John Arnold on Trading, Energy, and Evidence-Based Philanthropy

28:51It was obviously different in different parts of the US and you can take advantage of that difference and then the difference in weather patterns as they move from west to east and so the more linkage you have the better benefit you get and in terms of governance would you keep them independent or just have them economically more interconnected for better arbitrage? I think the nature of nature of history is that these things are gonna stay relatively independent and you're going to have the RTOs and ISOs that you have today generally. The Northwest is talking about creating a new regional transmission organization.

29:26And so there is more integration among states, but I think each of the RTOs probably stays independent over the long term. And the long term energy and electricity outlook, as you know, the demand for data centers is way up. AI has been arriving. How are we going to accommodate all that? I live near Loudon County, they're putting restrictions on day, the centers. How are we going to do 3x, say, on the grid? It's a normally difficult challenge. I think for a long time, communities welcomed in data centers. They viewed them as not many jobs, but it was tax revenue that was being brought in. And so there was competition amongst jurisdictions about who's going to win the data center and bring that tax revenue.

30:10And so, jurisdictions would give a rebate of tax revenue back to the developer. I think there was a realization just in the past couple years that, wait a minute, these things are, don't bring that many jobs and they use a lot of power. And the marginal cost of new power is greater than the average cost of power. And so as you bring new load in, it's raising the cost of power to everybody. And so you see jurisdictions now starting to fight it and say, we don't want these things. Or when they're a bit of a nice or not many jobs and they're raising the cost of power for everybody. Now there's ways you can do a large load tariff that's starting to happen to try to isolate the effect on individuals, that leaves the problem of how do you get one gigawatts or two or three gigawatts and some people are talking about more into a particular location on the grid.

31:01And that's as much of a challenge as anything today. You can build the resource, but building the infrastructure to get it to one point is very difficult in much of the country. So when people say, well, we need all to say, I compute, we need it rapidly to be China. So we need to set up something quite soon in UAE or Saudi Arabia. Does that make sense to you? Or do you think they're just barking up the wrong tree? I think it's true that you can build quicker in some other countries. It's also true that you can get as cheap, if not cheaper power in some of those same countries. What's not true is that the faith in the political system that I think there's grave concern about as the AI is becoming talked about more and more about strategic national interest and national security.

31:50Question is, do we want the most important data centers to be located outside of the United States jurisdiction? And I think both at a national level as well as at a company level that answers largely been no. But say if we don't do it, one, especially UAE might cut its own deal with China, and China just does it. And China's way ahead of us on AI, which has military, cyber implications, and we just lose out because we're still fiddling around with lobbying the citizens of Laven County or something. I mean, do we need to preempt them even though we don't have full trust in those governments? Yeah, it's one of the things that the Energy Dominists Council with the White House is considering right now.

32:28And there are places in the US where you can build. Again, like trying to bring this into the AI, the historical AI or historical data center development corridors like Virginia is increasingly hard. Bringing it into Texas is still very doable. And so you see many of the announcements of the gigawatt plus data centers are now happening in Texas. But they're also happening some random places across the United States that have, you know, a good point that are at the intersection of, you know, many high voltage electrical lines and can bring in resource from a number of different areas and get that portfolio approach for resource for that particular plant.

33:15Do you have a favorite so -called weird idea for energy supply, like generalized geothermal or solar powered space stations? Does any of that have a chance? answer, it's just science fiction. I think it's science fiction. You know, I've heard a lot of these these proposals. It's hard. It's hard to figure it out. How good or bad putting aside the national moves away from nuclear, but how good or bad is EU energy regulation?

33:42Look, it's hard to isolate the shutdown of Russian supplies into the EU in terms of, you what would their energy system have looked like absent that? And so, yeah, I think one question is, do you want to have an N minus one, that is that your largest supplier goes away and have that risk, have that type of effect on the system and was that a foreseeable possibility that they should have planned for? I think that's a reasonable proposal or hypothesis. I think the question is the more backup and redundancy you build into the system, the higher cost it is. And so there's frequently this trade -off between reliability and cost.

