Dr. Brian Klaas: The Secret to Financial Resilience

23:54Like sometimes if you're trying to hit a metric and you know that that metric is important and you know exactly how to get there, then you should optimize to the absolute limit. So it's identifying the two kinds of situations. There's a great example of this in the sort of difference between open systems and closed systems as well, which our lives are full of. Moneyball is this idea that you sort of can use data analytics to optimize decision-making in baseball. And it's really, really good. It's exceptionally good. And it's because it's a closed system where there's only so many outcomes. Each team knows it wants to win, right?

24:25There's only like one outcome where you win and one where you lose. So like, it's a very, very straightforward system. And in that, the data analytics work really, really well. The problem was it caused Major League Baseball to lose a ton of money and also a ton of viewers because people found it boring when two spreadsheets were basically battling out on the field. There were fewer home runs. It was not a very exciting game. And they realized they were optimizing for the wrong thing. They thought the teams were supposed to optimize to win in the most straightforward way possible. What they should have been optimizing for is the maximum excitement in the games, because that's why people watch sports.

24:59When it comes to that in your life, if you think that Moneyball is a data analytics problem, than in your job or whatever it is, then absolutely you should use analytical thinking, probabilistic reasoning, and so on. But there's sort of that uncertainty also that we like as humans. There's some aspects of this where the experimentation about the bigger questions, what should I do with my life? Is this the right job for me? Is this the right career trajectory? Those questions are much more effectively answered through experimentation. Whereas once you are certain that this is what you want to do, if you want to become a neurosurgeon, then yeah, like you shouldn't dabble in pediatrics because it doesn't make sense, right?

25:33You should become the best neurosurgeon. So it really just depends on whether you're trying to ask the question of what to do versus how do I exploit the system now that I'm already in it and I know and I understand how it works. So Moneyball and the way that it made baseball more efficient but boring is, as you said, an example of a closed system. What happens when you have a system like you gave the example of fleas, where you can have fleas on a board with 26 squares and each flea moving to a different square. And as you introduce new variables into that hypothetical situation, if you make even one of the fleas turn cannibalistic, right, you suddenly have, instead of a closed system with a very small number of potential outcomes, you have a system with infinite outcomes.

26:26You can't apply the money ball data analytics thinking in a system even as complex as flea life, much less human life. You're completely right about this. And this is something where I think it is bewildering to understand this. And this is something I think is getting a lot of our societies in trouble. And I'll use this as an analogy for human life, right? For individual lives. One of the things that has happened in the modern world is that we have optimized the absolute limit in our economics. So we have just-in-time manufacturing, we have all these systems that are at their absolute limit. And then you get one gust of wind that turns a single boat sideways in the Suez Canal, and it causes$50 billion of damage.

27:03Now, that was not a good idea, because it would have been less expensive to have a little bit more slack, a little bit more give in the system and avoid those catastrophes. When you think about that in the context of an individual life, my grandfather's advice to me is the secret to a successful life is to avoid catastrophe. Are those two words? And there's a lot of thinking that's exactly the opposite. It's about how to squeeze the last ounce of inefficiency out of life, when a lot of it should be about resilience. It's a sort of an aspect of how do we protect ourselves from these big harms that can come our way?

27:37How do we make ourselves able to sort of survive or weather a storm when it does arrive? That is something where there actually is a tension between optimization and resilience. When you think about human systems in general, the reason why the Suez Canal or a terrorist attack or a financial meltdown is both unpredictable and also sometimes caused by very small tweaks in the system is because it has got chaotic elements to it. And it has an infinite number of possible outcomes with like 8 billion moving parts in it, right? And I'm just restricting to the humans. I mean, we can also talk about weather systems and all this other stuff.

28:11When you think that way, you realize that money balling the world isn't possible. It's not like there are just two teams with a very specific set of rules, with a very constrained set of outcomes. Life is infinitely more complex than that. So like machine learning is this great tool. It's incredibly useful on closed systems. It's going to revolutionize healthcare in terms of diagnoses and all these sorts of things. In those closed systems, it will be revolutionary. But if we apply it to open systems uncritically, I think it could be really dangerous because it's this illusion of control that it gives us, which works really, really well in a money balled system and really badly in the Suez Canal system.

