Your "Diversified" Portfolio Might Secretly Be One Big Bet on AI, with Alec Litowitz

25:13It doesn't understand causality. It's very fluent, okay? So what is AI really, really good for? AI is really, really good when it can cheaply verify its answers. So why is it so good at math, coding, and language? Math, it does something, makes an equation, and it can figure out whether, just digitally figure out, is it right or not? Coding, it does, it writes code, does it work or does it not? Language, it writes something and it says to you, is that good, do you like that word? Did I come up with the right words? And you go, oh, it's pretty fluent. So you start to get lulled into thinking, man, it does these things really well.

25:47I assume it does all these other things really well. But there's a lot that's still reserved for humans. And that part of it is the part where we partner with AI, but only in a particular way. You reserve judgment. You reserve the capability to say, is it even in the right frame? Is it even answering the right question? Who decides whether, I mean, the AI, whatever one you are using, was trained six months ago. So it's already outdated for whatever information came in the last six months. But more than that, it's trained on data that we have as a society in enough scale for it to do its, you know, modeling.

26:21There's a lot of things that we have as humans that it just doesn't have the data for. I think you may know this, but Jan LeCun, a well-known AI pioneer, had said that by the time a human is four years old, you've taken in more tokens than any AI has taken in. Meaning that you as a human, because you not only take in words, audio, visual, which is incredibly content-rich, That's how much information you're taking in. The best computer is still a human. You may not be as good as math and coding as AI, but there's a lot of things you can do better. And so when I say the way you have to partner and work and what this means as part of the second cognitive revolution is that it's like anything.

27:04You should see to AI and take its answers where you know there's truth there. Coding is truth, math is truth. but you shouldn't ask it about your relationships where it has not had a relationship, okay? Would you teach your kid to ride a bicycle by just reading or would you be like, go out there, wobble, fall a little bit, et cetera, et cetera. You'd be like, oh no, you gotta go out in the real world. Then why are we asking AI for answers to problems that it just has not experienced, right? You can read about it, it's different than experience it. So I think that going back now to your concept of the partnership, My answer is you can either resist the change of AI, you can adopt it and go, I'm just using it as a tool, or you can adapt to it.

27:49And the point of adapting to it is understanding AI isn't a tool, it's more than a tool. It changes the way you think because it's part of your thinking. So understanding, which we're trying to get into, when to use it, when not to use it. And then the last thing I'll say about that is for a pretty clear rule of, well, then Alec, just tell me. So how do you use it? How do you not? Think about doing the following, which is if it expands your set of possibilities, that's great. Don't use it to shrink it. So if I say to it, give me an answer, it has now gone to the internet, gathered information, compressed it, given you one answer, okay?

28:26Just one answer and here it is and it sounds really fluent. So you're gonna just say, that's, I saved me a lot of time. That is not what you wanna do because you're having it take over your judgment for you. What you want to do is say, I've thought about the problem and here's my thinking on the problem. Where do you think I'm wrong? What have I not thought about? Now you're not saying to it, you compress and give me the answer. You're saying to it, expand my thinking. It's great. That's like having a bunch of smart people around going, what other ideas do you have and where might I be wrong? That it's incredibly powerful.

29:01So ultimately, if you don't resist it because it's coming, and you don't just adopt it, it's a tool. Use it whenever you can. That advice is, which I hear going around a lot, is bad advice because how you use it is everything. You use it to augment what you do. You don't use it to atrophy. If you start using it in ways that substitute, that shrink things for you, then you are going to atrophy that capability, which for a large part of problems is still uniquely human, and we still have a better capability of doing it than any other animal on the planet or any synthetic animal on the planet. So use it as a sparring partner, use it as a debate partner.

29:40Great, great uses. Absolutely great uses, 100%. Don't use it to just shrink what you do and offload it. We've done this experiment before. This might be helpful for listeners. For the last 20 years, we literally just ran this experiment. You offload or anybody offloads attention to social media. What were you supposed to get back? You were supposed to get back relationships and connection, right? Is that what we got back? Because studies show we got back loneliness. We got sadness. What went wrong? I'll tell you what went wrong. You offload attention and it gave the friction, like the leftover, so to speak.

30:19So like, I'll give you a couple examples. First of all, I used to go on dates. Now I just swipe left, swipe right. Okay, the digital version is not like the friction of going on a date. Those are two different things, right? I used to go on vacation with my friend. Now they go on vacation, post really cool pictures, and I go thumbs up like, wow, that's cool, that's amazing. But I wasn't there with you. So the example we just gave of using AI, how could social media be used? Well, because it can, okay? Here's how. You know, I have not connected to my old friend from high school in 40 years. I found that person on Facebook and I wouldn't have found them without.

30:55I expanded the set. I use it to find things in other people that I hadn't connected to in a while. I have a bunch of friends and we're trying to coordinate getting together and I use it to organize a meeting or a trip together, you know, using social media. Great, I expanded the set. But in each of those cases, the digital version follows with a physical, like I'm gonna do the embodied work of then meeting with the people and hanging out with them. To the extent you sit and say, let's not meet, let's just digitally connect. Did you, you know, I say to my, I have four sons, say to one of my young, you know, my son, did you connect with so-and-so?

31:28Oh yeah. What they mean is they texted him. But that's not the same thing, right? That is an artifact and not the friction and the real thing. So we all use social media that way. And we all, through an act of omission, nobody came out and said, this is, this is bad. There was mixed reviews on it. People were like, maybe it's good. Maybe it's bad. I personally think it's going to come out that the way it was used is bad. It's being used to atrophy, not augment. It could be used for better. It's not. And part of that is the problem of the people that have provided it to us because they run on algorithms.

32:00How do the algorithms work? They give you whatever, what gets engagement? Extremes. So it gives you extreme beliefs. Now you think everybody thinks I'm crazy. I think they're crazy. And here's the irony. What does AI do? Instead of giving you the extremes, it gives you the average answer that someone would give. It's like a double whammy. Social media has made you feel like the world is extreme. And AI that you're offloading to, if you're not willing to have it expand, if you say, you give me the answer, it gives you the average mean answer. So the fear I have is, hey, wait a minute. We just ran the experiment and you offloaded some of what it means to be human in terms of social interaction.

32:40If you go now and offload to AI your cognition, I mean, what about what makes you human? Your ability to have agency. If you are listening to things that are fed to you in a certain way and you're getting answers fed to you, what have you retained? Where is your agency, which is what makes you human? And it is my argument that when the world changes and the example is going back again to the three you gave of people being confused and we're happy to come back to that. The only way to solve that problem, given the world right now, is for you to be adaptive and for you to think through things and retain your agency.

33:16and what I consider my book is it's a field guide for retaining agency. There are a lot of entrepreneurs out there, of which I've been one. And when we go out into new businesses, we have no model because we think the world is different in the future than the past. So I don't get to use AI or get to rely on some past model because I think it's wrong. So how do the best people who serially are successful compress and model that new world when there isn't a reliance? IQ and EQ don't help you figure out. I don't know where to point them because I don't understand the model. I have to figure out the model of the future.

33:49Once you do that enough times, you begin to realize if you talk to other people that everybody's using the same underlying set of processes. This is what's going on inside the heads of people that are highly adaptive. And so when they face a problem, when you face the problem that you described, what do I do with my children? How do I do it? How do I do this problem in my company? The answer is thinking a particular way because the world isn't the same as it was. It's different. And you have to map that a particular way. And I wanted to write down for people, here's how you map it. And it doesn't matter what the problem is.

34:26There is a way to map things in a world of uncertainty. And let me give you that sort of underlying source code to do it. But I think that's particularly important, as I said, because I think we went through this with social media. We're doing it in AI. And that's kind of, if we let go of cognition in addition to social. I'm very fearful that we're beginning to lose a little bit of what it means to be human and I'm very pro-human.

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39:02If we move in the wrong direction, we often don't know that we're doing it until we have the benefit of hindsight. Social media is one good example in which when social media first came out, and I remember Facebook back when you still had to have a college email address in order to access it. At that time, we didn't have the foresight to see that this would cause social atrophy. We thought that it would cause social augmentation, right? And it isn't until 20 years later that we have the hindsight to know what has happened. Similarly, I know you've given the example of Blockbuster, where Blockbuster did not have the foresight to recognize that prioritizing foot traffic right at the moment when everybody was starting to stream video was setting the wrong priority.

39:52And so they made a whole bunch of highly efficient business decisions moving in the wrong direction. So given that our judgment, you know, you just talked about the importance of judgment and agency, given that our judgment is so often wrong, what do we do with that? Well, first of all, that's an excellent question. I'll get to the end answer first and like the actual answer. And the answer is, is that a lot of times people think that successful decisions, you're like, okay, they're obvious in hindsight. But I can tell you at the foresight time when people are making them, people aren't sure that they're right.

