyst for Defense Intelligence Agency. She fell under suspicion in 1996 when a series of events caused counterintelligence agents to focus on her activities. Scott Carmichael, a highly trained DIA counterintelligence agent, questioned her at length and she denied the allegations. Carmichael was convinced of her innocence even though, years later, he would reflect on several warning signs related to Montes’s responses and her demeanor. It turned out that Montes was a Cuban spy and had been for nearly her entire career. She had met with Cuban handlers at least 300 times. Her brother and sister both worked at the FBI and had no idea of her betrayal. Her treachery was finally detected four years after Carmichael first interviewed her — after countless other national security secrets were given to the Castro regime.

Gladwell asserts that human beings tend to default to truth – that is, we tend to view other people as relatively transparent and give them the benefit of the doubt. This approach is not without its benefits because society cannot function in an environment where there is no baseline of trust. Most people require a trigger to snap out of “truth-default” mode. In general, we fall out of truth-default mode only when the case becomes definitive. As was the case for Fox Mulder in the X-Files, most of us “want to believe”. If this tendency caused a trained DIA counterintelligence agent to explain away the fidgety demeanor and shaky story of Ana Montes, what hope do the rest of us have? Bear in mind that we are referring to the ability to detect truth in individuals within our own culture and society. The problems multiply manifold when interacting with those who we share little in common with.

Default to Skepticism?

What is the antidote to the many problems that are caused by truth-default mode? Can we train ourselves to be skeptical about others and only come to the conclusion that something is true when presented with evidence? This is the approach many of us in the investment community try to take. Perhaps the most famous recent example is the case of Harry Markopolos who was one of the very few individuals to detect Bernie Madoff’s massive fraud years before Madoff’s Ponzi scheme collapsed in 2009.

Markopolos had been watching Madoff’s activities for years and warned the Securities and Exchange Commission repeatedly starting in 2000. All warnings were ignored. Markopolos did not default to truth – he did not care that Bernie Madoff was well respected on Wall Street or that his reported results were excellent over a long period of time. Markopolos looked at the facts and they did not add up. Markopolos did not trust the system and assumed nothing.

Markopolos did not require a high threshold to be jolted out of truth-default mode. He had no threshold at all. However, Markopolos is very unusual and his distrust of the system comes at a cost. He detected the Madoff fraud but, according to Gladwell, he was constantly paranoid and on edge, insisting that his life was in danger and living in what sounds like an armed compound. It is unclear whether the kind of skepticism demonstrated by Markopolos is an innate personality trait or whether we could train ourselves to behave in that manner. In either case, however, it is not obvious that defaulting to skepticism is desirable. Doing so comes at a high cost to the individual.

Returning to the case of Sandra Bland at the end of the book, Gladwell believes that the situation escalated out of control primarily because the police attempted to adapt a policing strategy that had worked in certain locations with a high concentration of crime but was inappropriate for Prairie View. The premise behind this strategy was to train officers to overcome their default to truth and actively look for things that appeared unusual or suspicious in the conduct of others. Additionally, the police had adopted a strategy of pulling over motorists for very minor infractions in order to observe behavior and consider whether the pretext existed to search vehicles. Sandra Bland’s irritation with being pulled over, coupled with her out-of-state license plate resulted in the officer becoming suspicious of her situation. Bland refused to follow instructions, Officer Encinia forced her out of the car, and she was arrested. The outcome was tragic as a young woman with a history of depression took her own life in prison.

Gladwell’s treatment of this case is bound to cause controversy. Should police officers “default to truth”? It would be naive to suggest that police should not be skeptical and constantly aware of potential crimes. After all, law enforcement is about protecting and serving the public. However, Gladwell asserts that the tactics that work in very specific high crime areas, down to a city block, do not work well in a broader context. Ironically, although Gladwell appears to have been inspired to write this book based on the tragic case of Sandra Bland, his argument with respect to police behavior may be the least persuasive part of the book. He is much more convincing in his discussions regarding spies, Bernie Madoff, and Chamberlain’s appeasement of Hitler.

What Happened in Japan?

Back to our opening anecdote. What in the world happened in Japan? The story took place in early 1998. All of the software engineers were young men who had grown up in California and were steeped in its informal culture. This was also a time of frenzied activity in the technology industry with companies being founded and going public constantly. Success and optimism, coupled with a very direct communication style, characterized Silicon Valley technology firms during that era.