34:28We have it in Texas. You saw after Stormyuri and the Texas legislature is debating about what reliability do we add and what's the cost of it and how do we find the perfect balance of it and the answer in Texas is different than the answer in Virginia or the answer in Europe. And so I think it's easy and retrospect to say, you know, Europe regulations failed. I think it's harder to say that, you know, had you gone to Europe five years ago and said, do you want to build redundancy in case Russia supplies completely cease or, you know, or down very significantly? And do you want to pay for that?

35:06I'm not sure what the answer would have been. What do you like best about living in Houston? You know, there's something dynamic about being in a growing area. And I have a house in a Colorado mountain town and it's fantastic and it's beautiful and the weather is great and it's a bit stagnant as well, right? And you have the growth and dynamism in Houston. In Houston doesn't have the natural beauty, it doesn't have great weather, but it's a place that is only going to succeed if it works. And so governments responsive and people go there because of the opportunity. I think it's been easy to build.

35:50Texas has had this libertarian culture and low tax culture that's encouraged businesses to come, which then encourages people in their productive years to come. And so many of the first generation professionally, both blue collar and white collar, have chosen to come to Houston for the opportunity. I was at a dinner with friends the other day. I think there were 10 of us around the table. Every one of us was first generation to Houston that had come for the opportunity. And so none of us had our high school friend networks that we were hanging out with. It's a very welcoming city. I think the ethnic diversity and the fact that the diversity is intertwined throughout the city.

36:34If you look at the ethnic maps of many northern cities, and it takes Chicago for one, right, you kind of have everything south of downtown as black, and north of downtown as white, and you just have this dividing line. And these cities are very separate. The ethnic makeup, if Houston is very interspersed. And so you have these little pockets of, you know, Hispanic neighborhoods and black neighborhoods and white neighborhoods, but it's more of a check board throughout the city. And I think the city's better for it. At least superficially, I have the impression that there aren't so many externally influential institutions or movements coming out of Houston.

37:11Arnold Ventures aside, but do you think that's true? Or why is that? It's a large city, it has a lot of wealth, a lot of civic spirit. Great art, two great art museums, plus the Rothkoch apple. But it seems fairly self -contained in a way. Yeah, I think Houston is an execution city, right? It is a place that people go to To do this stuff to build the things its core business has been energy and then kind of all the things associated with energy and chemicals and Manufacturing and so it kind of has the blue -collar roots to it But then also has you know become the magnet for corporate headquarters in this space And so even a generation ago, 20, 25 years ago, the energy industry was much more dispersed than it is today.

38:03You had parts of it in Dallas and Tulsa in Oklahoma City in Denver and New Orleans and a little bit in LA in New York. And much of that has congregated to Houston. And so, you know, I agree, like Houston has not been on the forefront of movements. It hasn't been historically an inventing city. It's been a manufacturing and execution city and more of evolutionary improvements rather than revolutionary improvements. Now you live in an Alexander Curlin designed modernist house and he once said in an interview and I quote, to live in a modern space requires discipline. If one or two things are out of place, it just destroys the whole balance.

38:47And then someone said, well, this is why people who don't want to live in modernist homes because they're messy. And then he said, quote, not all lives are messy. How do you feel about this living in one of his houses? You know, it takes a little bit of work for sure. It takes a lot of work. I love it. My wife loves it. Our kids, I think, would prefer the messy house. And we would prefer things not to and it's feel like you can't touch them. We have parts of the house that are more formal and parts of the house that are more informal. There is a component to that. If a house looks worn in, if a modernist house looks worn in, it starts to degrade quickly.

39:25The aesthetic value of it starts to degrade much quicker than a normal house. It just requires a lot of maintenance and up -to -date. Can you do Houston Hurricane protection with a modernist house? Is that contradiction? It just works. No, it works. I think building materials today are extraordinarily good. And so, you know, any house that was built in the 21st century can withstand, you know, the vast majority of any type of windstorm. What makes a really good Picasso better than a middling Picasso? I think the amount of work and effort he put into it. You know, there were some paintings he did where he worked on them for two years.