28:49Right. And this is the kind of stuff where we're developing a certain hubris that because we get this sort of pattern of regularity, we're like Starbucks is always the same every day. We've developed this idea that, oh, everything's unchanging. And then the big stuff wallops us. So you have, you know, all these meta structure changes like financial crises and terrorist attacks and pandemics at the same time that Starbucks is the same. And there's a sort of cognitive bias towards thinking that everything is sort of under control when in fact we're living in this very chaotic, larger world, whereas our day-to-day life is something that we have regularity and patterns within that we cling to for some level of comfort.

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32:58In terms of how the average person listening can apply these lessons into their own life, one of the things that I'm hearing is build more slack into the system. Have an emergency fund, for example. Have extra money laying around that you are committed to keeping in cash because you're not trying to squeeze every ounce of return out of every dollar. Or build some more slack into your schedule. Things like that. Yeah, exactly. So there's lots of ways that you can do this. Most of what we are told is about the upside. And it's not thinking carefully about the downside risk. The moments in my life where I've squeezed an extra 3 % of efficiency out of my day, those aren't my happy days.

33:33The days that are the worst in my life are the ones where I've miscalculated, I didn't have resilience and things fell apart. And so when I think about those lessons, I think, yeah, there are things I could do a little bit better, but are those the moments that were truly alive and truly living and so on? And I think this is the kind of stuff where, for me, philosophically at least, this idea that if I'm just another$50 ahead, that I'll be happy. In the grand scheme of my life, I actually think it's the stuff where you lose lots of money, or you lose your job, or where you get really sick, and all of a sudden, everything falls apart.

34:04That's the stuff that really catastrophically impacts human life. So I want to see a little bit more focus on the sort of self-improvement literature that's about how do you deal with this problem as opposed to the upside risk? How do you think carefully about these aspects that are out of your control that might wallop you unexpectedly. And maybe the sort of meaning of life question is one that is part of what helps people process this, right? If everything happens for a reason, then when I get diagnosed with cancer or something terrible like that happens, then there has to be a way to sort of process that, like this was supposed to happen.

34:39Whereas when I feel like there's sort of arbitrary forces, the resilience that I have is like, okay, that's something that happens to human beings, and I'm going to have to deal with it. And hopefully I've set up a financial fund and so on to sort of be possible to sort of weather it. This endless focus on optimization to me is something that is causing us to basically drift towards catastrophe more and more frequently these days. What I'm hearing is a strong message of playing defense. So the lesson avoid catastrophe is a defensive lesson. Play a strong defense, avoid catastrophe. Similarly, the lesson of build slack into the system, don't try to overly optimized, that's also playing defense.

35:19Would that be a fair characterization? Yeah, well, it's not because you don't want to create good outcomes. The other analogy that I use that's from a real world case in Latin America is where there was a power grid that was trying to decide how to set itself up. There was one proposal that said, let's make a national grid because it will be slightly more efficient, it will be cheaper to build. And the alternative proposal is let's make regional grids where they can be quickly decoupled from the national grid, but it's going to be more expensive and it's going to be less efficient because there's going to be these regional nodes.

35:51What they did was they did the regional plan and it saved them a ton of money because when the node failed in one place, it didn't affect the rest of the economy. Now at the time it was expensive and at the time it was inefficient, but the thing is in uncertainty, it's actually much more offense to do that because they ended up better off than they would have. Right. I think that this is the kind of stuff where I think we have these sort of snapshot views of reality where it's like, was the financial crisis a bad thing? Yes, it wiped out a ton of money. Well, if we just look at growth before it, then it was great.

36:23And so when I think about what we could have done to play offense in the financial crisis before it, it's actually to do things quite differently there as well, because we wiped out a lot of the gains that were produced before the financial meltdown happened in 2008 and so on. The way that we frame these things is a question of timeframes as well. Like over the course of my life, I think the things that are going to save me both money and lots of pain are building resilient systems into how I live. Whereas, you know, it will actually probably save me money to do that as well, because catastrophic risk has huge downsides.