Japan, on the other hand, was a tradition-bound culture with a complex set of rules and business etiquette. Society, both in family life and in the workplace, was defined by clear hierarchies and protocols. It could hardly have been more different from the culture and ethos of Silicon Valley. However, both the Americans and the Japanese assumed transparency when interacting with their counterparts. But in addition to the problems inherent in assuming transparency in general, they were viewing their counterparts through the lens of their own culture.

In American business culture, if you have hired a consulting firm to install software for your business and the users cannot clearly see the fonts or access the expected functionality, you would most likely be very direct and make it clear that the results are unacceptable. This would be obvious through your demeanor and your words. In Japanese business culture, the cues appear to be more subtle and not at all direct. In addition, etiquette such as hosting a guest for meals or tea is a ritualized experience not necessarily dependent on how happy the host is with the visitor.

The outcome of this story is that the problems were eventually worked out, but it took much longer and cost much more than it would have had the individuals understood each other. Gladwell’s examples are all far more serious than the problems encountered by software engineers operating in a foreign culture, but the underlying principles seem to hold. We often misunderstand others and pay the price for it.

Gladwell’s book is more useful for pointing out these problems than for coming up with strategies and solutions to counteract them. Nevertheless, there is value in being aware of the hazards of talking to strangers and at least recognizing where the consequences of misunderstanding are likely to be greatest. Trusting each other, to a certain degree, is required for modern society to function at all. However, we should be aware of situations in which our tendency to default to trust could carry very high consequences if we are mistaken. A certain degree of skepticism when facing very high stakes situations is simply being prudent. We need to figure out when to emulate Harry Markopolos and, perhaps more importantly, when not to.

The Paradox of Trust

“We have listened to the wisdom of an old Russian maxim, doveryai, no proveryai – trust, but verify.”  

— Ronald Reagan

Trust is the foundation of society. Without a basic level of trust regarding the intentions and expected behavior of other human beings, our modern civilization would very quickly disintegrate into total chaos. If you need to be convinced regarding this basic premise, consider your activities over the past day. Chances are that you made countless implicit decisions to trust other people, whether you realized it at the time or not, and misplaced trust would have produced severely negative consequences.

Did you take the subway to work this morning? You trusted that the dozens of people standing nearby on the platform would not push you from behind onto the tracks. Maybe you stopped for a sandwich at the deli near your office. You trusted that the person who prepared your food practiced basic hygiene and did not sneeze over your food or, even worse, purposely contaminate it, and you trusted that the food supply chain was safe. For something that is about as personal as it gets – food that you ingest into your body. After work, you stopped by the local barber for a haircut and shave. You trusted that the barber had the skill to use that straight blade near your neck, and that he was not a murderous lunatic who would slit your throat.

It would be ridiculous to consider every one of these possibilities in day to day life. Your life would grind to a halt, and your mental state would be in tatters as you see threats lurking around every corner. And if everyone in society felt the same way, the consequences would grow exponentially. We need a certain level of trust in society to function as individuals and for the system to remain intact. A civilization that falls below a certain level of trust will descend into anarchy.

Trust in Society

Relatively small groups of people can form cohesive groups and social hierarchies based on close personal relationships and communication within the group. In his best-selling book, Sapiens: A Brief History of Humankind, Yuval Noah Harari pegs the upper limit of social cohesion based on such personal relationships and “gossip” at approximately 150:

Even today, a critical threshold in human organizations falls somewhere around this magic number [150]. Below this threshold, communities, businesses, social networks and military units can maintain themselves based mainly on intimate acquaintance and rumormongering. There is no need for formal ranks, titles and law books to keep order … But once the threshold of 150 individuals is crossed, things can no longer work that way. You cannot run a division with thousands of soldiers the same way you run a platoon.

Sapiens: A Brief History of Humankind, page 27

Harari believes that larger groups are able to function based on what he refers to as the “appearance of fiction”. This is described in more detail in this excerpt from our review of Sapiens:

Fictive language involves the ability to use imagination to describe things that are entirely abstract.  The concept of religion, for example, describes a set of beliefs that cannot be observed by ordinary human beings but, nonetheless, allows humans to form a common set of beliefs and customs.  Without fictive language, it is difficult for groups larger than about 150 individuals to form a cohesive society because they lack the ability to develop “fictions” that bind together larger populations.  The development of the notion of religion and nationality allowed much larger groups of humans to form social bonds.  

Harari’s use of the term “fiction” in the context of religion is unfortunate, but for our purposes we can simply regard what he is saying to mean that society on a large scale requires common value systems in order to properly function. Without these value systems, it would have been impossible to scale society beyond the tribal level. The concepts enshrined in religion and national identity allow individuals to assume a certain set of common beliefs when encountering strangers — to trust that strangers are very likely to behave in certain ways.