40:04And there are some that he did in a day. And that he would just wake up and, you know, pump something out. and this, you know, it was especially true later in life, I think, you know, as artists get more successful and kind of get lazy and get wealthier and the market starts to take anything that they pump out. The quality of work would tend to decline. And what's peak Picasso for you? His Cubist period. You know, where it was, you know, kind of marrying kind of abstraction with That's a figuration oftentimes, and that's very much a kind of a core thread throughout Loremai's collection is that intersection, and I think just the revolutionary components of Cubism is one that I very much appreciate.

40:53A lot of our Silicon Valley friends, they strongly dislike modernism, and they think it's a kind of corruption or even perversion, or it represents decline of the modern or contemporary world. Well, what does it you think they're missing? I've always been drawn to things that are timeless, that were created at a moment in time, and I think that's what great art is, is doing something that's relevant to the moment. And then there's only a very limited subset of those things that become timeless, that are still relevant, you know, in a different moment, in a different generation or a different century.

41:29And I think those are the truly great objects, and I think there are components of modern that fit that mold and their components that you look at and like, yeah, that was, that's dated today. And, you know, it is no longer, you know, appreciated by somebody like me or by many people. What attracted you to buying 17th century Baroque? Because it seems like an outlier from a lot of the rest of your art collection. And Baroque, sometimes seen as the kind of opposite of modernism. So we have one painting of 17th century Baroque. One's a lot. One's a lot. In a modern stone most of all. You know, I think the collection, Lauren, I have built, has really tried to look at and of the history of art and especially figuration over time.

42:12And from the birth of art until maybe 1500, there was this trend of how do we, we the art community, we artists try to create representation of the figure more and more realistically. And this probably peaked with Leonardo, right, who then masters even Musco -Skella -Tool. components of the body. And then, you know, once he's mastered it, then there's a big question about where do we go from here, right? And it's now you have to tell a different story, you have to bring emotion into art, you have to start doing abstraction or bring a new voice or style into the body. And so I love that arc of art history of, you know, trying to perfect the body and then trying to move forward.

42:57And so we've built this collection of objects that are largely around and the figuration, as you go from the perfection of it and then to the abstraction of it. And so the 17th century broke, just again, kind of a moment in time that's part of that arc that then, Genev, helps tell the story of the collection. And I think the great challenge we have is we need pieces that talk to each other. You can very much end up with clutter by putting together pieces from different cultures, different time periods, different media that don't speak to each other. How does African sculpture fit into this picture?

43:35African sculpture, of course, was very inspirational to a number of modernists, Picasso, number one, and so number one, I think it's, I love them as art objects. Many of them were used for almost all of them were used for some type of ritual. These would be like Congo pieces or what an African sculpture is attracting you. Exactly. So, you know, there was a lot of it that was developed as kind of for pagan rituals, and it was either celebrating birth or death or the transition to adulthood, weddings, and it's this isolated culture that still comes up with these objects that are beautiful, right?

44:15And had no idea what other people around the world were doing at the time, and the Westerners came there and quickly and have saw these and were fascinated by these objects and started bringing them back to Europe. And Europeans fell in love with them and they started to be even an export market that developed over time where Africans were developing pieces specifically for Europeans. And then as African cultures went from pagan religions to Christianity, they started kind of discarding many of those objects. There's the flip side of it, which is kind of best represented by the Benin bronzes, where a British expedition in 1897 comes in and conquers the royal palace and Benin and steals all those objects and brings them back to Europe.