36:56These like iterative gains and efficiency sometimes can have big upsides. But actually, I think the stuff that really causes us to strike it rich or to, you know, have huge breakthroughs is often through creativity. It's often through thinking differently. It's not through three minutes more of productivity in front of your laptop, right? That's not the transformative stuff that makes the Bill Gates or the Steve Jobs. Are we talking about a snapshot in time, or are we talking about the whole life? Most people, when they get to their deathbed, they're basically happy if they avoided catastrophe.

37:24And they're not necessarily happy if they had a 5 % more efficient day-to-day life, which I think is sometimes what we're told is the pathway to success and happiness. How do you avoid catastrophe when major macro catastrophes befall you? I'd love for you to share the story. And this is, I think, a really perfect example of if one thing were different, everything would be different. In the 1920s, a gentleman named Stimson went on vacation and the world is forever different because of it. And a lot of people suffered catastrophe due to that choice of vacation destination. Yeah. So this is a story you about a couple that goes to Kyoto, Japan in 1926 for a vacation.

38:06They stay at this place called the Miyako Hotel, and they fall in love with the city. And 19 years later, the husband in the couple is Henry Stimson, who is the America's Secretary of War. And the generals on the target committee have decided that Kyoto is the best place to drop the first atomic bomb. And their target plan actually is right next to the Miyako Hotel where he stayed, the rail yard next door. And so Stimson springs into action and meets with President Truman twice and convinces him to take it off the list. And so this is where Hiroshima gets bombed instead. And the second bomb was supposed to go to a place called Kokura.

38:39And instead, it ended up getting dropped on Nagasaki because there was briefly cloud cover over Kokura when the bomber arrived. Now, what you're alluding to, I think, in the question, which is a great way of framing it, is that for the people in Kokura, who avoided catastrophe because of a cloud, or in Kyoto, who avoided catastrophe because of a tourist vacation 19 years earlier, what choice did they have? Well, none is the answer, right? They were the playthings of chaos. The people who died in Hiroshima and Nagasaki were also the playthings of chaos and they died and the Kyoto and Kokura people lived.

39:14So some things we can't avoid. I'm hyper aware of the fact that there's a lot of stuff that can go catastrophically wrong in the world that I have very, very little control over. Now, beyond the stuff that I'm not, I'm not a personal finance expert. So beyond the stuff tied to the financial resilience and so on. For me, the way I make sense of this, honestly, is I think about what stuff do I need in my life that is actually automatically resilient. So I found meaning, for example, in doing things that are pretty much free. Like one of the things I love to do is walk my dog and go camping. I also think about stuff where, who are the people around me who give me meaning?

39:52And those things, okay, there could be a financial crisis, but my family's still going to be there. My friends are still going to be there. It's a somewhat flippant response to it because of course there's nothing we can do. Of course we want to vote for the right politicians and so on. But at some point there was a very limited amount of stuff we could do to stop the pandemic. A person gets infected in Wuhan and then the world changes for two years. When you process that, you accept this lack of control and the resilience is sometimes stuff you can plan for. And sometimes it's a mentality. Resilience is basically a way of having a worldview in which if stuff goes catastrophically wrong, are you still going to feel fine?

40:29For some people, the answer is no, because they put all their eggs in the basket of status and success exclusively. And I think for people who diversify that basket a little bit with stuff that gives them meaning in other parts of their lives, they're probably actually more well set up for the inevitable catastrophes. And they are happening, I think, more often because of how we've engineered the world, where a lot more black swans affect our lives than they used to in the past. How does a person know if their worldview is resilient enough to be able to survive catastrophe? And what I mean by that is often you may think that your current worldview is resilient, but when catastrophe strikes, in hindsight, you realize that you had a previous way of thinking that actually proved detrimental.

41:14You were asking excellent and very tough questions because this is something where we can never know. I mean, this is the case, right? Like in the last few years of my research, I have changed how I think about the world. I think about the person I was a couple of years ago and my worldview shifted, shifted because of experience. It's shifted because of learning and so on. Is my worldview that I have now going to be resilient in five years? I have no idea, right? I mean, the pandemic did shift my worldview a little bit as it did for a lot of people. You know, it's a sort of stress test. You do have stuff that gets stress tested through various aspects of misfortune outside of your control.