The written and unwritten rules of the road, established formally by governments and religions and informally through social conventions and habits, governs how we all interact with each other on a daily basis and what baseline expectations we have. Outside of deeply dysfunctional communities, in the United States most of us assume that those we meet on the street or in casual business contexts are basically honest and mean us no harm. This is why we can wait for a subway train, eat a sandwich, or have our hair cut without suffering a panic attack.

A Moral Imperative

Charlie Munger has often stated that it is a moral imperative to act in a rational manner and for those in charge of important institutions to create systems that promote rational and honest behavior. In other words, those who are entrusted with political and economic power must do their utmost to maintain an environment in which trust continues to exist.

The highest form which civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another.

Charlie Munger, USC Law School Commencement Address, 2007

Such a seamless web of deserved trust is extremely rare in today’s world but, if attained, can produce tremendous dividends. For most of us, at least for the fortunate among us, a seamless web of deserved trust is reserved for very close family members and friends but not often extended to coworkers or employers.

In Mr. Munger’s case, the seamless web of deserved trust extends into his professional life and sixty year business partnership with Warren Buffett. It is unlikely that a large society can ever approach that level of trust, but we must at least comfortably surpass the threshold needed for society to function reasonably well. At the very least, institutions should avoid creating systems that promote distrust. Perverse systems are much more common than one would expect.

The Cash Register

Consider the case of Eve, a woman who is well liked within her small community, active within her church, and seen as a solid employee and citizen by those in positions of authority. Eve was widowed at an early age, lives with her three pre-teenage children, and works paycheck-to-paycheck as a general manager at local small business. It is early November and Eve suddenly falls ill and is unable to work for several days. Her employer feels too financially insecure to offer any kind of paid leave so this sets Eve back financially. She’s able to cut back on enough spending in November to pay her rent on December 1 but is flat out broke heading into the Christmas season. She’s ashamed that she took a turkey and a few other groceries from the store for Thanksgiving dinner, but that seemed like a minor one-time indiscretion.

Eve’s employer is an elderly man who has owned the small market on Main Street for well over a half century and he has known Eve since she was a child. The business is run on a cash basis and there is no real inventory system in place. Most customers are known to Eve and some of the older folks still run a tab with the store. There are no barcodes on products, there is no scanner, and Eve uses a hand calculator to total up orders, accepts cash, puts it into a drawer, and takes cash out of the drawer to make change. The old man might come into the store every few days to socialize at the counter with old friends but he has long spent most of his days on the front porch of his house on the outskirts of town. Other than Eve, the store has a handful of part time employees who are mostly the grandchildren of the old man’s friends.

It is obvious that this type of scenario is tailor made to create massive temptation on the part of Eve and other employees to steal from the old man. She could steal inventory easily because there is no system in place to track what should be on the shelves. She could steal cash from the drawer. There is no real limit beyond her inherent honesty and, heading into Christmas flat out broke, her willpower gives in and she steals food and enough money to buy presents for her children.

In Charlie Munger’s worldview, the store owner has acted in an immoral manner. He was a man in a position of authority within the community and he failed to establish systems in which virtue and honesty are promoted within his business. Eve was wrong to steal, regardless of her situation, but the old man also had a responsibility as the owner of the business to promote good behavior even if he did not particularly care about the theft. Tempting an otherwise decent person to act immorally is itself immoral.

Obviously, the scenario here is a fantasy in today’s world. Almost no business would be run in such a lax manner. But this was the norm in the late nineteenth century. Temptation was rampant in retail businesses because there were few effective controls to promote trust. This began to change with the invention of the cash register:

The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms.

Charlie Munger at U.C. Santa Barbara, 2003

Like many other inventions that change the world, the inventor of the cash register was not the man who popularized its use. James Ritty owned a saloon in Dayton, Ohio and suffered a great deal of theft from employees. Facing this “shrinkage” of inventory and outright thefts of cash, Ritty developed a machine that he referred to as an “Incorruptible Cashier” and filed a patent for the invention in 1883. John Patterson was one of the early customers of this new invention and saw the potential more clearly than Ritty. Patterson purchased the patents from Ritty and went on to found National Cash Register which dominated this market for decades to come. By 1915, the cash register was an essential piece of equipment for nearly all retail establishments.

It is obvious that the cash register reduced the temptation to steal from retail businesses, but how did it do so? It increased the perceived cost of theft by increasing the probability that one would be caught. By doing so, it also keeps fundamentally honest people honest by removing the temptation to act immorally in a way that carries little risk of detection. One might wonder how employees reacted to early versions of the cash register. Did they operate in a seamless web of deserved trust if the owner of a business felt a need to introduce this type of technology?