40:26and this is one of the big, big keys, okay? It is switching your identity. A person who's high AQ is someone who can sit and say, I'm relocating my identity from the need to be right to being an adapter, to be willing to be wrong. I just want to update. So why does that matter? Because what all these people did, if they were making the right decisions, is what is the least amount I can do to get feedback to tell me if I'm going in the right direction. So it isn't cliff-like. It's not like somebody's clairvoyant and they know, but everybody else doesn't know that's the future. They think, they have a hypothesis.

41:06I think that this might be the future, but I don't know. I mean, you know that Netflix tried to sell themselves to Blockbuster. So it's not like if they knew in advance, they would have been like, they're done. We're gonna be huge. Why would we sell ourselves? This is a learnable skill, okay? IQ is a trait, EQ is a trait. AQ is learnable. Everybody, because they're born adaptive, we went through that. As a child, you're adaptive. You start to lose it. And I'm trying to say to people, you gotta bring it back. But the way you're adaptive is just like a child. I'm gonna play with this. I'm gonna play with that.

41:35Don't put your finger in the socket. If you wanna keep learning, don't make a huge bet on something. Just probe a little bit. And so when you think about the methodology in my book, which broadly is metacognition, that's clear your lens, understand that you have a view on the world. Two is simulate possibilities. And three is test it. So someone around said, hey, I want to have an objective view. I don't want to be biased. I'm not sure Blockbuster is the right way. Maybe there's a streaming thing. Then they have simulation. You know, they tried doing books. Originally, they wasn't just DVDs in stores.

42:10Netflix was sending you DVDs. And then they bought the company and they were involved in, like, you could buy Walgreens and there was like a self-service kiosk. So they're probing. They're trying things. And then eventually the streaming becomes the big thing, right? Where I think it differs a little bit is that you don't have to be clairvoyant and you don't have to bet it all on red. What you do need to do is sit and go, I don't care if my experiments are wrong. I don't care. I've lost my identity being associated with, well, I'm afraid to experiment because what if I'm wrong? I don't care. I don't like, it's better to make decisions right than make the right decision.

42:44I want to be in a process, which is what AQ is, to experiment, get feedback, and then be a little closer and a little closer and a little closer. And so, you know, if you really go back and look at Blockbuster and Netflix, what it shows is someone said Blockbuster sat around and didn't have metacognition to go, what if we're wrong? What if the world is moving in a different direction? I mean, Netflix went to them and they were like, yeah, no thanks. someone else has to sit and go well if we are wrong what could possibly be the future state is streaming a future state i don't know instead of dismissing it and going well that would hurt our identity we're the people that people come into our store get popcorn and you know raisinets and and leave with the dvd we don't want to be streaming but you're in the entertainment business it's not your job to determine how people want to consume it right you let your identity stop you from experimenting and getting feedback someone else then comes in and goes well i'll do it i don't care if the answer is in store, out of store.

43:44I'm going to experiment. So I think my answer to your question is, there's simple answers. It doesn't require hindsight or foresight. It's simply, what it does require is, are you willing to experiment, get feedback back, listen to it? It sounds easy, but to be willing to experiment is part of being curious. And one of the things that is a derivative to being curious is the willingness to go, I may not know the answer. People don't like doing that. They don't like running into uncertainty. They like it when they're like, I have an answer. I think this is the answer. But all of learning is the willingness to go, I have an opinion.

44:24It's provisional. The only thing that's stable is my identity that I'm willing to adapt. If I fuse my identity to an answer, I'll defend that all day, every day. If I fuse my identity as being I'm adaptive, I fuse, I'll update. I'm always willing to update because I'll learn and I'll adapt. And so what is confidence? Confidence comes from not just I spring and all of a sudden I'm confident because I'm always right. You will not be right. Most of the time you'll be wrong. What confidence comes from is the ability to sit and go, I don't care what's coming. I will learn it faster than everybody else.

45:01I will drop the thing that no longer works. That's being adaptive. And if I'm adaptive, I don't care what comes. I don't care which of those problems you give me. The solution is to be adaptive, update and learn quickly with as little risk as possible that keeps me learning. And then whatever it is, I'm stable in my own opinion. I'm an adaptive person, but my answers are always provisional. Reality gives me the right answer. I have an opinion. Reality has the answer. And so all I do is just try to explain to people, here's a process for letting reality speak and being open to the feedback loop.

45:36And part of doing that though, is being able to go back to your original self and go, I'm gonna just play around with this toy and it might drop on the ground and it might do other things. I'm gonna teach my kid to bike and he's gonna get a skinned knee and otherwise. But nobody ever said to me, Alec, when you were teaching your four sons how to ride a bike, did they wobble? How many times did they fall? Everybody just says, so how did it go? Yeah, my kid rides the bike. Like, well, how did they get there? Through a lot of little problems and a lot of little errors. That's what learning is. I talk about shallow failures and deep failures.

46:08shallow failures aren't failures. They're just feedback loops. So the answer to your question is you don't have to have clairvoyance. You have to be willing to run an experiment. Don't bet everything. Run it on the least amount that you can get feedback and just keep adjusting and adjusting. And if you do that because you have a willingness to explore, then you'll get to better answer slowly over time. It won't come all of a sudden. And I think most, most great entrepreneurs, what from the outside looks like they had some one great idea and it worked perfectly, is absolutely not true. What they're really good at is adaptability and running through a process that says, I want the right outcome, the right product for this group.

46:46I have an opinion. I call it a strong opinion, weekly health, and I'm gonna let reality give you, that's what you hear about people doing in minimally viable product or an A-B test. What are those? Feedback loops, just test. Oh, they didn't like that. That feature is no good. Oh, this one, they like that one better. Okay, do that. It's not, it looks in hindsight, well, they got it right. No, they got it right over a long period of time of errors and other things. So that's where I think there's this, you know, an important aspect and why adaptability is so important. Right. I hear there's this process of iteration and experimentation.

47:17Yes. How do you balance that with also having the courage of your convictions? Yeah, I've run into this before, even when I was thinking about the wording. I think I mentioned earlier my parents are psychoanalysts, but my mom is a PhD in linguistic. So words sort of matter and don't matter. but I try to be careful with words. It is a very subtle distinction, but it's a critical one. My methodology is first metacognition, which just says you observe the world, but you're eventually gonna get feedback from this experiment, right? If you are biased, you won't see reality. You'll see some version of it based on your biases.

47:54So try to have an objective sort of like view. And then you go out and you simulate possibilities. And I think that's where we come to your question, which is if I'm willing to be updated, then how do I square that willingness to be wrong with the courage and conviction to go test something? Those are sort of at odds. And I wind up before I go experimenting in this phase two. So remember, it's like, check my assumptions. What else could be true? Experiment, get feedback. Those are the three. So I checked my assumptions. Now, what else could be true? And what it ends up on there is what I call a strong opinion weekly held, S-O-W-H.

48:30So the word itself, strong opinion, So you should hold it with conviction, but it's weekly health. How do you have something that you have a strong opinion on weekly health? And here's the distinction that matters. It is the best answer that I have so far, but I haven't tested it yet. I have a strong opinion based on thinking about the problem that this is the best one. But I hold it weekly because, again, I care more about the process of testing than I do about being right. Just because I came to the conclusion that that was my current opinion, I'm an adaptable person. If new information comes, if you told me, oh, now this just happened.

49:06Okay, I changed my mind. I go to that answer. Like, it's truly not caring whether you're the one in possession of the right answer. Here's what you're in possession of. The process to get closer to an answer. That's what AQ is. A process to get closer to an answer when the world is uncertain, right? In a stable world, probably all of your heuristics and the things you do day to day get you pretty right. We're not in that world. We're in a world that changes rapidly. You know, if you're in a stable world, I mean, one of my favorite authors I see on the shelf here is Andy Duke. She has written incredible books, I think are really excellent.

49:41I've read them multiple times, you know, on how do you make decisions when you know possibilities and probabilities? There's like, how do you make optimal decisions? The problem is the world we're in right now, we know possibilities. We can talk, will AI take over? Will it not? Will it do this? Will it do that? We just can't assign probabilities. And therefore, that is not the same world. That's a world of uncertainty. That requires testing and experimenting. I can't know the answer using math. I have to experiment to get feedback. Don't kill yourself getting feedback. Don't, just do a little bits, get information and iterate really quickly.

50:15So the end answer to your question, which is, well, wait a minute, courage of, you know, how to have that conviction. You have conviction at that moment that you're right, but it's always provisional. Have more conviction in the process than in the outcome. If you hold your conviction that you have the right answer, you've just transferred over to having conviction in the outcome. That's the error. Don't have conviction in the outcome. Have conviction in the process to be adaptable, and whatever reality tells you is the answer at that moment, that's what you go with. But an adaptable person, AQ override says, even when you get an answer, and it's right for five years, the next day, the world might say that doesn't apply anymore.