41:48I will say that there are certain things though that I think are fundamentally resilient, like deriving meaning from stuff that is intrinsic to you. I've met a lot of really happy people who have very simple pleasures that make them happy. And the simple pleasures are resilient. I mean, I'm not trying to disagree with people who have a worldview that is fulfilled and genuinely is fulfilling for them for different values from me, right? That's something that's, it's a beautiful thing about humanity that all of us have different things that fulfill us. It would be super boring if we all had the exact same passions and preferences and so on.

42:17But for me personally, when I think about stuff that could get taken away, a lot of it is actually physical objects. So you could lose your money and then all of a sudden you have to sell things or something gets destroyed, friends dying and so on. That's out of your control. There's nothing you can do about it. But what you can do is you can say, okay, I'm going to have a worldview in which the meaning for my life is something that no matter what happens, pandemics, whatever it is, I'm going to be able to derive something from it. For me, it's spending time with people I care about, and it's doing things that are intrinsically valuable to me, reading, going for walks with my dog.

42:53There's no one size fits all answer. And I think you're raising a very astute critique of what I'm saying, which is that how can I possibly know that this is the correct worldview? I can't. That uncertainty is something we all have to live with, that a lot of the stuff that we're told about how to live a better life is tied to the idea of stamping out uncertainty. It's tied to this notion that you have to control things because uncertainty is an enemy to be slayed. And of course, uncertainty can be terrible. I mean, if you have a health diagnosis that you don't know what it is, it's horrific. But uncertainty is also where humans have their most exciting, awe-inspiring, mysterious moments of life, right?

43:29I mean, if you were told you have a 12 % probability of marrying this person and a 64 % probability of marrying that person when you're like 12 years old, it would be terrible. We wouldn't like that. So I think rather than trying to stamp out uncertainty, it's about embracing it a little bit more and trying to think about how to be resilient in the face of that which you cannot control. To what extent are we even in control over our own minds? You know, when you were a kid, you were super into, what was it? The Civil War? It was - Yeah, you were super into it. And that didn't feel like a choice.

44:05It was just a passion that overtook you that you didn't consciously one day sit down and say, I think this is going to be my new obsession. But when you were a child, that just became your obsession and it dominated your thoughts. To what extent are we all that kid? I sort of joke about this because it's like, I look back on this and I was like an eight-year-old Civil War aficionado who subscribed to like two Civil War magazines. I mean, I'm sure it comes as a shock that I'm a total nerd through and through. This was not like a choice that was in some way top down where I thought, what could I be that would be cool in life?

44:40I want to be an eight-year-old Civil War aficionado, right? I mean, that's not going to happen, right? So instead, I was just drawn to it. I went to the Gettysburg battlefield and I was hooked. And all I did, like still in my childhood bedroom in my parents' house. There's like a rack of Civil War books, right? Just like, oh, this is the huge rack that I read as a child. The reason I bring this up is because there's a lot of stuff that we don't think about, the degree to which our minds are not something that we can control from a top-down or independent sense. And there's a whole can of worms that I can't open and then leave there in a relatively short answer.

45:14The kind of stuff that I think about that explains the basis of this is I don't understand where the difference between my mind and my brain would be, right? We use two different words for mind and brain. I think my brain is my mind and my mind is my brain. I'm what's called a physicalist. So I don't believe in any sort of inanimate spirits or anything like that that's providing independent control of my brain. And because of that, just as I can't control cell division in my brain, the thoughts that I have to a certain extent are also outside of my control. Now, this doesn't mean we should be nihilistic.

45:46I completely reject that idea that sometimes people who deny free will sort of end up concluding that, oh, nothing matters. I think exactly the opposite. I think literally everything that we do matters. But if I were to tell you that somebody murdered someone because they had a brain tumor, you would say, well, it was outside their control. And then I'd say, OK, but hold on. Why is it that unhealthy tissue is different from healthy tissue? There's not some magical property to healthy versus unhealthy tissue. Like a brain tumor affected the way his brain behaved, but like also the brain structure of a healthy brain or quote unquote healthy brain also affects the way that I become a civil war aficionado or I behave or how I frame sentences.