A Seamless Web of Suspicion

Let’s fast forward about a hundred years to the present time, nearly one-fifth of the way through the twenty-first century. Technology has advanced by leaps and bounds which allows for checks and balances that James Ritty and John Patterson could have only dreamed about. Over the past 150 years, we have gone from a world where almost nothing could be monitored without human eyes and ears to a world where literally every movement of every individual can be tracked and recorded. In the context of a private business, video cameras and facial recognition software can be used to track known shoplifters and to serve as evidence in criminal cases. Employees are under constant surveillance as they do their jobs and any kind of theft is far more risky than anything Eve could have contemplated.

For all of its intrusiveness, video cameras and facial recognition are relatively invisible technologies allowing people to go about their daily lives imagining that they are not being closely monitored. However, certain retailers have taken very visible steps to deter theft. For example, Wal-Mart has implemented increasingly drastic security measures recently. Initially, locked shelves for small, high value products such as razor blades were introduced. When one wants an item from a locked shelf, it is necessary to find a store employee to unlock the cabinet. This creates an environment of distrust and inconvenience.

Over time, my local Wal-Mart has added locked shelves for products such as deodorant, bath soap, over-the-counter drugs such as Tylenol, home cleaning products such as laundry detergent, and more. On my latest visit, the underwear section was entirely locked up. These are products that sell for $10-20 and are bulky. It is one thing for someone to steal a $20 packet of small razor blades and quite another to attempt to steal a twelve-pack of briefs or a 100 count bin of Tide Pods.

The seamless web of suspicion continues with very obvious facial recognition and video recording at the self-checkout registers. Wal-Mart has increasingly substituted capital for labor in its stores even in regions where the minimum wage remains at the relatively low Federal floor of $7.25. Customers are now the workers responsible for scanning their own purchases, and you are told that you are being watched and can even see an image of yourself as you check out. The cash registers of 1900 are nothing compared to these technological marvels of the twenty-first century. The final strand in the web of distrust occurs as you are leaving the store where an employee is stationed to inspect your cart and your receipt to detect signs of theft.

When I posted some of these details about my recent Wal-Mart experience on Twitter, I got my share of snarky responses regarding my neighborhood. Granted, this Wal-Mart is not in the best of neighborhoods but it is the closest Wal-Mart to my home and only four miles away. What is interesting is that the Walgreens on my street, in a much better neighborhood, has also started to lock up products in recent months including laundry detergent. The web of distrust seems to be spreading. And it might be bad for business. I would rather order underwear on Amazon than ask an employee at Wal-Mart, if I can even find one, to unlock a shelf. In a low-margin retail business, perhaps the calculation is that shrinkage is so costly that giving up on sales due to customer frustration is an acceptable trade-off.

Where is the Balance?

All of this brings us back to the essential role of trust in a functional society. Is it realistic to ever approach the “seamless web of deserved trust” idealized by Charlie Munger? The cash register was clearly a major advance in human civilization because it promoted virtue and discouraged vice, but what about modern advances in technology? If the cash register of 1919 was a positive impact on society and did not create an environment of distrust, why would the modern equivalent of monitored self-checkout registers be a problem in 2019?

A possible way to think about this question is to acknowledge that new technology almost always causes suspicion when it is introduced. If the old man who owns the market suddenly installs a cash register and inventory system at his store, Eve might think that her employer does not fully trust her. However, in due course, the cash register will become a familiar part of her work life. It also makes her job much easier and this is, in fact, the primary benefit of the technology. In addition to increasing her productivity, the register encourages her to live up to her true nature as an honest person.

Perhaps we can then differentiate between technologies such as background facial recognition and monitoring at self-checkout lanes and steps such as locking up products behind secure shelves. The former might eventually fade into the background and not be seen as an element of distrust. But the latter will never be seen by customers or employees as anything other than a sign that Wal-Mart or Walgreens distrusts those who they do business with. When there is distrust, people begin to question motives such as in the case of a Wal-Mart that locked up products commonly purchased by African-Americans while leaving other products out in the open.

Society should strive for systems that promote trust and keep people honest while avoiding systems that encourage people to think that everyone around them is dishonest. Trust is fragile and when society is full of cues that lead people to believe that no one is to be trusted, this can very well become a self-fulfilling prophesy. Striking the right balance is difficult but essential and the political, business, and community leaders in a society have a moral duty to get it right.