51:00Sorry, that's out. So do you hold on to that opinion and continue? Or do you go, well, I'm the first to see that that world's changed. I'm dumping my old opinion and I'm going through a process to formulate the new set of rules. That happens a lot throughout history. I've lived through a bunch of these. I lived through the internet. I lived through the share revolution. I lived through the great financial crisis where lending was changed. I'm living through the AI revolution. And in each of those cases, I, as an investor and leading financial businesses, we made money monitoring, mapping those, and being one of the first to participate in those changes.

51:40This revolution, this regime change, is not about an industry like drilling for oil or otherwise. It's not about lending. This affects everybody. It's washing over everything. This literally, because we've never had a tool or a change that actually enters into our head and changes the way we actually function in every way. I looked at what I did. I said, I never wrote it down. I think this is what other people are doing. I'm going to hand people sort of the source code for when the world's changing this fast, here is how you get to be the first person to map it. And then you can go with what you do, but it requires certain types of modeling of your mind.

52:17It's a different way of thinking because the last 10 or 20 years was relatively stable and you could have your rules and they worked. But there will be times, especially going forward, where that changes more and more and more. So again, knowledge, which used to separate you from everybody else. In fact, 20 years ago, you had information and nobody did. You know, when I was young, I went to the library and I just source it. And then Google and others, you know, the third industrial revolution created mass data and information. SaaS companies came out to say, well, you have so much, let me order it for you.

52:51So that was really scarce. Engineers and people to order all that information. AI comes out and makes that scarcity abundant, right? Now, coding's abundant, knowledge is abundant. The part that is saved for humans is that judgment and the ability to be adaptive, the ability to do that higher order function. This wave was overcoming everything. The only thing that you can have conviction that is permanent will be whatever values you hold and your ability to direct your life toward whatever goals you have, which I consider to be agency, the ability to be the owner of your decisions, to direct the way of your life in whatever reality there is that's changing quickly, that literally requires you to be adaptive.

53:39It doesn't matter if you're the smartest person in the room is not the one who knows they're in the wrong room. I haven't seen in my life that the best people and the most successful are always the smartest people. They're adaptive. They're highly adaptive. And I said before, sometimes if you have a high IQ, you're the best at going, I don't see the world's changed. Let me explain to you why the world hasn't changed. I have 20 reasons why the world hasn't changed. Now you're fixing that old world into your identity and you're not being adaptive. And so it's a different skill. I'm trying to square this with, because sometimes things come along and your mental model of the world is now outdated because of new changes.

54:16Yeah. That is true. And then simultaneously, there's also the famously the most dangerous words in investing. This time it's different. Yes. And so both of those truths need to be held simultaneously. Going back to how this applies in the lives of the people who are listening, the three examples that I outlined, essentially one was career, one was investing, And one was the trajectory of your life and the priorities that you set across your lifespan. To hone in on the middle one, because that's the one that I think that is resonating right now with what you're talking about, the investing piece of it.

54:54Most people who are listening to this are index fund, passively managed, again, VTSAX crowd. But again, how do they square knowing that this time it's different? You know, the danger, the inherent danger of thinking this time it's different every time, you know, because there's the temptation that like April 2025, Liberation Day, and a whole bunch of people are going, oh, but this time it's different. Pandemic, this time it's different. Like every time there's some upset in the markets, it's tempting to think this time it's different. But if you panic, that would be a mistake. So how do you save yourself from that while also embracing adaptability and AQ?

55:39Yeah, so let me give you a very concrete answer to that. A shock is not the same thing as a regime change. Let me give you my definition of regime change. It's very useful for people to say, when I say this time is different, I'm saying when a regime change occurs, you have to change your mental model. And when a shock occurs, if you can withstand it, it'll probably come back. What is the difference? And then we can apply it to this exact example of people investing. Let me give you the four parts of a regime change. Other people can have a different model. This is my model. First is the production function changes.

56:16So I'm going to use an example. When the shale revolution occurred, prior to hydraulic fracking and horizontal drilling, we can leave aside whether people agree that it's good or not, just from the pure mechanics of it. We were drilling vertically, and now we can drill horizontally. The US was, so the actual production method changed, okay? That's number one. The second thing is what was previously scarce becomes abundant and something else becomes scarce, okay? What was scarce? Oil and gas were scarce. We were a huge importer in the United States. What happened post-hydraulic fracking? We are the number one producer of oil and gas in the world.

56:54Okay, so something was scarce and it's not anymore, it's abundant. Scarcity doesn't go away, it moves. What became scarce? Well, we don't have the pipelines to connect all this stuff. We don't have the capital. There was so little development going on. There was some$5,$10 billion a year of capital going into drilling anew, putting a rig, drilling, moving it a little bit. You went from$5 or$10 billion a year to hundreds of billions of dollars a year. First of all, the capital was scarce. Second of all, who has that many rigs lying around? You didn't need them. You added a physical layer to it, and then the capital layer to build the physical layer out That became the new bottleneck.

57:32And then the fourth element, so you've got production function changes, the scarcity and abundance flip-flop, bottlenecks migrate somewhere else, and then it's irreversible. Nobody ever sits and goes, let's go back to vertical. Like, forget that. Sorry, that was a temporary change. We're gonna go back. It's irreversible. It doesn't ever change. That is my measure for if you think it's gonna revert, but it's gone through all four of those, it isn't. Okay, it's done. we only go forward from here. When the banks in 08, for a variety of reasons, regulators came in and said, here's what you can't do anymore.

58:08It was the rise of shadow banking. It was people like Magnetar or BlackRock or others, private equity firms that came in and did a lot of the whole rise of alternative lending. Well, the production function of loans changed. Regulatory came in and said, you who are the biggest, cheapest source of capital, you can't do certain things anymore. that opened up the gates like before Magnetar couldn't do a loan because the return was too low relative to what my investors wanted. Banks had a lower cost of capital. Move them out. We get to move in. There hasn't been a point where the regulators are like, okay, banks, back in, right?

58:44It's just like, so people build whole businesses around being the provider of that. What happens? Well, there's production function change. All of a sudden, capital went scarce. It was abundant. Banks were lending everywhere, whether they did a good job or not, they were lending everywhere. That went away. Someone else now bottleneck, alternative private equity hedge funds go, I'll be the capital provider into that. That production now is just forever changed, right? And so we can keep doing this like AI is the same thing. The production from chips, GPUs, power, scarce materials come together to produce knowledge.

59:21Now, every other regime change and every industrial revolution was a regime change altered. And it met all four of these requirements. Okay. It's something that was produced, changed, right? We predict like now we're producing what's changed. The production function of knowledge is now, I mean, AI produces knowledge. That was always humans that had knowledge. Now AI produces knowledge. The second is, well, wait a minute. Knowledge was scarce. It was in humans' possession. Information was voluminous. But converting it into knowledge, that was our territory. We literally have GPUs and data centers producing something.

1:00:02We didn't have that before. What it's producing was scarce and it made it abundant. So the bottleneck move, what's the bottleneck now? Well, turbines, you know, transformers for power, GPU, the material to make the knowledge is now scarce. Does anybody think we're going to go back to a world where we don't have social media and don't have AI? I don't think so. I think it's irreversible. So that's different than, so you gave the example of like a shock as an example. So let's use tariffs. I don't consider that to be a, what production function changed? It's a tax. And I'm not saying it's going to stay or go.

1:00:40It's not a complete reorder of the way something's produced. It can happen at the industry level. It could happen at like, this one is society. We have held knowledge for 100 years as the owners of using knowledge, producing knowledge to do things, either to transfer to people in college, to use it in a company to make goods or sell services. we have never had a non-human participant in making knowledge and or judgment because it is not just knowledge. Agents are now using that knowledge and at least at a micro level with your instructions, making decisions. So you can't even say decisions are solely the part of humans now.

1:01:24Let me tell you, this is not only a regime shift. If you think somehow this isn't, I think, That's why I'm very specific. This is the second cognitive revolution. If I say the fourth industrial revolution, which it is at the physical layer, people will be like, oh, we've had these before. Yeah, there's regime changes. But I say second cognitive because this is the big one. And I really believe it. But I think we're prepared for it if we move, if we act. Social media, we didn't act. We all fell into a slumber and one by one gave away our attention and got crap back, in my opinion. Could have been good, but it didn't.

1:02:01Are we going to do that again? So it sounds great. It's good at certain things. You're still the best at certain things. And it is exactly what you have left and what you need to stay ahead. Because AI doesn't know when it's in the wrong frame. It doesn't know when its data no longer fits the world. It only is training on our data. But when we see the world's changing, only then does data come up for the AI then to train on. And then it becomes, so we're ahead of the game. But the way to stay ahead of the game, is to be adaptive and to keep modeling the world as it's changing. When that regime change occurs for investing, so let's say you're someone and you're in a retired account.

1:02:40Why does that matter for you? Why does any of that have to do with investing and otherwise? Let's assume you're not even picking stocks like, well, Alec, pick Micron or pick, you know, NVIDIA, and we can talk about whether there's a bubble or not. But here's the important part. If you're a retiree and you are in the S &P 500 and you used to have 500 stocks and you had a diversified portfolio, what does this regime change mean? It means that, first of all, well, seven stocks are driving the S &P 500. So you're not diversified, okay? Not only are seven stocks, that'd be one thing if they were seven diverse stocks, but it's one theme, which is AI.