45:04I think there's still this kind of struggle in the west of how to deal with these. Because you give them back, you're not sure they'll be treated well, Correct. And it's also theft of cultural objects has been happening forever. And I think there's the question of how exactly did the theft occur? How important were those objects to the culture? And I think in the case of these Bening and Bronzes, I've never acquired one because I've never been comfortable with that story. I think there's a spectrum here and there's a lot of gray area and the art markets. and art academics and museums have been struggling with many of these questions about where do you draw the line on cultural appropriation and when do you start giving back objects because you know that's a slippery slope for for many cultures across many time.

46:00the more leesa you'd have to return, right? Exactly. The late period Alzheimer's to coonings, underrated or overrated. I think overrated. I think if you didn't have the decooning name on it and there was just an object that people would look at it and would say, yeah, it's somewhat interesting, but we're not gonna describe the same. Certainly evaluation and art historical importance to it. Now in energy, you had to make a lot of trades and you hope to win on average. In art, it seems you make a relatively small number of buys, but you know, each one is a very good decision. What's your overall model of yourself that ties together those two facets of decision making?

46:43Your art's hard once your walls are full, because then, you know, not only is the question, do I love this piece, but do I love this piece more than the piece I love least in my collection today? And that's a higher hurdle sometimes. all the time. Trading was and is a great industry because of the immediate feedback loops associated with it that are very rare in most industries and probably I'm on the opposite one today in terms of philanthropy where you have extraordinarily long feedback loops. And those feedback loops I think drive improvement because you can see what's working, what's not. It also creates much higher stress.

47:26And so I've appreciated that I had that moment of my career where I had that, you know, strong feedback loop and high stress level. It's not something that I thought was sustainable for my entire life. And your skill and decision making at philanthropy, which is done with your wife, Laura, how does that fit into the schema? It's more like trading, more like buying art, something else. I think there's a lot of similarities to private equity or venture capital. Right? This is mostly a money allocation venture. We have some components of being in operating foundation and a lot of internal expertise on areas and we do a lot of consulting with policymakers internally.

48:10But the majority of the effort is in making grants. And so the question on making grants is very similar to the questions of making investments. It's what field do I want to be in what team do I want to back? What's their theory of change? Do I believe it? What components of their organization do they need help in and do we need to supplement or require them to supplement with our resources in order to maximize a chance of success? What do you think is the key skill behind a good philanthropist?

48:48It's hard. I think Yeah, it's trading is easier. Trading is easier. I think that question is almost like, what's the key skill to be a good businessman? All right, there are so many different types of businesses. There are so many different types of philanthropies and theories of giving and types of giving that one can do that I think you have to find something that suits your own personal passions and your own personal strengths and traits and go from there. A lot of your philanthropy, it seems quite evidence -based and you would say rational, has your belief in that approach strengthened or weakened over time?

49:29I think it's maintained. I think when we first decided to start giving away very significant sums, we had no vision that it would turn into what is today Arnold Ventures, right, with 150 people and three offices and the number of areas that we're working in. We thought it was this find five or six really good social programs that we think can ramp with resources and just go fund those and do this rather rather passively. And I had enough training to be able to read the academic research and so I just start pulling up many of those studies and it felt like the more I read the less I knew about what worked in the world.

50:12And that certainly led to this question about what is evidence, what is the integrity of the evidence that's being put out there to try to convince people to give them money, either policy makers or funders. And then it led to, I know this question, that philanthropy is going to be a lot harder, especially the way that we wanted to do it and the impact that we wanted to have. And they was going to take this effort around that the core focus of it was around developing better evidence and trying to increase demand for evidence from funders. Again, both public funders as well as private funders.

50:54And that's been the core theme of our work ever since. Do you think other funders now demand tomorrow evidence or that's failed? I think they've they demand more evidence. I think there's also more poor quality evidence out there at the supply has met the demand and so we started this whole line of work about What we called scientific integrity? I got academic integrity on the how do you improve? the process and the incentive system of academic research because there was this realization we had that everybody in the chain was incentivized to find the positive result. Whether it was the funder, the academic, the university, the journal, or the popular press, everybody wanted to find and publicized the positive result.