46:23That does give us a little bit of pause in how we think about the world. I don't think it functionally matters that much for how I actually make decisions on a day-to-day basis, because I think it's the question of the origin story of my behavior. So the origin story of my behavior, I think is tied to my brain, which is a physical structure. but I still have to make decisions. So the question is, where are they coming from? Well, I don't know. I think they're coming from my brain. And so in a way, it's a sort of a semantic philosophical debate, whereas whether I have free will or not, I still have to navigate the world.

46:53And so I'm still making decisions, whether it's an independent soul that's doing that, or it's just my brain chemically processing the world and then helping me decide or deciding for me and so on. So this question about free will is one that I think is going to be a huge, huge discussion point for the 21st century as neuroscience advances and as machine learning gives us better understandings of how the brain works and so on. But the lessons from this are that if there is a little bit less control, then you also, again, you still strive, but you accept that sometimes failure is outside of your control and sometimes success is outside of your control.

47:30And humans are very, very good at accepting that some sort of failure is outside of our control. We're less good at sort of saying that sometimes our success is also not fully deserved by our own independent actions.

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49:56For someone who's listening to this, who wants to figure out how to reframe their thinking and how to reframe their behavior, what do they do with this? Where do they take this? One of the great tragedies of modern living is the number of people who think their lives don't matter and who find a lack of purpose or a lack of drive. They think they're interchangeable. I think there's a lot of modern malaise that is tied to this idea that if I didn't exist, the world would just sort of keep turning over and so on. When you think about chaos theory, and when you think about the sort of contingencies of what ifs, of small changes having big effects, and a vacation causing an atomic bomb to get dropped in one city or another, or my existence being predicated on this terrible tragedy in a Wisconsin farmhouse, what I always say to people is everything that you do is important.

50:49That's the lesson. And that doesn't mean that everything that you do is going to conform to your idea or your narrative about how your life was supposed to unfold. But it does mean that everything you do is going to affect the future trajectory of everybody else because we're all in an interconnected system, which I know sounds like, you know, sort of like a Zen guru, but it's also like scientific fact. Like the interconnected system of the world is something that like is totally uncontested by theoretical physicists and also Zen gurus sometimes. But it is the kind of stuff where when you think about that and take it seriously as the ripple effects of our actions always exist and we don't know how they're going to play out, I think it empowers people.

51:27This doesn't mean that you hover over the snooze button with sort of trepidation each day and wonder, am I going to make the wrong decision? There's some stuff that we can't foresee. There's a lot of misfortune in the world that is not tied to people whose lives are 3 % too inefficient or is not tied to the fact that they have not been able to achieve an endless array of goals on a checklist. I think it's more tied for a lot of people, this notion of what is the point of all this? That's the stuff where when you contemplate it and think about it more deeply, it actually unlocks the sort of self-fulfillment that a lot of people are trying to find in a book or by sitting at their computer a little longer or whatever, because they're actually forced to confront the questions that are deeper and harder to answer.

52:15And my answer to those questions is, I don't know how it's going to play out, But if I didn't do what I was going to do, if I didn't have this podcast conversation, if I didn't do all the things that I do in life, the world would be slightly different, some good, some bad. And that to me is an empowering feeling. It's the exact antithesis to nihilism, which is the viewpoint that nothing we do is important or matters all that much. And even if we have money, what's the point and so on. there's a lot of aspects where you can think strategically about the aspects I was describing previously about experimentation or resilience.

52:46But there's also that deeper underlying question of like, what is this all for? And when people answer that, they actually become much more passionate. When they become more passionate, they become more successful. So I actually think the two questions are linked, right? That you actually, if you know why you're doing something and you know what the purpose of a sort of strategy you have is, it becomes much easier to actually fulfill it. So it's not a perfect answer to your question because there's not like a big aha moment where it's now we know how to make every decision. But I have thought differently about these questions having sort of incorporated a lack of control and the sort of elements of chaos theory into my thinking about how to live in the world.