1:03:20So you are now rising and falling. So you could sit and go, I don't think the world's changed. So I'm going to leave my portfolio. I'm nearing retirement. I'm in the S &P 500. I'm diversified. Things are stable. But it's the recognition that, you know what, this actually isn't diversified because the world, the model has changed. Not only is it more concentrated, but I see that everything is riding on one theory and I need to diversify not by stocks, not stocks and bonds, but by thesis. Because if I said to you before, like a SaaS loan, software as a service loan, land, GPUs, semiconductors, copper company, you would have been like, that's pretty diversified.

1:04:05All of it correlated to AI right now. So it's the recognition. Why? Because the world regime has changed. Something's changed. The fourth industrial, second cognitive is making a change that is now your portfolio that an old risk model would have said, wow, really good, very diversified. You know, now you're going to throw it into the old model. It's going to still say that. It's just going to start going, yeah, it says diversified, but some weird stuff's been happening. It's been moving up and down a lot. Why? Because that old model's wrong. That's why. It's not a bunch of different stocks in different industries.

1:04:40They're all related to the same factor. that should possibly change how you invest your retirement account. You know, my dad is 92. My dad doesn't need something moving up and down based on whether AI is in mode or out mode. That's a terrible idea for my dad. So if he's in the S &P 500, somehow you have to say, now you can say, well, Alec, it'll go away. I don't know. I don't think AI is going away. It could subdue. We could over time get answers. But if you think that this rate of change, you know, we're never going back and we cannot forecast how having a participant that is just getting started getting better is going to change and alter the way we live our lives when we see what it's done to social media and we're now about to do this test again and run it again in cognition.

1:05:28That to me is uncertain future. And there's only one way to succeed and solve an uncertain future. And that is to be adaptive and figure out and be the fastest person to go, I'm remapping and I'm updating. I'm remapping and I'm updating because it's a moving target, right? The longer you stay on the old one, well, I've been on the S &P 500. It's always been this way. It's always, no, it has not been correlated this way and moved with this way. It just has not. So that's sort of an example of an application to it, if that helps.

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1:10:09Two follow-ups. There have been times in history where the S &P 500 moved in tandem largely with railroad stocks, for example, or where there were a few key leading stocks like railroads. that drove the majority of the gains of the broad market. Many people have argued that the MAG7 leading the bulk of the gains was not a bug but a feature, that it's part of a long history of a few outperformers driving the majority of the overall market. That's one piece of it. The other piece, I'd love for you to elaborate on the idea that you diversify not based on stocks and bonds, but based on thesis. Can you talk more about that?

1:10:52Yeah, so let's go to the first one. I've tried to study a lot about the prior industrial revolutions and I read a fair amount about railroads and otherwise, but let's just remember, and I am gonna harp on this, a railroad did not participate in my thinking. It is simply different this time. This is not just the fourth industrial revolution. If you ask me about data centers like railroads, if you ask me about those things, I'll agree. Okay, there is a physical nature to this, but railroads, this is different. We have another entity that is thinking. And let me add one element to this. AI is a tool at the interface, but it is a regime shift at the system level.

1:11:34You use it like a tool, but literally using it changes your mental architecture. It's an environment. And if you think, so that's why I keep saying, you can be a resistor, you can be an adopter. And a lot of people on the West Coast are like, the best thing you can do is use as much as you can. But if you use it in the wrong way, it atrophies you. You can use it in the right way. I'm a fan of using it in a particular way. We talked about that earlier. But you better understand that's on the way to being an adapter because it literally is right now, just like social media has clearly altered the way people socialize in their mental framework.

1:12:09We are about to run the experiment again. A railroad didn't do that. It is simply different. There's two things driving both public stocks as well as some private ones that are now probably going to be coming public shortly, like OpenAI and Anthropoc. And that is that some of these stocks are representing the physical layer of what's produced. They represent the fourth industrial revolution. What happened here? What happened, and this bubble talk needs to be separated a little bit. What happens is the production function changes. You need to literally take data centers, power, semiconductors, et cetera, materials, copper, optics, et cetera, put them together.

1:12:46All these inputs, massive demand goes up. We need to redo some of the grid. All these changes occur at the physical layer. And a lot of public companies respond into that. But the two big private companies are the ones at the second cognitive revolution. They're the knowledge providers. They're not the only ones. Google does it, Meta, Amazon. I'm not saying that. I'm simplifying a little bit. the railroad piece is public and it's moving up and down. And so people sit and go, okay, well, if the knowledge is being produced and here's how it's being produced, this is scarce. What's scarce? Oh, GPUs are scarce.

1:13:20Memory is scarce. The first thing people realize who have modeled this going through my regime shift is where's the next bottleneck? Oh, I found out before anybody else does. Micron's cheap because that's the bottleneck. And the stock goes from 100 to 1 ,000 in less than 18 months because you modeled it first. You followed, well, where is the bottleneck? Just go through Alex's thing. What's production changed? What is now abundant? What's scarce? Oh, I'm going to go buy that scarce thing. Now I look at the scarce thing, the stock goes way up. Now the question, is it a bubble where it's trading here?

1:13:51Well, here's the question. Once you realize what the bottleneck and what the level is, now we get to the question of what's the duration of it. how long will that bottleneck anew to the both pricing and quantity capability of that company? The reason why they're gone up a lot but trade at low multiples is because people don't know how to answer the duration question. I'm afraid to say it's going to cut, you know, is this a temporary change in bottleneck or is it a long bottleneck? How big's your moat? And is the reflexivity like Soros? Well, the more they make and the more they produce, the more I encourage someone else to come up with a better, cheaper version, in which case that'll cut short their own duration because they're sowing their own demise by making more and pricing more, creating more profits that other people come in.

1:14:37So this is why AI is not a bubble. This is getting started. This is a once in an eon change, in my opinion, because of the second cognitive. The physical layer is gonna have ups and downs and bubbles and different things correlated. They're correlated, but that is what you're seeing that's closer to related to the railroad. But that to me is not the most interesting. I can play it, you know, in our family office. We bought Micron a year and a half ago. We were following the bottleneck. But what's interesting to me as a human, this is different, okay? And so going back to your question around, so the railroad to me is more like the fourth industrial physical layer and not the knowledge side of it.

1:15:18We've seen other industrial revolutions before. So we can sort of map out parts of this now and what will last longer, what is going to be a mode or not. I don't know. It was a long time ago since we saw a cognitive revolution. I'm not sure it's that easy to map out what that's going to look like. We can debate what can AI do, what can it not do, what is it going to gain capability of doing or not. I think that is really, really difficult. All I can say is the following, which is that if I said to you for the language, I'm assuming that a lot of the audience, but if I use the word TAM, which is the total addressable market, like how big is the TAM for knowledge?

1:15:53Well, the first thing someone says is, well, knowledge is a 50,$70 trillion market. Will AI take some of that? Probably. How much? We can debate. But what about the latent demand? What about all the things that you couldn't do until the cost of knowledge went to zero and now you can do? Nobody said I needed my iPhone. Someone says, well, what's the TAM? Someone would have been like, I don't know how many BlackBerrys, you know, here's how bad. it's gotten way bigger than we imagined because the latent demand was there. So knowledge, when the cost of it goes to zero, what will it be used for? How big will that market be?

1:16:29And my answer simply is it has been the production function of society. And it has been the scarce input. And what happens, like Jevon's paradox, like when the scarce input goes down to zero, it gets used nearly infinitely. And there's a lot we can do with knowledge. That's why these two things are slightly different, and I separate them a little bit as it relates to that. Right. Well, I've been thinking about Jevin's paradox with regard to AI because it seems, you know, in terms of latent demand, I mean, all of the things that we cannot yet imagine, building whole cities underwater, for example, whole nations underwater.

1:17:05I know there's lots of talk about colonizing the moon or Mars. There are many, many things that I cannot imagine that nobody has imagined that will likely be done knowing that we are on the cusp of that, I'd love for you to elaborate on the idea of diversifying based on thesis. You said not based on stocks or bonds, but based on thesis. Yeah, I think that the answer there, and look, I spent 30 years in the hot pursuit of trying to understand the risk in portfolios. You know, both when I was at Citadel and building Magnetar, these are complex portfolios. These aren't just stocks, they're stocks.

1:17:46There's fixed income. There's options. There's derivatives. There's a lot of complexity. I was a math major and anthropology, which is a weird combo, but there are lots of people I've worked with that are better mathematicians than me and PhDs. I was always sort of like there trying to think through both factor models like Barra and then principal components models, always at search around like, why do hedge funds tend to correlate things together? Why do they tend to go up and down together? How do you stay independent? How do I make sure I know what I'm betting on? it's a pretty challenging exercise.