51:46There was a lot of positive results that were coming out that were either done with an aloe bars of integrity and quality or at the extreme end, and it's relatively rare, but you know, bordering or absolute fraud in the industry. Let's say I'm a person of great means, and I come to you, I say, John, I think prison is immoral, but I don't want to just release Charles Manson. Where should I put my field in thethropic efforts? What do you tell them? What have you learned? I think there's a fundamental question of if somebody's going to get released from prison, which 95 % of the people who are in the prison system today are going to get released back into society.

52:29Do we want that person to have spent the past 10 years in a gang fighting for their life, doing nothing productively? Or do we want that person to have been working on education, working on skills, have been working on their addiction, et cetera? And I think 100 out of 100 people will choose the latter. We have a system where the political economy of putting money into the prison system for most jurisdictions is very low. And so much of our prison system actually looks like the former, where it's become the largest mental health institution, the largest place for people with addiction, the largest place with people who have a lot of time on their hands and are under -skilled and under -educated and don't get any improvement in those things.

53:22And so I think the real value add is how do you improve conditions within prisons? And is there a structural reform that would boost the incentive to do that? Are you just think telling people they should improve the conditions is what we should be directing our efforts at? So, you know, I think there's, and we're very interested in, haven't gotten all the pieces together yet, is kind of the equivalent of the charter school, but in prisons. Like, can you get a non -profit to run a prison and try these things? And that non -profit can supplement the standard money that's coming in from the public sector with private donations and probably kind of a greater focus on volunteers coming into the prison.

54:07And just try this as a model, as a prototype and see what the effects are. And then do a long -term evaluation as to what happens to the people when they return to society and what's their impact on the economics as well as recidivism and do the long term cost benefit on a financial basis and try to see if you can prove that this is a appropriate model for the public to start funding. Let's say we put you in charge of everything. How do you fix our tax laws? You can just do it. Your Congress, you're the president, you're the Supreme Court. Yeah. Big question, big question. We have a system today where I think it's easier to turn dials than to start something new.

54:56And so we just have these dials that have existed because they've existed. They were kind of easy to do historically and so that's what we do. And so things like Pagovian taxes, which kind of most people agree that you would like to do things that you would like to tax things that are bad rather than tax things that are good or extraordinarily hard to get started in the US and whether that's on carbon or things like sugar. So I think that's one. I think a second is I think you'd rather tax things that tax money that has been made in the past than tax money that's to be made in the future. I think there's fewer distortions and I'm not talking about a wealth tax which I think is not able to be implemented.

55:41But I think, and at the step up and basis that we have today, where you're exactly. I think is the original sin of the tax code. I think there's real questions about how should endowments, including private foundations, which is this legacy of power, because money was made in the past or money was contributed to an organization in the past. The tax code then and gives favorable treatment to that. And you have organizations that are well -resourced today because they were strong historically or were funded by somebody who was successful historically. But the tax code kind of makes those organizations stronger for no good reason.

56:26And I think there should be kind of a public test that those organizations should be required to, if they could maintain their influence, to convince new resources to go to them rather than just get a tax benefit. So the 5 to 6 spend down requirement for foundations, is that the right number? Should be higher? I think it should be higher. And the donor advised fund out that should be eliminated or kept. That should be eliminated. So if it's not 5 to 6%, what should it be? I think the number should be a little bit higher than the expected real which imposes the test of bringing in new money. That's the case.

57:02Exactly. These organizations, including my foundation, should get weaker over time and not stronger. Electoral reform, political reform, and I mean the systems by which we choose leaders and policies. Do you have favorite ways you would change those? Yeah, I think a lot of the original sin of elections and the electoral system in the US is the primary system and non -competitive races between the parties. So the vast majority of house seats, the only competition happens in the primary, the person who's more likely to show up in the primary is an a more extreme than the average for median Republican or Democratic voter in many jurisdictions.