53:24Well, we're coming to the end of our time. Are there any final messages that you would like to impart upon the audience? I think the other takeaway that we haven't talked about is this aspect of trying to figure out in your life, what are problems that I describe as rubber problems and what are problems that I describe as rice problems. Now, there is a group of indigenous farmers that operates in Southeast Asia. They have rubber to plant and they have rice to plant. The rubber is basically a crop that if you know how it works and you plant it in the same place every year, it will just grow. It's always going to be fine.

53:59The rice is much more fickle. It sometimes fails based on weather patterns. It sometimes fails based on things that they don't understand. What some of the groups do is they just sort of try to do the same strategy over and over. And the rice crop often fails for those groups. What one other group does is they decide to plant the rice based on the movement of what they view as sacred birds. So they have seven birds and they track their movements and they interpret them. And then that's where they decide to plant the rice based on these birds. Now, when people came to study these different groups, they were astonished to find that the group that followed the movements of the sacred birds actually had much better rice crop output.

54:35And the reason for that was because they had effectively randomized in the face of uncertainty. They had experimented. And so they had figured out this very strange way of basically deciding randomly where to plant the rice. And because the constant uncertainty was existing and unfolding, it turned out to be the best strategy. It actually was much smarter than the people around them who just said, I know what's going on and I'm just going to maximize my output by doing it the same way every year. That's the sort of stuff where when people are trying to be smarter decision makers, what they should really do is they should sit down and think, what part of my world and what part of my life is a rubber problem and what part is a rice problem?

55:13What's the stuff that I can't control that has irreducible uncertainty where experimentation and some level of randomness and some importance of resilience are going to be a huge part of my calculation? And what's the other bit where you're pretty sure you know what's going on, you understand the system, you understand say exactly what you want, and you're just going to maximize it the way that the people did with planting rubber. In my view, a lot of what we're told is that the world is just rubber problems, that everything is a solvable issue with machine learning, with better technology, with better optimization, and so on.

55:43And that's not true. There's a lot of rice problems out there which are fundamentally uncertain and benefit from sometimes experimental random decision making, trying new things, exploring and so on. So that's my message to people who are trying to come up with a life strategy from this bewildering aspect of a little bit less control. As long as you're aware of the areas where uncertainty is most prominent, you can develop better strategies to deal with it. And as long as you're aware of this sort of money ball or rubber problem strategies where things are pretty constrained and confined and predictable, then by all means, go to the life hack checklist and the optimization and just maximize everything you can in that system because they're not the same.

56:26And you get into really big problems when you mistake a rice problem for a rubber problem because you optimize the limit. And that's where the Suez Canal disaster happens because it's not a resilient system and something really unexpected happens and you lose$50 billion, which I do not recommend. We also know that there are farmers who believed that they had, metaphorically speaking, rubber when they actually had rice. And I'm thinking specifically about the plague of locusts, right? I'm thinking specifically about the farmers who year after year had quite a lot of consistency within their crop, but then the locust population hit an inflection point, turned into a plague and decimated their crops.

57:09And so what do you do in a situation where you believe that you're dealing with the proverbial rubber, you're growing a rubber plant, when in fact, a calamity, a black swan event, in this case being locusts, comes around and decimates your best laid plans. Well, that happens. That is what black swans often are, right? They're systems where we really think we understood them and it turned out we didn't. And that was what the financial crisis was. Everyone is sort of optimizing in these systems where we figured, oh, it's all going to be fine because we understand the way the financial markets work.

57:37We didn't. And we all got sort of wiped out the same way the plague of locusts can sort of wipe people out. There is some irreducible uncertainty. We cannot protect ourselves from plagues of locusts all the time. I think we cannot protect ourselves from black swans all the time. And I think the people who tell you that are just lying because it's absolutely the case. There are certain systems that are just fundamentally unpredictable and chaotic and very sometimes dangerous for us. And maybe the world of AI will produce another one of those. We don't know. I mean, there is some risk that could exist in a fundamental reshaping of how the world works.