1:18:18And most of the time you kind of are trying to narrow down to like, oh, this is what's driving my stocks. And then there's, for anybody who here knows a lot about regressions and math, there's an error term. There's like the stuff you can't figure out. For most of my career, it's sort of, well, the error term is alpha. Like if you can explain stuff then, and it's liquid and you can bet on it, then you could get those exposures, maybe for cheap. And anything left over is, oh, you outperform because that's stuff that nobody can recreate. Sometimes we would talk return on labor, return on sourcing, like things that are hard to reproduce.

1:18:50The problem is, is that error term is really, really tricky. What I was articulating before is if I sit around and I go, well, I own semiconductor stocks, right? A model might say to me, okay, Alec, I close my eyes and say, is micron going to be up or down tomorrow? What are the questions you want to ask? Like 20 questions. You're going to go, well, is the stock market up or down? Are large cap stocks up or down? Are technology stocks up or down? You're going to go down a row of things because there's an association between micron and these things. Those are categories. Those are buckets. In my career in investing, the best money is made taking advantage of people that place things in buckets.

1:19:32It's because a lot of the edge and opportunity is between them. It's in the error term. It's not in the special spots where everybody's competing. It's, you know, why was converts where Ken started his career? Ken Griffin, my, you know, former partner and the founder of Citadel. Converts is not a bond. It's not, it's debt and it's equity, but it's this middle ground and everybody, our equity people are debt people. Well, if you're early on in the middle trying to understand where that there's a big opportunity there. Getting back to answering the question, why does that matter? Because people want to take their portfolios and use old models and go, oh, here's your portfolio.

1:20:08It's these buckets. But the error term is starting to show up. Stocks are moving together. You have an inkling of it. You can call it momentum. And I think people want to go, oh, you know, nowadays people probably are learning what momentum is, which depending on the duration, it's like, what is this price movement of a stock over six months or a year? And if a lot of things move up together and then down together, they have positive or negative momentum. And you see momentum when people are really excited about it because these go up and they go down. So there is a factor that associates it. Why is, for example, an energy stock, why does a company, you know, there's a public company that provides housing and trains electricians, right?

1:20:49If you had been in the past, you know, semiconductors are moving, is that stock going to move? But if that's the company that is providing housing and training the electricians that are needed to go build the data centers, that company now is not per se a housing and just a hospitality or real estate company, its output is related and demand is related now to how many engineers are building data centers. Now it's correlated. So my point is, is that when people sit now and say, well, what are the things that are moving and why are they moving together? The reason they're moving together, you could say, well, those are momentum.

1:21:24What does that mean? It means that they have the same thesis, that everybody is buying or selling them at the same time, because that is a unified thesis around AI, both the physical production of it and how much demand there's going to be and what the shape of that. How are people going to use knowledge? Is it going to be open models or closed models? Is it going to be in a vertical, like I'm going to use Harvey for law or am I going to use Claude for law? Like we just have a lot of unknowns. It's almost like sitting and going, you can use these old models. And I'm not to fit you in buckets. And even when you fit in a bucket, you have to sit and simulate, okay, I'm not going to just sit and say for 30 years, I risk manage the same way.

1:22:07What else could possibly be true? What else could be driving this? Oh, that they have the underlying demand function and they move together. That's what momentum is the output of the fact that their demand drivers are all the same. So the real problem is that it's the same thesis. So that's what I mean by not going to old models. And I'm not saying, you know, I always like to have my models around and, you know, it's a mixture of models, as they say in AI. But you shouldn't blindly sit and go, oh, I can, this new world, I can take that old model and apply it. That's not recognizing this for an actual regime shift.

1:22:44And this is two at the same time, I don't think we've ever had before. And the one that matters the most by far is that it's the second cognitive revolution. To stay on the concept of this is the second cognitive revolution. And this actually links back to something that earlier in this interview, I mentioned Yuval Noah Harari and said, hey, we'll address that later in the show. As he's written about, first cognitive revolution, humans developed language, which was huge. We were anatomically modern humans for 100 ,000 years prior to the development of language. The writer Tim Urban refers to that as the unimpressive era.

1:23:22and then we developed language and everything changed and that was the first cognitive revolution and now we're in the second. That points to sapiens as a species might not even be the same again. Where do you believe we as a species are headed next? Yeah, first of all, I'm a huge fan, probably just like you, Yuval Noah Harari. I've read all his books. I watch his videos constantly. He's a clear thinker. He takes a lot of information, compresses it, conveys it to you, tells you where he's making a hypothesis, doesn't project it like he has all the answers. He's really just asking a lot of questions.

1:23:57So huge fan. We do differ a little bit. And here's where I tend to think that we differ. And then we can get to the question around what is the end result? And I have to go to the difference. And I don't want to speak for him. He might, if he's watching, say, Alex got it totally wrong. So that could be, right? It's an opinion. As I say, strong opinion, weekly health. I would say the following. I would say he tends to want to ask about governance of AI. He thinks he's not worried about the robots running wild killing us, but he is worried, I think, about this cognition and what guardrails can we play.

1:24:27Stemis had written an article recently about the guardrails around, you know, so I think there's a bunch of people sitting and saying, someone's got to be the adult and come in and put guardrails around this. I agree with that, but I think it's necessary, not sufficient. Because where I think that that language tends to talk, and I think there's a little bit of this in Silicon Valley, who, you know, some brilliant people way smarter than me. And Yuval does this. It tends to talk a little bit too much for me about it using it as a tool. I'm more interested in how it changes what humans do and what we're like and are thinking.

1:25:03And so I worry about not just AI as a tool, but AI as an environment in which we live every day. Social media did that. It wasn't just a tool. I can be on Facebook. It's changing the way my behavior. It changes my kids' behavior in ways I don't love, right? So I'm worried about the policing of the tool so that the tool doesn't do cyber war and it doesn't do things. But I'm worried about the human and what we become and how we're infected by the environment being changed. And so one of the things to come out and say to people is, hey, forget about portfolio. Okay, I'm worried about people's portfolios.

1:25:44I want people to have retirement, you know, and everything. This is existential, okay? This is literally existential. And it goes directly to the heart of your question, which is what happens to humans going forward? I don't think we're anywhere near AGI, okay? And yet I think AI is very useful. Do you think we're close to RSI, recursive self-improvement? You know, I hear the same stuff that you do. I think we're at the beginning of that. I don't think, I mean, other people can answer. I think also we get into this problem, but what's definitions? I understand what the acronyms mean, but that doesn't, if I say the words knowledge, judgment, information, we can have a debate all day about, well, what do those words mean?

1:26:24Much less these kinds of things. Here's what I would say as a following. I would say that AI is very good at math, coding, and language because they're cheaply verifiable and because there's incredible amounts of data on which to train those. There is a lot about human and human decision-making and other things that is either very little of it written down. and also we operate differently. We operate, I'll tell you, several things, right? First of all, we operate with causality. I not only know that if I drop that glass down on the floor, it'll break, but I understand why. AI is probabilistic.

1:26:58It doesn't have a why. It just has probabilities all the way down, okay? It can speak like it has a why, but it doesn't have a why. It doesn't have a world model. It has a language model and otherwise. I know people wanna develop a world model. It is hard to develop world models It's really, really hard. I mean, humans are incredible animals. I view, will we make progress 100 %? Will some of that begin to look like it can do certain things 100 %? Do I think AI has incredible, powerful capabilities and that it could be used for good 100 %? I'm asking the different question, which is great. What is it that is uniquely us?

1:27:35And I'm going back to what I was saying about AGI and we can talk about RSI, but for the near term. And I don't know how long that is because it's moving fast, 10, 20, maybe it's 50. I don't know how many years. We still have capabilities that I don't think are within the reach of AI. That's not to say that AI won't get more useful, more powerful and help solve a lot of problems that we have. I do, but it doesn't mean it's gonna become human. We humans dream, humans have emotions, humans have stake, we understand cause. We get feedback loops that AI cannot get. You know, anybody right now who's listening or anybody on any station that is listening and they are sitting and going, it's so fluent, I'm gonna ask it about my relationship.

1:28:16I think it's this terrible idea. It has never been in a relationship, okay? It has no feedback. It is training on a bunch of people. It's like literally going to a bunch of strangers and saying, okay, what does this group of strangers think that doesn't really have all the details about your relationship? It only knows you prompted a little bit and you think it's going to understand everything and it's going to give you an answer is really, really not how it works, right? So one is, I think it's far out that we get really across the chasm to really being more human-like. As a result of that, my answer to you is in the next 10, 20 years, humans are going to evolve alongside AI.

1:28:57And what I'm talking about is not just prescriptions for the AI companies to police themselves. There was a group that got together 70 years ago called the Macy Conference. Some of the smartest people ever lived, but who was in it? Anthropologists, psychologists, psychoanalysts, technology people, mathematicians. It was an incredible group that sat and said, it was on a topic called cybernetics. What is cybernetics? Cybernetics is how systems control themselves. Also how they adapt to environments. Why is this temperature in the room kept to a certain thing? There's an environment and you're in control of your response to the environment.