Avoiding 21st Century Twaddle

“Man, as a social animal who has the gift of language, is born to prattle and to pour out twaddle that does much damage when serious work is being attempted. Some people produce copious amounts of twaddle and others very little.”

— Charlie Munger, The Psychology of Human Misjudgment

We have all come across people who somehow always seem to soak up our time, break our state of flow, and generally act as impediments to getting anything meaningful accomplished. When Charlie Munger gave his now-famous speech regarding psychological misjudgments nearly a quarter century ago, most of these distractions took place in person or over the telephone. Today, we have infinitely more opportunities for twaddle induced distractions due to our constant state of connectivity. The number of distractions that can impede serious work has risen exponentially. Achieving anything meaningful in life requires avoiding twaddle as much as possible, both in terms of generating it and being subjected to it. Like most things, this is easier said than done. How can we avoid twaddle and preserve our state of flow?

Charlie Munger started his professional life as an attorney who made a living billing clients for legal work. The legal profession is known for its focus on producing as many billable hours as possible. If an individual attorney in private practice wishes to increase his or her income, the two levers to do so are to increase the number of hours billed or to increase the hourly rate. At an early age, Mr. Munger grew dissatisfied with the limitations of billing people for his time:

“I had a considerable passion to get rich. Not because I wanted Ferraris — I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t know where I got that notion from, but I had it.”

Charlie Munger, The Snowball, pages 226-227

Diligence and hard work as an attorney will eventually lead to a higher hourly rate and more legal work and this will lead to higher income. However, this type of work has inherent limitations because it depends on a finite resource: the limited hours of an individual human being. Having the desire to increase his wealth exponentially, Mr. Munger started a legal practice in which he and his partners employed associate attorneys and he also began investing his capital in real estate ventures. How did he find the time to do this while also continuing to bill clients in order to support his large family?

“Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.”

Warren Buffett, The Snowball, page 226.

The mindset of considering yourself to be your most valuable “client” is incredibly important. It recognizes the fact that the only way in which you can leverage your financial outcome is buy not selling all of your time to others. Even more importantly, you cannot allow your most precious resource to be consumed by pointless twaddle that not only does not result in any immediate income but steals your ability to invest your attention toward pursuits that might have exponential outcomes.

Never before has it been easier to be consumed by pointless twaddle, and to mistake twaddle for actual information. The most obvious distractions today stem from our constant connectivity which, by default, is very permissive in allowing twaddle to enter into our lives. Incoming phone calls and texts are classic disrupters of the state of flow and require constant context shifting in which deep thinking is impossible. Nearly every app one installs on a smart phone will send notifications and other interruptions unless we explicitly turn them off. Smart watches and smart speakers are even more intrusive than phones.

Yes, we can turn off many sources of twaddle, but do we want to? If we are going to be honest with ourselves, the truth is that many of us not only enjoy distractions but actively seek out twaddle as often as possible. Twitter is an excellent example of a source of noise that many people actively seek out, compulsively, multiple times every hour. The signal-to-noise ratio on Twitter, particularly on what is known as “fintwit”, is abysmally low unless one carefully limits followed accounts. Even then, what you’re mostly engaged in is the modern day equivalent of water cooler talk. Sure, it is entertaining, there are many links to worthwhile articles, you can communicate with some very smart and interesting people, and sometimes you might get an actual idea, but it’s hard to see most of it as much more than twaddle.

The concept of selling yourself your best hour can begin to counteract the malign effects of being subjected to noise. That “best hour” will naturally vary from person to person. If, like Charlie Munger, you find that your most productive time of day is in the early morning, don’t waste that time reading the newspaper, checking your Twitter feed, or even doing paid work for others. Instead, reserve that time to pursue projects that will add long term value and have the potential to produce exponential gains in your professional and financial life. Ruthlessly eliminate sources of potential noise during this most important hour by not being in the presence of your phone and making yourself totally unavailable to others.

There is much that we can learn from Charlie Munger’s latticework of mental models as well as the psychological framework he created entirely through self-study, observation of human nature, and practical application over a long lifetime. One of the purposes of Mr. Munger’s study of psychology was the realization that understanding irrational and harmful behavior and then doing your best to avoid such behavior can provide an enormous advantage in life.

Over time, dysfunctional behavior will change with technological innovation but human nature will change very slowly, if at all. The internet and connectivity in general has exponentially increased the amount of twaddle we are subjected to. But by creating so many productivity penalties that most people enthusiastically accept, it has also increased the dividends that will accrue to those who can resist the distractions that consume others.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.

A Silent Interlude

“My God, what did he tweet now?!?”