58:11What I think is important is what happens next. And what I worry about is that we don't learn the lessons of catastrophic failure very well. And the reasons we don't do that is because we don't audit decision-making, we audit outcomes. My favorite example of this is from the Challenger explosion. You have the Challenger blow up after an O-ring fails, this tiny little piece of the shuttle that fails. That exact O-ring existed multiple times before in space shuttle launches that were successful. So actually what they had done is they had basically just gotten unlucky. Eventually, I think it was it got too cold.

58:44And then finally, it failed and the shuttle blew up. But what we always do is we always audit based on outcomes. And what you have to think about is was the decision making process that you use to get there actually smart? Because there's a lot of times where things that are stupid have produced good outcomes, right? There's also times where things that are really smart produce catastrophic outcomes. And so you learn the wrong lesson if you imagine that every time that something good happens, it is the result of wise strategic thought. And I think there's a lot of people who learn backwards this way around the sort of gurus of business as well, where it's like one person made a billion dollars.

59:20Therefore, we should just like listen to everything that they have done. Like we should do their life, you know, exact same life strategy, exact same pattern. I should wear the same shirt. But it's like, no, sometimes people just get lucky. Sometimes there's randomness that produces these outcomes. And so thinking strategically about the decision-making process and thinking also carefully, like, did you misdiagnose a rubber problem for a rice problem? That's the kind of stuff that does help you avoid catastrophe as well, because it makes you more resilient in your thinking. And I wish there were more audits for success.

59:51I wish there were more times where organizations, individuals looked at something that worked out and did a forensic audit of what happened, and especially focused on the stuff that wasn't smart. Because what we tend to do is every time a good outcome happens, we just say it was a genius decision. And there's always bad parts of genius decisions. So you can always get better and smarter about thinking about problems if you audit the process as opposed to the outcome. Right. And that reminds me of that famous phrase from Warren Buffett, when the tide goes out, you see who's been swimming naked.

1:00:21So oftentimes, oftentimes there are people who are in the waters and they look like they're doing well, but they're not set up right. Yeah, no, exactly. A lot of people learn that lesson the hard way, unfortunately. So I think we can avoid some of those naked swimmers if we have a little bit more of the sort of thinking about auditing decisions rather than outcomes. Well, thank you so much for your time. Where can people find you if they'd like to hear more about you and your work? I have a newsletter called The Garden of Forking Paths and I have a book where I write about these things called Fluke.

1:00:50Excellent. And you can find that Amazon, anywhere books are sold? Anywhere books are sold. It's all there. Excellent. Well, thank you so much. Thanks for having me on the show. Thank you, Dr. Glass. What are three key takeaways that we got from this conversation? Key takeaway number one, embrace the unpredictability. Brian illustrates how even small, seemingly insignificant actions can have profound ripple effects on our lives and on the world around us. Every decision that we make, no matter how seemingly minor, can alter everything. And this perspective encourages us to appreciate the complexity of everything that unfolds.

1:01:31And it highlights the importance of being deliberate about our choices, choices about how we spend our money, our time, our effort, our attention. All of that being said, it's equally true that actions have downstream effects that we in no way can predict. This entire interview wouldn't have happened had it not been for the tragic story that Brian told about his great grandfather's first wife's death at the start of the show. There's this very strange thing about reality that you and I would not be talking. Nobody would be listening to my voice on your podcast, but for a tragic mass murder in Wisconsin 119 years ago.

1:02:10And so we need to embrace something that is seemingly a little bit of a contradiction, which is that we need to be deliberate about our choices while also letting go of the idea that we can control what happens downstream of those choices. Wisdom comes from holding two seemingly contradictory ideas at the same time. Those two ideas are that we, A, must be deliberate and conscious about our choices, but B, have no ultimate control over the outcome. So choice matters, but control is illusory. That's what I mean by embracing unpredictability. And embracing unpredictability is the first key takeaway.

1:02:51So where do we go from there? Well, that leads us to key takeaway number two. Optimize for resilience, not just efficiency. Brian argues that our focus should shift away from squeezing out the last bit of efficiency and towards building resilience. And we should do this in our systems as well as in our personal lives. So he used the example of Latin America's regional power grids, and he talked about how these were designed to decouple easily in case of failure. And that decision ultimately saved the region from widespread blackouts. So that was an excellent act of foresight. But by contrast, there are also systems in which there is no resilience built in.