1:29:33My whole book is sitting and saying, let's talk about the human side of it. I get the AI side, you can invest in it, whatever, but like, what are we doing as humans and where are we going? This is in a way of saying, we in some ways have to evolve to make the highest use out of what is currently only our capability. What is uniquely human? I'll tell you what it is. All animals adapt over eons. You were going back hundreds of thousands of years. All animals, not just humans, adapt over hundreds and hundreds of thousands of years, millions and millions of years. And we do it by mutation. Random thing occurs.

1:30:09It's either selected for or not. We then breed and it gets passed on, right? We have no control over that. It happens. But here's what's uniquely human, even beyond, for the most part, most animals. And I would say in the fullest extent, no animals and no AI. We have the ability to override our genes. AI doesn't sit and go, I think that all my data is wrong. I want a new set of data. It doesn't do that. Humans can do that. We can sit and get, I don't want to have kids. Nothing wrong with that. But your genes want you to have kids. I know, I'm overriding it. You get choice. You have agency in your lifetime to alter your direction.

1:30:50Nothing, not AI, not any other animal has the full capability to do that other than a human. You want to give that away? You want to give that unique, that is a cue. That is the ability to adapt in your lifetime. The one unique human trait that beyond every other animal or synthetic being, it has that, you have that ability. Use it. Do not let that atrophy. It is the best skill you've got. It survives any condition, any environment. You don't control the condition of the environment. You control your response to it. Use it. This is another environment, AI. Let's think about how we react to it.

1:31:30If you let it just use it and everybody does like social media, we have now dictated everybody's reaction to it. It takes over and it just bleeds in and we're lazy and we just let it answer things. Why would you do that? Why would at this moment, would we do it both socially and cognitively? We're about to make choices one by one that affect everybody. And so, yes, I do think there should be policing. And I think Yuval is more on that front. And I agree with him. And Demis are like, what do we need to police the encroachment of AI? But it is already affecting the humans. We have to make an active commission, not omission, which is stay adaptive.

1:32:11Nothing else on this planet is as adaptive. Nothing else can control your outcome in your lifetime. Use it. It's our unique ability. We're human. We're not Chinese, American. We're not, you know, pick your gender, pick your nationality. Like, as you know, you know, anybody who's studied anthropology, I mean, we're all the same. Whether geologically, I mean, yes, we have a different opinions. But by the way, different opinions is the source of all richness. Otherness is the source of all richness. If you and I have the same opinion and somebody comes in the room and they speak to both of us, it is literally no different than speaking to one.

1:32:45There is no new information on the second person. The only way someone could learn anything from the two of us is only where we differ. Otherness is the only source of any learning for someone else. I don't want something to confirm something for me. I want something, we talked about this earlier. I want to know otherness. Tell me where I'm wrong. Tell me what else I'm missing. There is nothing else to be learned. And the only way to adapt is to be perpetually learning, allowing that learning to come in and changing your mind. Just I'm open, I'm experimenting, not enough to kill me. I'm not doing it to be perfect because I don't know.

1:33:22It's an uncertain world. I can't put all my bets down because, you know, life at this moment isn't quite the same as poker. But if I understand the model, then I could start betting like it's poker because, oh, I know the rules. I've got the rules down now. And until the rules change, I can go with that. I see what humans can do as being very unique and different. The adaptability is the end state that drives agency and it drives judgment. because you have no agency. If you don't update and adapt, you're running on an old model. And let me tell you what happens. Either reality is gonna force something on you or someone else's model is gonna force something on you.

1:34:00You are not going to be the one deciding. Other things will overrun you because you just are running on some old map. You only shot you have is, I don't care if I'm right or wrong. I just wanna be close to reality. That's it. And I'm the person who's, I had that idea. Yeah, you know, you just gave me a better one. I'd dump that one. I'd take yours. You might go, I'd say, I don't care. Your idea's better. I like your idea. Thank you. Now I get to go use it. Great. The first person to do that is the one who's closest to reality again. And that's how we as a species survive ahead of AI, which just doesn't have the capability to do that yet.

1:34:36Adaptability is how we get that judgment and that agency, which is what makes us so uniquely human. How does adaptability differ from grit and curiosity? I think of adaptability as a method. And I think they're very valuable. You know, grit and curiosity are traits. And so they're used, just like IQ and EQ. They're usable, but they fit within and sort of like, AQ is the meta skill. So let me explain what it is. And by the way, I recommend for anybody, if you want to read about both grit and curiosity, Angela Duckworth's book on grit is phenomenal. Let's start with grit. So where does grit fit?

1:35:11I think grit, a lot of people think of the following. And I did Ironmans, I did mountain bike races. I've done these crazy things. And I think people normally think of grit. They're like, can you just suffer and keep going, you know, and survive? Like that's what grit is. And I think there is a component of grit in that respect and a valuable one. And I've had several times in races where I've not wanted to go on and you just go on and you finish the race. But there's another form of grit, which is not, you know, think about what that says. It says, it's a simple one, but I have a goal. I have a model.

1:35:43I'm going to keep going and I have the grit. And you might say, hey, hey, there's adaptability in there because I got thrown a curveball with the weather in that race, but I overcame it, et cetera. But grit sort of says, you know, keep going. There's another kind of grit. If you come in with an opinion already, right? You go through metacognition and you're like, I have a world model. Grit is also the ability to hold it off, okay? Here's a bad form of grit. I have a world model and I'm sticking with it. No matter what. Well, that's a bad kind of grit. It's good in a race, but it's a bad kind of grit.

1:36:16So I consider one form of grit to be hold your biases, hold your opinions. We're going to play a what if game, okay? I know you have a strong opinion. Let's play what if. Let's go think of what else could possibly be true or why that answer might be false. You don't have to let go of it. I'm just saying suspend it over here. Just put it over here for a second and play what if. Open your mind, play what if. So now grit is being used. It wants to come back in because people like certainty. It doesn't want to explore. It wants to just collapse into an answer, but you hold it. You use grit to hold it.

1:36:48Curiosity then is the twin power that says, okay, go explore. Go explore other possibilities. And so that is what enables you to separate your identity and begin to think about other possibilities. Grit says, I know you think you know the answer, but wait. Curiosity says, go explore. Come up with other possible answers. And eventually you come up with the best version of another answer. You still don't know if it's right. Your answer could be right. This new one could be right. But who's the judge? Reality. Okay, I have my old answer. I have my new best version of a new one. I'm going to go probe and get answers and see what's right.

1:37:26I'm going to get a little information. It comes back. It might lead me to my old answer. It might lead me to my new best answer. It might go, well, some of the new has to mix with some of the old, but you're still off. Go do another experiment. Okay, I'm going to do another one. And then slowly I iterate to get closer and closer and closer. So I view those as traits that enable me to go through AQ. AQ is the dominant piece of, in my view, of adaptability, which is adaptability includes the ability to check your assumptions. That's grit. Hold it. Check it. It is think about other possibilities.

1:38:04That's curiosity and exploring. And then I call it in my book exploiting, being able to sit and go, great. I have my strong opinion weekly held. It's conviction, not that this is right. It's conviction that this is the best answer that I got so far. And at some point I have to test it. I'm gonna go test it. I go test it, I get feedback and now I iterate. So that's how I view grit and curiosity. Very, very important and necessary, but it's part of the framework that starts with metacognition. There's lots of embedded things in there and then how you think about other possibilities and then run an experiment.

1:38:39But that's where I fit grit and curiosity. Grit, not stay with the thing and don't ever consider an alternative. Hold your old answer and then use curiosity to explore around before you go test. That's how I use those two. Yeah, I agree. Angela Duckworth's book is excellent. One of the things she said that really resonated with me was she talked about the study of her students, the study of students and how the ability to just power through boredom or frustration. And I think about all of those times when I'm trying to log into a website and they want me to do two-factor authentication and I'm like, forget it.

1:39:17You know, like the little bit of friction can really throw a person off. But the point you just made is it really, it's important. And I'm going to just take what she says in that book and with a slight twist angle, which is what is boredom that people, it's the desire to collapse. Like I'm working on something. Now I'm bored. Can't we just get to the end answer? Can I just act? Like, I don't want to work through the rest of it. Grit in my vernacular is it's not boredom. It's excitement. I get to go explore. That's why I think uncertainty is incredibly powerful. I don't know what the answer might be.

1:39:47Let me learn and see what it might be. What other possibilities could be. You don't get rid of boredom by collapsing. That's what I think, you know, one of the lessons was the best students and the best thinkers later, they don't want to collapse prematurely into an answer just because it feels better and they're used to it. They hold it, explore possibilities, and then later get better answers because they haven't collapsed down. And that collapse can feel like a stall. It can be like, oh my God, I keep like, how long do I have to try coming up with something else before I just go with my answer?