One week ago, at exactly the hour that I am typing these words, I stood at the tallest summit in the contiguous United States. Mt. Whitney, at 14,505 feet, is the crown jewel of the Sierra Nevada mountain range and towers over ten thousand feet above the small town of Lone Pine in California’s arid Owens Valley. But isolated and serene it is not. Every day during the brief summer season, hundreds of hikers ascend the eastern slope of the mountain wearing headlamps, long before daybreak, in order to catch the sunrise from the summit. At times, the traffic on the trail can resemble a pedestrian rush hour and, while injuries and deaths sadly occur every year, the mountain is hardly unspoiled wilderness, and it is hardly disconnected from the world. Cell connectivity allows for texting, talking, and bragging on social media, and hikers fully avail themselves of these opportunities as they make the grueling 21 mile round trip to visit the summit from the eastern trailhead.

Three hours before joining the crowds coming from the east, I woke up at 2 am seven miles to the west. For the past week, I had been on a hike of a portion of the John Muir Trail, a hiking path winding from Yosemite to Mt. Whitney, a distance of over two hundred rugged miles involving nearly fifty thousand feet of cumulative elevation gain. Although the trail has a reputation for being “crowded” among hiking enthusiasts, crowded is a relative term. I camped alone most nights, including the night before the push to the final summit and, for the first hour of my walk that morning, I did not see another human being.

There is very limited cell phone reception in the vast wilderness on the western side of the Sierra Crest, so seven days previously when I crossed Bishop Pass a hundred miles to the north, I departed from the modern world of constant connectivity and noise and entered into a different world, one that is infinitely more “silent” and where the passage of time means something quite different. I exited that quiet world a week later as I stepped onto the summit of Mt. Whitney and descended ten miles to the east to finish my walk.

In the world of finance and investing, events are taking place every minute of every day that market participants, both human and algorithmic, feel a need to incorporate into the thousands of prices of securities on a real time basis. When I say “My God, what did he tweet?” everyone knows exactly who I am referring to. Wall Street has always been hyper-responsive to both real news and mere noise, but it seems like the severity of reactions have become more amplified over the past few years as politics has become less predictable.

Most of us have read the books and listened to the words of investment sages who urge intelligent investors to ignore the noise and focus on the long term, and this is a practice that most successful value investors take to heart. There is no way that I know of to succeed in investing if you’re constantly reacting to day-to-day “news” because much of what we are “learning” is merely noise. To separate the signal from the noise requires sustained study and a calm temperament. At least in the value investing world, individuals who feel a need to act on every piece of news or become emotional in response to every price swing are unlikely to beat the market over time.

While I have always tried to internalize the wisdom of the sages, and doing so has saved me from much folly that would have come from being emotional, I still follow news on a daily basis and I suspect that most of you reading this do the same. My news diet has decreased in recent years, but I still review the Wall Street Journal for 45 minutes most mornings and I check to see what’s going on in politics and markets a few times per day, and more if I am bored. So far, I do not think that doing so has impacted my actions but my recent trip leads me to suspect that constant connectivity has indeed impacted my mind and has the potential to influence future actions.

Were the past seven days more eventful than the seven days prior to that? It certainly does seem like the past week was more eventful because I’ve been following daily events, “his tweets”, and market action. And the past seven days have flown by in a blur. In contrast, the prior seven days in the wilderness had a different pace, a more sustainable mental pace in rhythm with the physical world. Those seven days also seemed to be longer in duration. When you are in a disconnected wilderness, the rhythm of your day involves waking up, cooking breakfast, breaking camp, walking ten or twelve hours, setting up camp, cooking dinner, and going to sleep. And when you are walking alone, you are alone with your thoughts all the time, unfiltered and unaffected by outside noise.

A side effect of such a disconnected interlude illustrates aspects of the central insight of Daniel Kahneman’s Prospect Theory which is covered in Thinking, Fast and Slow. Human beings, unlike algorithms, normally feel the pain of losses more than they benefit from the pleasure of gains. If you take quotes seriously and live through a week when markets go down one percent on Monday, Tuesday, Wednesday and Thursday, but the market recovers the losses on Friday to end the week unchanged, you will be psychologically worse off at the end of that week even though nothing has changed.

