Smart vs. Stupid Risk Taking — with Nate Silver

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1:13Episode 312. 312 is a year ago belonging to Chicago, Illinois. In 1912, the Titanic hit an iceberg and sank. And the Girl Scouts of the USA were founded. Why do Girl Scout cookies taste so good? Job labor. Go, go, go!

1:37Welcome to the 312th episode of the Prop G Pod. The dog is on vacation. For the rest of August, I go to one of those dog farms where I play with 30 other dogs, roll around, and deer are urine. You know, the usual. August. Augusto. All month long on Thursdays, you can expect conversations with blue flame thinkers, innovators, professors, authors, and the like. I didn't write that. I would never say and the like. Today, we're sharing our interview with Nate Silver, the founder of FiveThirtyEight and the New York Times bestselling author of The Signal and the Noise. He also writes the substack Silver Bulletin.

2:11We discussed with Nate his latest book, On the Edge, The Art of Risking Everything. I could write a book called On the Edge about fucking depression, anxiety, and turning 50 and looking like you're fucking 80 years old. That's what it would mean to be on the edge, Nate. Anyway, we hear about the role of risk in shaping modern life, his background in election forecasting, and his thoughts on Kamala Harris's VP pick. Oh, that's kind of, that's what you call timely. That's why you come to the Prop G pod. That's why you come to the PGP, if you will. We really enjoyed this conversation and think you will as well.

2:49Nate, where does this podcast find you? At home in New York, Manhattan. You live in the city. Where do you live in the city? What would charitably be called Chelsea, kind of by Penn Station, Madison Square Garden, basically. So let's talk about your new book, On the Edge, The Art of Risking Everything. You investigate the river, the community of like-minded people whose mastery of risk allows them to shape and dominate so much of our modern world. Can you explain what you mean by the river? So I have a very kind of geographic mind. I have like a good geographic memory and I like looking at maps and things like that.

3:22So I kind of wanted to create a metaphorical place where a certain type of person lives. And this type of person has two basically defining characteristics. One is that they're super analytical. They're kind of in the moneyball, math nerd tradition for the most part. So they're playing poker or founding companies or things like that. The other is that they're extremely, insanely competitive, which makes them really risk-taking for the most part. They want to win. They want to prove things to themselves and other people. They aren't afraid to stand out. They can be contrarian to the point of sometimes being more than a bit annoying, I think.

4:01But I kept finding the same personality type in all the different fields that I cover. I mean, I kind of started in the world of poker. I actually have a background as a professional poker player. But if you talk to people in Silicon Valley or people trading crypto or people making sports bets, or even the effective altruists who we'll talk to a little bit later and the AI people, they all have this kind of same competitive nerd analytical personality in mind. They speak the same language. And so, and it's a small community. The river is a community of mostly successful elites, I guess you'd call them.

4:36And, you know, you go to Silicon Valley, it's like kind of a small world still. It's not sprawling through thousands of people. The top VC firms might have a dozen partners or something, but not hundreds. And so there's more community than I would have thought. And you've seen that community have a rivalry more and more with this other community that I call the village. And talk about the distinction between folks in the river and folks in the village. Yeah. So the village is basically, if you think of it as kind of New York, Boston, Washington, maybe except for like Wall Street. So it's like government, media, and academia.

5:10So the kind of quintessential river, village rather, institutions are like Harvard University and the New York Times. So it's politically progressive for the most part. As compared to the river, it's much less analytical. In fact, it's very concerned about social status and social appearances. The ultimate punishment in the village is to be ostracized or, I suppose, canceled. That's becoming a little bit outmoded. And it's risk averse. It's kind of neurotic. It was much more cautious during COVID. It's afraid of offending people. and there's a rivalry between these two communities increasingly.

5:47When you see things like, I guess it was last year, maybe in January, when you see hedge fund investors attacking university presidents who are speaking before Congress, that's an open conflict, I would say. When you see people in Silicon Valley kind of going more to war with the Democratic Party establishment, we're actually seeing this kind of play out more and more. I mean, loosely, the words that come into my mind are kind of libertarian versus establishment. Is that fair? I think the river would champion itself as kind of lowercase L libertarian and would champion itself as being apolitical.