1:40:21I know that feeling. It's a bad one, okay? It is a bad trait. Like it's a, you know, you have to be willing to go, listen, make it fun. I mean, who knows what happens? You don't know what you'll discover. You might learn something, might meet new people, like probing around, trying to figure out what might be different than you thought. For me, I grew up in this family where nothing was certain. Every answer was provisional. You know, I've said before, I mean, I'm not joking. You know, I'd walk by my parents, the youngest son of two psychoanalysts, and I'd be like, mom and dad, are you happy? And they'd be like, happy?

1:40:51Happy is a strong word. What's your definition of happy? Come over here. Like, let's talk about what it means to be happy. So you couldn't even collapse on the definition of the word happy, right? It was just like, well, let's explore. I mean, I can't even have the grit to just, can I just solidify that there is a definition of happy? Nope. So I'm a little unusual on that. My training early on, I said, when you're a little kid, you explore, and then you go and you start to get a reward from your parents' particular answer and then school. But the way my parents do this, it was different, right?

1:41:22It wasn't me, but my older brother was in fifth grade in a class. He was looking out the window and he got called up to class later. My mom got a phone call at home. My mom goes into the teacher. The teacher says, your son, Malcolm, was staring out the window. Should be paying attention in class. And my mom's like, he was probably thinking. And she goes, well, in this class, we don't think, we do. And my mom's answer was, well, in our family, we think, okay? And so like, that is the atmosphere that I grew up in, which is you don't collapse. You think about possibilities always. Eventually, you do have to make a decision, but it is not boredom to think through those.

1:42:00It is a gift to have the time and the moment to think about what might happen. It is a gift to sit and say, I actually, it's actually relieving, to be honest. Having to be right all the time and predict the future kind of stinks. I mean, it's really hard. You talk about having like going crazy. How much easier is it to sit and go, I don't have to be right. I just have to be willing to be wrong and be the first person to go and be adaptive to figure out what looks more right next time. That's a way more comfortable spot. Man, it takes a lot of pressure off. Like I'm willing to change my mind. Oh, you're an idiot.

1:42:34Oh, you just don't have strong convictions. No, I have conviction that the world is moving really quickly and conviction and confidence that I'll find the right answer. I may not know it, but I'll find it. And my willingness to move is itself the confidence and the adaptability to get to better answers. Because at some point, your confidence will cease to be right because everything's provisional. When I was a kid, there were nine planets. I think there's eight now, unless it went back to nine. I don't know. But like, you know, that's knowledge. But adaptability is, tell me how many planets there are.

1:43:05You know, what's the definition of a planet? I mean, by the way, right? That's how we got into the trouble in the first place. There were nine until we, well, what's the definition? Okay, new definition. We're okay. All right, final question that I'd like to ask. Earlier, we talked about the three major things that the people who are listening to this are thinking about in their own lives. One was investments, which we've addressed. Yeah. But the other two, one is career and how you, a framework, a framework for how to think about career-related decisions that you may need to make as we move into this new era.

1:43:41Yes. And then in addition to career, more broadly, priorities across their life, priorities around how they want to plan out their retirement, their elderly parent caregiving, they're supporting their kids as kids grow up and leave the nest. We've talked about these concepts of grit, of curiosity, of adaptability, of EQ, of IQ, of this new cognitive revolution and using AI as a thinking partner and a sparring partner, as we try to synthesize all of this together, how does a person synthesize this and apply it to these big questions that they are facing and that they will continue to face around the domains of both career and life?

1:44:24So let me go to the career first. I've written some substacks. In fact, I wrote one recently around graduation time as a letter to graduates. So I have a bunch of thoughts on the career side. And I think of that as a decision-making process. And so it's slightly different than the other one, which I considered a bit more of like, what is your mission and purpose and what's your utility curve, which we'll come back to in a second. So I consider them slightly different. Here's my advice that I give to graduates. Your skill that travels is an ability to build a new skill perpetually. when I got to Citadel, it wasn't called Citadel Investment Group.

1:45:01It was me, Ken, who started it, and then Dave Bunning and James Jay. And the three of us collectively did, I mean, Ken did. I mean, he had started it out of his dorm room. We didn't know anything. I never traded a day in my life. I started doing risk-garb. I couldn't have told you what it was before the interview. James was a string theory guy. Dave was a wrestler slash football player. We didn't know anything. It was total beginner's mind. What we did know is how to think. all you have is how you think not what to think a lot of school which i think needs to massively change i'm a believer in education but the education people need is not a transfer of knowledge okay knowledge the cost of it is zero as an output at a university if that's all you do is transfer knowledge and a credential the value of that is going to zero so you've got to do something else so the first thing i would say on the career side you have to learn how to think critical thinking, and being adaptable, these are the skills that apply wherever vector you decide to apply it to.

1:45:59And so the first thing is literally separate your job and your skill is not whatever knowledge you just learned. You can go to school and still learn coding. I don't consider the value to be that you can code. I consider the value, you must have understood logic. You must have understood how to solve problems. Like learning how to think. I also suggest people take a class in philosophy, take a class in economics, Take a class in psychology. Learn how problems are solved in those areas. In anthropology, what were the problems of the day? How did people solve them? What are the mental models in all these different areas?

1:46:33That is incredibly valuable because if you sit and get it in one place, it doesn't, it's great to have that sort of perspective. So the first part of a career is whether you're in college, graduated, or you're young or you lost your job or not. If you're a relatively young person, I'm turning 60 in a few months, so that's most everybody. Your skill is not what you know. It is your ability to learn, unlearn, relearn. That is your skill because the half-life of knowledge right now is going down very quickly. Someone might sit and go, oh, but wait, judgment, Alec. Like even judgment, I mean, you know, what is judgment?

1:47:11It's compressed experience. So here's the problem. The perimeter of judgment is moving. AI is going to take up more and more territory as people with experience convey that in, AI trains on it. It's going to crowd out some of that. Where it won't crowd out is the stuff that's uniquely human that can't be compressed and otherwise. So again, I go back to the important part of this is get yourself in the mentality. It's not that I know something that I can convey to this new company or otherwise. It's that I can help solve problems, whatever those problems are. So that's one. The second is what matters a lot, and I don't think it's really around now, but a couple years ago it was, which is I don't care if they have a ping pong table, serve great food, have a coffee bar.

1:47:58All you care about is being somewhere where you get feedback loops. Be somewhere where you see high-frequency feedback loops. Learning that mechanism of we tried, experiment, feedback. So I went to J.P. Morgan, which is a great company. I'm a client of J.P. Morgan. and I was on investment banking. And for me, for Alec, it didn't work because the feedback loops were too slow. Where did I go? I went to trading. Every second of every day, feedback, feedback, feedback. Am I right? Am I wrong? Now I could sit and go, I'm wrong right now, but my thesis is a month or a year or so. It depends on the loop there.

1:48:32But in a lot of cases, very, very fast feedback that you get. I like that. I like taking it, processing. The market's right, not me, but I can try to find the patterns, et cetera. So one lesson for people is when you're figuring out your career, always go where you get fast feedback loops. You could be in an environment, you know, on a career, what are the constraints around that? And I think, what are careers? What are you the most interested in working on? Who do you want to do it with? And sometimes learning what you don't want to do is completely fine. Most of the people that we're talking about are relatively young.

1:49:06We're back to the same philosophy. Do not worry about getting it right on the first, second shot. It's just as important to go, oh, I did this, I went there, here's what I didn't like about it. I didn't like the people, I didn't even like, the work wasn't inspiring, I didn't get feedback loops. If you go somewhere and the people are challenging, they're challenging your ideas, not you personally, not ad hominem, but ad res, challenging ideas, we're experimenting, getting feedback loops. Those are exciting places to work because that is the motion of the loop that you learn that you can apply anywhere.

1:49:38That's my AQ loop, just go and see that in motion. So I think about a career as what am I talented at? Who do I want to work with? And what makes me motivated to do? You should literally take those three and figure out where do I get feedback loops on all of those? I'm not saying switch jobs every two seconds, right? You stay somewhere if the feedback loops are upgrading your learning constantly. And if you go somewhere who it's a great boss and it's really nice environment, but the feedback loops are slow, you got to leave. You have to leave. I don't care if they're nice. It doesn't matter. You have to get feedback loops.

1:50:15That's your value. You have to get, you know. So for me, back in the day, you know, I did a lot of work, investment banking. I prepare a deck. They're going to go present it to the company. And I was like, can I go in and listen? No. I mean, this is the early 90s. And I'm like, why? Are you investing in me so that I can learn, get the feedback loop? Because I made like a better presentation if I hear directly, what did they like? Would they not, whatever? Like, why would I not be able to go in? So for me, that's just like, okay, hey, you're not letting me in feedback loops. I have to go. It's risky.