My week offline was not particularly more volatile than other weeks in recent history, but there were significant interim changes in the market value of my holdings. I was none the wiser, however, and from my perspective, I noticed just one weekly net change, not five daily changes. Even though I don’t take market quotes seriously and try to mentally anchor to my own independent assessment of intrinsic value, as a human being it is inevitable that I am subject to psychological effects just like everyone else. I might not think that I will act rashly in the future if I subject myself to the daily noise, but do I know for sure? Furthermore, although I do not believe that my past results were negatively impacted by exposing myself to noise, I cannot know that for sure. It is certainly possible that one or more of my regrettable past decisions were due to mental pollution from overexposure to “information” that turned out to be noise.

Isolating yourself is not a desirable or realistic option. We need to be aware of what’s going on in the world and in our communities, and being informed can lead to opportunities. Warren Buffett doesn’t read five newspapers every day for no reason. One must find the right balance between exposure to the news and avoiding unnecessary noise. This task has become much more difficult as the perceived pace of “news” increases. The best way to prove to yourself that this is true is to remove yourself from the news cycle for a week or more and observe the changes to your mental state that will inevitably result. One can then calibrate news consumption and frequency accordingly.

It takes five hours to descend from the summit to the trailhead and from there it is twelve miles by road to Lone Pine. Having no desire to walk into town, I stuck my thumb out on the side of the road and soon had a ride. As we approached town, I turned on my phone. The beeping of text messages and voice mails started. Thanking the driver for the ride, I smiled at the noises emanating from my phone and remarked that “we’re definitely back in civilization”. The driver smiled but it looked like he had yet to turn on his phone. His silent interlude would continue for a while longer.

Resources for those who are interested in the John Muir Trail:

The Giles Resolutions: Scandal and Bailouts in the 1790s

What has been will be again, what has been done will be done again; there is nothing new under the sun.

–Ecclesiastes 1:9

Political intrigue, allegations of financial impropriety, vicious attacks in the media, intemperate politicians, and anonymous trolling. These are all obvious characteristics of political life in America two decades into the twenty-first century and many observers bemoan the abandonment of more collegial days earlier in our history. It is part of our nature to idealize the way things used to be and, in the process, we are prone to forgetting that people who lived long ago were also subject to the realities of the human condition. As we celebrate Independence Day, it is interesting to take a look back at a period of history shortly after our founding when partisan politics was in its infancy and the stakes couldn’t have been higher for the opposing camps.

Thomas Jefferson

Despite George Washington’s efforts to forestall the development of partisanship, by 1792 his own administration was split into two camps, with Treasury Secretary Alexander Hamilton most forcefully representing the cause of the Federalists, who supported a more vigorous executive within a powerful national government, and Secretary of State Thomas Jefferson who was the champion of republicanism that sought to limit the centralizing tendencies of the Federalists. The broad strokes of this long-running dispute might be well known to those with a passing understanding of American history, but only those who have delved into the background in some depth can fully understand the vicious animosity and partisanship that easily rivals what we have experienced in modern times.

On February 25, 1791, President Washington signed the legislation establishing the first Bank of the United States. The establishment of the bank was an expansion of the power of the federal government supported by Alexander Hamilton and vigorously opposed by Thomas Jefferson and his allies who viewed the bank as an unconstitutional measure designed to benefit the business and investing community at the expense of the general population. One of the measures of the legislation was to establish a sinking fund that was designed to begin paying off the national debt, which had been expanded in 1790 at Hamilton’s urging when the debt of states was assumed by the federal government. Jefferson was named as one of the commissioners of the sinking fund.

Alexander Hamilton

Only one year after the bank was established, a credit crisis known as the Panic of 1792 was caused by speculation on the part of prominent bankers including William Duer, who was also a friend of Alexander Hamilton and previously served as the first Assistant Secretary of the Treasury. Duer and other speculators came up with a scheme to use large loans to corner the government debt market. United States debt securities were needed by those who had invested in the initial public offering of the Bank of the United States because the terms of the offering required them to pay for their stock in installments comprised of 25 percent specie and 75 percent government bonds. Gaining control of the government bond market meant that Duer and his partners could potentially reap a windfall due to the presence of forced buyers who needed to settle their installment payments.

The collapse of the scheme in February and March 1792 caused Hamilton to take measures to prevent a broader credit crisis. He utilized the sinking fund that was established along with the Bank of the United States to purchase government securities which had the effect of propping up prices and forestalling a broader crisis. However, the political fallout from doing so was severe and the acrimony easily rivals controversies we have seen in modern times. The crux of the dispute was whether Hamilton had authority to utilize the sinking fund as he did, and especially whether he was justified in purchasing securities at par when they were trading below par in the depressed market during the panic.