6:22But of course, it's often hypocritical. People go from being apolitical to being like Elon Musk, where you're very politically charged up on a lot of issues. I mean, if you did a survey of the people I call reverians, they'd probably be three to two Democratic before Republicans still or two to one, maybe. I mean, most communities of elites today where you have high educational credentials tend to be Democrats in the United States. But it's notably more varied than the village, which is kind of uniformly 95 % blue Democratic progressive. Talk about what you think are the key habits of highly effective risk takers that you talk about in your book.

7:01There's a list of 13 of these in the book, and they kind of fall somewhat into personality characteristics and somewhat into psychological characteristics. From a psychological standpoint, some degree of detachment where you're focused on process and not results. If you play a poker hand, you can play the hand perfectly. And if your opponent makes her flush draw, you're still going to lose that hand a third of the time. That process orientation, I think, is counterintuitive for most people. Personality-wise, some of it does come down to simply being willing to take risks and being courageous. Maybe the single most important defining characteristic is being cool under pressure.

7:39in most walks of life, higher stakes moments vastly outweigh the day-to-day. If you do make it deep in a poker tournament playing for a million-dollar first prize, it's more important by a factor of 1 ,000x than your Tuesday night beer league game, for example. Learning how to handle pressure is important. I mean, I did, like I said, talk to mostly people who are doing analytic, math-oriented things. But I also talked to an astronaut, an explorer, a military commander, people like this. And I heard some of the same things over and over. One thing I heard a lot is don't try to be a hero when you're under pressure, when you're literally in outer space and some red light is blinking.

8:18Trusting the process, following protocol that kind of frees up bandwidth for dealing with an emergency versus just winging it. So it's a lot of preparation and experience and coolness under fire. It's interesting because, well, the way I would try and translate that to entrepreneurship is I don't think I'd be nearly as good an entrepreneur now as I was when I was a younger man. Because when I was a younger man, I had a bit of sociopathy in the sense that shit could be awful around me and my business and we were running out of funding. And I'd be stressed, but I would still be able to sleep at night.

8:54I just didn't, I didn't, I was almost sort of sleepwalking through life and didn't, and now I'm too anxious. I'm too kind of concerned about the downside. Do you think there's any truth to that? For sure. I think it's not a coincidence that more founders are younger, although there's probably some stereotyping that takes place in VCs. Poker players are often younger too, despite it being a game that it takes a lifetime to master. That's partly also a matter of physical fitness, I think. But yeah, the ability to like shut out distractions and be really focused is really hard and maybe not entirely healthy sometimes either.

9:32But yeah, I actually gave more responsibilities, right? So I played, as I do most years, I went to the World Series of Poker this year and played, but it's an election year. I have this book coming out. So there were like constant distractions and it was in my best interest to manage those, right? I can write newsletter posts and gain subscribers or book interviews and publicity for the book. But still, yeah, part of what comes with being an adult, I think, is you have a little bit more to lose. That can make you more risk averse. You have more responsibilities. And that can be okay. But if you're a VC trying to invest in a founder, you want a founder who has kind of literally insane single-minded focus, maybe for a period of 10 years, whatever runway period that you have, and that not be a younger person's game.

10:16So I've always thought people are risk takers and are successful, are good at taking smart risks. In other words, to a certain extent, the risks they take have a much, they do the analysis and go, there's a greater upside here. You know, betting on a team that has a 50 to 1 chance, you get 50 to 1 odds seems like crazy risk. But if you actually have done the analysis and say the likelihood is more like 30 to 1, that's a good risk. How would you coach young people around how they approach risk? I think probably 90 % of people, of course, it would be your probability. I think probably 90 % of people could stand to be more risk-taking, at least in terms of their career lives.

10:57I'm not saying, oh, go do drugs or something like that. That's a personal choice. Look, we have a lot of evolutionary training where we don't live in this kind of world of abundance that we do now, where we don't have as much of a safety net if you fail. And where there was less of a reward for taking risks, you go out and get some infection or something and there's no cure for it and you die. And now we're in a world of abundance and we can afford to think more in terms of expected value, which means kind of, what is the outcome you get on average when trying this thing? Because there's uncertainties in the world.