1:50:45I mean, at the time, it's not like I had another, you know, I mean, I was going to, Citadel wasn't even called Citadel. It was like six people and$100 million. It was, you know, it wasn't, my parents were like, why are you leaving JP Morgan? They have a, I see the bank on every corner. You're going to this place. What is Wellington, which was the old name? And I was like, but I just, I gotta, I gotta go. I gotta get the feedback loops. So you have to be a lifelong learner and you have to know, worry about how to think, not what to think. Engage in that across a lot of different disciplines. Center yourself as being someone who's adaptive, where you don't care about being right, you care about being a learner.

1:51:20And then express that in three vectors. What are you good at? Who do you want to work with? And what drives your passion? Because you now are a learner that loops, if any of those, you're trying to get as much information and as quick as a young age on those three vectors as possible, That's what you should go do. So that's what I, for the most part, and I tell everybody it's a difficult time. I think this may be the hardest time other than during war to be a young person. I sympathize. I have four children. I think it's extraordinarily difficult. So I think it's important that they feel heard and that we understand it's difficult.

1:51:57And the best skill that I could give them is something like this book that says, here's where you have to identify yourself. I know the old game, you feel it's unfair. The old game was, I worked really hard. I had answers. People rewarded those answers. And I went out and I had a stamp and I should have the job that gives me this career. But one of the problems in the second cognitive revolution is that scarcity is now abundant and its value trends to zero. So what is the one thing you have left? This unique human ability to iterate, to get better answers in areas that AI just hasn't encroached and I don't think will for a long time.

1:52:36So that's my sort of guidance on that side. To the other side where I think your question was, okay, now people, you know, we were sort of investing, we did the career, and now it's how do people make judgments around priorities around their life? How do they weigh these things? Which I consider success personally to be family, health, friends, success at work, physically, mentally. I want to be good at all of those. I know that I'll never be the best in the world at any of them. It's hard enough to be the best in your industry at something, much less, you know, it's obviously a very competitive world.

1:53:13But I have sort of my own internal metric that I care a lot about being good at all of those. And I know at given points in my life when I'm a little more involved in something in work and it makes me a little less good as a father or as a spouse or as a friend. And I don't like that. And so I will adjust it. And so prioritizing for me is not how I go about doing some of those things is a decision-making process that I incorporate AQ into. But weighing those is more of like, what's my mission? What is my utility curve? Which is when I say an AQ is you choose the mission, right? You have a goal.

1:53:51I'm giving you the operating system. This is an operating system for how to live your life if you choose the goal. But you have to choose the goal. I have chosen that this matters to me. I've been very successful in business. Maybe I could have been more successful if I had been a worse father, you know, or a worse friend. I deemed that to be not worthy. I think it's much harder to be pretty good at a lot of things than be exceptional at one. And people will argue with me, that's fine. I think it's pretty hard across multiple functions to be pretty good. And again, maybe some friends would say he's not great or, you know, employee, I don't know.

1:54:26this is what my goal that I set out to do. And so how I go about doing that and implementing at work or otherwise is I do think about that. Even in my relationships with my kids, I think about AQ. One of the big things, you know, I've been in therapy for 10 years, son of two psychoamalysts. What is that? It's about metacognition. I need to understand myself. That's not just for making decisions at work. I need to understand where my kids are coming from. What has it been like to be my son. I'm not saying anybody's perfect at that, but the strength of my relationship, my empathy toward others, my listening to them, my understanding that I'm biased.

1:55:04And so all of that, I do think the concept of metacognition, simulating, that's all about perspective and being able to zoom out, look down on your life and go, what matters in your life? And be able to place yourself as an actor in there, making conscious choices toward whatever your goal is. So that's what I would say, which is, I don't know if I can answer for people, you should prioritize this over that. What I can say to people is when you decide what it is you want, what matters to you rather than telling you what should matter. When you decide what it is, there are better ways in a world that is uncertain to go about making decisions.

1:55:43I actually think there are. And I think this book is not just a business book. I didn't write it just as a business book. This is a life book now. It is about agency, which means it's about making decisions toward whatever goal you have. If you take this, you can apply it. It's not a, oh, I get automatic right answers. It is a process, whether it's in relationships or other things that will, careers, investing, it will lead you to more likely than not increasing the odds of getting to the outcome you want in a world that it's really hard to make decisions in. It's a manual for decision making.

1:56:19toward whatever goal you set. But I think it is broadly applicable because this is the soup we're in right now. So can't tell people what they should care about. I think that's the beauty of the world we live in is that people have very different missions and purposes. I hope that as a society and humanity that we can agree that there are certain base principles, rights, values, equalities, and otherwise that we can build off of. That would be a nice metacognitive moment for society. We'll see if we can get there. Thank you for spending this time with us. Where can people find you if they would like to know more?

1:56:55So my book launches on the 15th of September. Anybody on Amazon or Barnes & Noble, or I guess I almost sound like a commercial, wherever books are sold. And there's a website for the book. I think it's theaqbook.com. All the proceeds are going to Dare to Try, which is a paratriathlon organization. I did triathlons. There's a lot of people both born with physical deformities or a lot of military vets or police for other people. And it's about empowering them and having them achieve their goals. It's not just about doing a triathlon. It's a metaphor for you can do this, you can do anything. And so all the proceeds goes to that group that's done an incredible job.

1:57:31In fact, they're the primary source of the US Paralympic, not the only, but the primary source of the US Paralympic triathlon team, incredibly inspiring people. And maybe the iconic definition of adaptability is people who have had some physical disadvantage and you get to see that a lot of them are mentally advantaged and they're incredibly adaptable. There's a lot of inspiration, a lot of lessons learned there. Well, thank you again. Yeah, I appreciate it. Thank you. It's been my pleasure. Thank you, Alec. What are three key takeaways from this conversation? Key takeaway number one, knowledge is abundant, but judgment is scarce.

1:58:15Alec's framework is that when something goes from being scarce to being abundant, then something else becomes the new bottleneck. And so knowledge used to be scarce, but now, because of AI, knowledge is abundant. So what is the thing that's scarce? It's judgment. The ability to receive that knowledge, weigh the evidence, and then decide based on a mental model of the world that's three-dimensional and real. The attribute that keeps your judgment current, like the fuel for that judgment is adaptability. When AI makes knowledge abundant, something else gets scarce. And what gets scarce is judgment and agency.

1:58:57Judgment is your ability to weigh the evidence and decide to act, and agency is acting. What enables judgment and agency to happen is adaptability. That's it. Adaptability is the ability to sit and go, my judgment's based on a world. Is that world still two? And if I update that, I can express my agency and apply it to the world that's changing now. That is the first key takeaway. Key takeaway number two, you lose your judgment, which means you lose your edge the moment that you allow AI to shrink your thinking. But you gain an edge when you use it to expand your thinking, when you use it as a sparring partner.

1:59:37Bring your own reasoning first and then ask it, Play devil's advocate. Tell me where I'm wrong. Steel man, the opposing side. And let's debate this. That way you're using it to become a stronger thinker rather than to replace your thinking. How do you use it? How do you not? Think about doing the following, which is if it expands your set of possibilities, that's great. Don't use it to shrink it. So if I say to it, give me an answer. It is now gone to the internet, gathered information, compressed it, giving you one answer, okay? Just one answer and here it is and it sounds really fluent. So you're going to just say, that's, I saved me a lot of time.

2:00:17That is not what you want to do because you're having it take over your judgment for you. What you want to do is say, I've thought about the problem and here's my thinking on the problem. Where do you think I'm wrong? What have I not thought about? Finally, key takeaway number three, your S &P 500 index fund is one giant bet on AI. There are a handful of stocks that are driving most of the S &P 500's gains. They're all riding the same AI thesis. And so investing in a broad market index fund is textbook diversified, but the overwhelming concentration of bet is an AI bet. That's what's driving our entire stock market.

2:01:02So his recommendation is to diversify based on thesis. If you're a retiree and you are in the S &P 500 and you used to have 500 stocks and you had a diversified portfolio, what does this regime change mean? It means that, first of all, well, seven stocks are driving the S &P 500. So you're not diversified, okay? Not only are seven stocks, that'd be one thing if they were seven diverse stocks, but it's one theme, which is AI. So you are now rising and falling. So you could sit and go, I don't think the world's changed. So I'm going to leave my portfolio. I'm nearing retirement. I'm in the S &P 500.

2:01:45I'm diversified. Things are stable. But it's the recognition that, you know what, this actually isn't diversified because the world, the model has changed. Those are three key takeaways from this conversation with Alec Litowitz. If you want a tool that can help you use AI as a sparring partner, If you want something that can help you interrogate your thoughts, challenge you to see things differently, we have a free guide. It's called Pause, Question, Turn It Around. It's based on the research of Byron Katie, and it's a guide that can help you challenge your thinking, explore new perspectives, separate what's actually true from what feels true.

2:02:28It's a companion to your thinking that helps you question your own thoughts. You can download it. It's completely free. It's at affordanything.com slash turn it around. That's affordanything.com slash turn it around. Totally free. Our gift to you for being a valued member of the Afford Anything community. Thank you on that note for being part of this community. This is the Afford Anything podcast. My name is Paula Pant, and I'll meet you in the next episode.