1:03:34There's no margin for error. And while that may seem efficient, it can also turn on its side with a gust of wind. We have optimized the absolute limit in our economics. So we have just-in-time manufacturing. We have all these systems that are at their absolute limit. And then you get one gust of wind that turns a single boat sideways in the Suez Canal, and it causes$50 billion of damage. Build systems that can withstand unexpected shocks. And that is a lesson not just for how we design electrical grids and canals at a social level, but it's also a lesson for us in our personal lives around how we design and manage our financial lives.

1:04:13Think about it this way. Remember 2018, 2019? At that time, we had been in a bull market for a decade. And a lot of people were starting to assume that a bull market lasts forever. A lot of people were kind of getting this idea that the stock market is a high yield savings account. And so right around 2018, 2019, I started getting a lot of questions from people saying, why should I bother keeping an emergency fund? Because in an emergency fund, my money is earning at that time in 2018, 2019, it was earning basically zero in a savings account. The APY on a savings account was abysmal. And meanwhile, money in the stock market was doing great.

1:04:54So those questions that I was hearing a lot back in 2018, 2019, you know, isn't it inefficient to keep money in a savings account? Why shouldn't it all just go into the market? Those were questions about trying to optimize efficiency, trying to deploy capital in the most quote-unquote efficient manner possible. But those were questions that didn't see the need for resilience. Fast forward to spring of 2020, and all of a sudden, everybody who maintained emergency funds were really glad they did. That was a moment when everyone collectively realized, ah, this is why we have an emergency fund. It didn't feel efficient in the moment.

1:05:36It didn't feel efficient in 2019. But wow, in 2020, I'm so glad I have it. So now take that lesson, apply it to today. What are the areas in your financial life where you're being perhaps too efficient? I'm putting efficient in air quotes. Where are the areas where you're being efficient at the cost of resilience? In other words, where you're playing offense in an area where you really should be shoring up your defenses? That's a good question to ask yourself as you review all of your financial accounts. What are the ways in which you can bolster resilience and optimize not just for growth, but also for protection?

1:06:16That is key takeaway number two. Finally, key takeaway number three, differentiate between rubber and rice problems. Brian uses the concept of rubber problems versus rice problems to distinguish between predictable issues and issues with a high level of uncertainty. So he shares a study of indigenous farmers in Southeast Asia who improved their rice yields by randomizing planting locations based on the movement of birds. And in that story, he demonstrated that by embracing randomness in the face of uncertainty, they actually stumbled upon a strategy that was more effective than rigid planning.

1:06:58When people came to study these different groups, they were astonished to find that the group that followed the movements of the sacred birds actually had much better rice crop output. And the reason for that was because they had effectively randomized in the face of uncertainty. So then the question that we need to ask ourselves becomes, what are the areas in our lives where we are perhaps too fixed or too rigid? And what are the areas where we could embrace more flexibility or a willingness to experiment? What are the areas that might, in fact, benefit from a more flexible and experimental approach?

1:07:34How might that impact your investments, your career, your professional trajectory, the way you spend money, and the way you make money? This is an essential question because to quote JL Collins, flexibility is the only true security. So those are three key takeaways that come from this conversation with Brian Klass. Thank you so much for tuning in. If you enjoyed today's episode, please subscribe to our newsletter at affordanything.com slash newsletter, where we share insights into the five pillars of FIRE, financial psychology, investing, increasing income, real estate, and entrepreneurship. Again, you can subscribe at no cost by going to affordanything.com slash newsletter.

1:08:19Also, please follow this podcast in both Apple Podcasts and Spotify, as well as on YouTube. While you are in your favorite podcast playing app, you can leave us up to a five-star review, and I greatly appreciate it if you do. Finally, please share this episode with a friend, a family member, a colleague, a neighbor. share it with someone who you think would benefit from learning about how to think critically about how they think. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything Podcast, and I'll meet you in the next episode.