Dumas Malone covers this episode extensively in Volume 3 of his six volume biography of Thomas Jefferson which was published in 1962. Malone frames this dispute in the context of the long running acrimony between Hamilton’s Federalist faction and their opponents led by Jefferson, along with James Madison and others in Congress. The extent to which Jefferson himself led the charge to investigate Hamilton’s conduct has long been in dispute. Malone acknowledges that Jefferson was in communication with the members of Congress who launched the investigation but minimizes the extent of a larger conspiracy. During this period, Hamilton was far more vocal in what he was willing to say personally while Jefferson tended to operate more via surrogates. Much of this had to do with the personalities of the men, but the personal nature of the dispute is not in question.

One of Jefferson’s allies in the House of Representatives was thirty year old William Branch Giles, a fellow Virginian who was also close to James Madison. The resolutions that were introduced to investigate Hamilton’s conduct were known as the Giles Resolutions. Malone explains the crux of the charge against Hamilton in this extended excerpt:

Specifically, the question related to the price at which government securities might be bought in this process of debt reduction, and it was answered in Hamilton’s favor by the voice of the Chief Justice, who held that under the act they might be purchased at more than the market price, up to par value. The point is that Hamilton wanted to buy at par at that time, when securities were below par on the market. His major purpose, as he claimed, was to maintain the credit of the government, but numerous speculators, including his friend the notorious William Duer, had been caught in the sharp decline of securities. Hamilton wanted to stay the panic, but to the mind of Jefferson he was purposely supporting the speculators. Furthermore, Jefferson believed that the purpose of the Sinking Fund was to retire the debt — as much of it as possible and under the most favorable conditions. He may not have sufficiently appreciated the positive functions of the Treasury in maintaining the level of public securities, but his simple philosophy was one that unsophisticated citizens could readily understand. Like him, they could not see why the government should pay more for its own securities than it had to, for the apparent advantage of men like Duer.

Jefferson and the Ordeal of Liberty, Chapter 2

The Giles Resolutions were debated in the House of Representatives but all failed to win a majority which represented a resounding victory for Hamilton and his Federalist cause. Jefferson, always reserved in his public statements, was willing to be a little more open in a private letter to his son-in-law following the vote:

Others contemplating the character of the present house, one third of which is understood to be made up of bank directors & stock jobbers who would be voting on the case of their chief: and another third of persons blindly devoted to that party, of persons not comprehending the papers, or persons comprehending them but too indulgent to pass a vote of censure, foresaw that the resolutions would be negatived by a majority of two to one. Still they thought that the negative of palpable truth would be of service, as it would let the public see how desperate & abandoned were in the hands in which their interests were placed.

We can see from this private correspondence that Jefferson not only supported the resolutions, but that he knew that they would very likely fail but wanted the political point made that the Federalists were acting against the interests of the majority. He went on to explicitly characterize the “corrupt maneuvers of the heads of departments”, obviously in reference to Hamilton.

Jefferson resigned as Secretary of State at the end of 1793 and retired to Monticello to look after his long neglected farms and personal interests, but he never left the political scene in terms of his influence on his proteges who remained in government, and he was back in the political maelstrom in early 1797 when he took office as Vice President.

Our times could not be more different from the 1790s in myriad ways, with the most obvious being the speed of travel and the instant and nearly universal access to information. What has not changed is human nature, with all its political backstabbing, intrigues, and scandals. In 1790, people and information could not travel faster than a man on horseback could ride, and information was distributed on paper to those with the resources available to purchase it and who had the literacy necessary to understand it.

Today, politicians, journalists, and ordinary citizens can communicate instantly on platforms like Twitter and the velocity of information, and misinformation, is like nothing the world has ever seen before. It is interesting, and entertaining, to consider how the personalities of Hamilton, Jefferson, and others would have navigated the age of social media for their political benefit. It is easy to imagine Hamilton as a heavy user of Twitter, while Jefferson might be more inclined to put out press releases or let surrogates go to battle on his behalf.

Financial crimes and outright greed are also not new vices of our times, with financial bubbles, scandals and cronyism being as old as the nation itself. As an epilogue, however, we can return to the case of the notorious William Duer. Unlike the villains of the financial crisis of 2008-2009, most of whom have bounced back very nicely, Duer paid a very heavy price for his sins. He spent the rest of his life in a debtor’s prison and died in disgrace in 1799.

Recommended Reading:

Jefferson and His Time, a six volume biography of Thomas Jefferson by Dumas Malone

American Sphinx: The Character of Thomas Jefferson by Joseph Ellis

Founding Brothers: The Revolutionary Generation by Joseph Ellis

X

Forgot Password?

Join Us

Password Reset
Please enter your e-mail address. You will receive a new password via e-mail.