57:52The independence are not allowed to vote in the primary. There's more money that comes in from the extremes. And so you end up with a legislature, Congress that is more extreme than the people are. And the independence or the moderates are very much underrepresented in today's political system. And it eliminates a lot of the incentive or creates disincentive for internal party debate. So we should do single transferable vote or something else. I think nonpartisan primers is. But that will end up working like single transferable vote because you have to rate then four or five people. Exactly. You know, Ireland does that as I'm sure you know, while it seems to work fine, is there some big advantage they get from that parts of Australia do it?

58:42Again, it works fine. But I don't look at those places and envy them. You're right. And I think there's no silver bullet in this stuff. I don't think there's any electoral reform that's going to solve all the problems. There's a lot of it is built in, a lot of it is things like the media incentives, human natures to how we like to take information and prefer to criticize the other side than to do real criticism of our own internal beliefs. And so this stuff is marginal, but I think the importance of the electoral system is so great that marginal benefits have significant impact. There's a common impression, both for startups and for philanthropy, that doing much with K through 12 education or preschool just hasn't mattered that much or hasn't succeeded that much.

59:34Do you agree or disagree? I agree. I think that heteropharm movement has been as a whole a significant disappointment. I think there's been isolated pockets of excellence. It's been very difficult to learn how to scale that. And I think that's largely true of many social programs or many programs that are delivered by people to people that you can find, you know, a single site that works extraordinarily well because they have a fantastic leader. And that leader might be able to open up a few more sites, but then when you start to scale it to 50 sites and start to go across the nation, it all kind of mean reverts back to what the whole system is providing.

1:00:20That said, I do think there's a lot of value in changing the incentives of this system. And having the rewards and natural growth cycles and evolutionary components that are so strong and have been beneficial in the business world also go to the K -12 world. And what I mean is that the service providers that are good and are delivering good results both for parents and for kids should grow faster than ones that aren't. And right now it's kind of the same. And I think there's a real question about whether government can be both the regulator and the service provider of the same program, which is what essentially independent school districts are today.

1:01:11I think the natural role of government is to be the regulator and that they should be regulating third -party and non -profit providers. And that model is what we support and has been rolling out across the nation. I think that the evidence is clear that it's a better system, but it's not delivering transformational results. When it comes to philanthropy, what's something important you've learned from your wife, floor. She's great at the organizational components of it, of how do you manage an organization, the communication components. I'm, you know, again, kind of coming from the trading background, that's not my skill set.

1:01:56And I love to dig into the details of specific policies and get into the nitty gritty of the design of a system. And Laura very much thinks about the big picture and about how AV can be a more effective organization in the macro level. Last two questions. First, what's something you've learned about markets or society that you didn't believe 10 years ago?

1:02:26I didn't believe 10 years ago. You can make it 15. If you whatever. Yeah, I think on society that is very hard to get people off of their baseline for the long term. There's a lot of interventions that can happen that will change somebody's short -term prospects. And whether that's a job training program or an addiction treatment program, an education program, and you can bump them off that baseline for a little bit, and over time there's reversion to the mean. And it's made it very difficult for or define social interventions that pass the benefit cost test over the long term. And I think that's why we're talking earlier about evaluations.

1:03:09We're very focused on the evaluations that we fund of try to do long -term effects of programs and policies because oftentimes if you're just looking at what the six -month effect is, you find an effect and a cost -benefit ratio that's not relevant to what actual policy making should be. last question. What will you learn about next? You know, I think we're really digging into housing policy and housing finance. And housing finance is one of the most complicated issues that I've seen in this space. And trying to understand it at a superficial level has given me no insight. And so I think it's one that I really need to spend some time in.

1:03:54You know, as we start proposing how to fix these systems. Part of it is, we can't just complain about that the existing system is too expensive and too slow, but have to have real specific and tangible policies about how to change it, how to improve it. John Arnold, thank you very much. Thank you.

1:04:16Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple podcasts, tasks, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm Attyler Cowan, and the show is At Cowan Convose. Until next time, please keep listening and learning.