11:28If you play poker, then some percentage of the time you're going to win the tournament, more often than not you bust out. But are you making, or is it a plus EV, positive expected value gamble on average? Now, if you're a founder and you're making these long, prolonged 10-year bets, then maybe it's a little bit different, right? I mean, the kind of brilliant thing that venture capitalists do is they gather together all these founders who are making long shot bets with probably positive expected value, but many of them will fail. If you make enough of those bets, then you're kind of guaranteed to do very well for yourself, right?

12:00Enough of them will pay off and you have a fund of 15 or 20 or 25 companies every year, then sooner and you have your pick of the litter, you're picking the best founders, then that's a very good business. For a founder, it requires, I mean, I think it literally does require more risk. I mean, if you are any one founder, your company may fail, which is partly why, you know, you get people like Elon Musk, who like literally, if you read the Isaacson book on him about Elon playing poker, he would like literally just kind of go in, go all in every hand until he'd lose and he'd walk away from the table and do something else.

12:36He's in that 10 % group where he's probably taking on too much risk, I would think. But these are often people that have chips on their shoulder that almost have like an evolutionary or genetic kind of propensity to take risk. Yeah. I wonder if they're, to a certain extent, I'm not talking about Elon Musk, but they have, they're addicts in the sense that they take risk and the new, kind of the new dopamine balance after taking some risk is to have that rush. You have to take more risk. I used to, I worked for a hedge fund manager who at one point was the, I think the 50th or the 70th wealthiest person.

13:12And he kept taking these just outsized crazy risks until he ended up broke. And he just has like almost a psychotic approach or aggressive approach. I want to bring it down to entrepreneurship because I've been an entrepreneur for most of my life and I've raised a lot of money from VCs. And where I thought there was a bit of a disconnect or dislocation between their interests and my interest is that they would always encourage me as the CEO or the founder of a company when it was going well to go bigger, harder, bolder. because they're looking for billion-dollar exits to pay for the 70 or 80 % of their portfolio that doesn't even get its money back and half of them that go to zero.

13:59And they need those big pops. And I always thought, okay, I don't need to be a billionaire. I need to have economic security. And this is where our interests diverge because I used to advocate for and usually would ultimately would win for selling the company. I sold my first company for$33 million. Our investors were disappointed. I sold my last company for$160 million. Despite my investors tripling their money in 27 months, they were disappointed because I didn't have a bunch of chips on the table. I had one big chip on one number. And so it creates a divergence of risk. Can you talk a little bit about where, you know, are there other divergences, whether it's an employee and you're, you know, of a company or an entrepreneur or founder and VCs?

14:44How do you want to be thinking about an approach to risk based on where you are in an organization? No, Scott, I think that's right. And I think kind of VCs get the better side of that VC founder interaction most of the time. And it's partly why they're picking people who have huge variance in their outcomes, right? You're not going to pick somebody to run like a chain of three ice cream stores in Boise, Idaho or something, right? Where the upside is capped. You want people that wind up on the extreme tails because the thing you hear over and over and over again from everyone in Silicon Valley is like, you can't miss out on the 1 ,000x, x-ing your money opportunity.

15:22You cannot let Mark Zuckerberg walk through the door. So the downside of that is you sometimes get a Mark Zuckerberg and sometimes you get a Sam Beckman-Fried or Elizabeth Holmes or whatever else. I mean, even in my own world, you know, I kind of run, I guess, my own content business and I'm realizing that it's actually a much better business where it's smaller scale, right? I keep more of the profit myself. I don't have a bunch of employees whose marginal contribution can be debated, I suppose. And so, yeah, I found that when I'm smaller, I actually am happier and more successful financially.

15:53But the obsession with scale, especially in the media business, which is maybe its own special beast. But the obsession with scale makes sense in most contexts from a VC standpoint, but may not be in the interest of the founder. In terms of your own personal life and risk-taking, I've always bifurcated it, and it may be incorrect. But again, just trying to reverse engineer this into actionable advice for young people. There was my risk profile before kids and then after kids. And I left investment banking, which on a risk-adjusted basis was what I should have stuck with, but I wasn't enjoying it and I wasn't very good at it.

16:26And then I moved home with my mom because I'm like, oh, I'll just, I don't know what I'm going to do. And not knowing what you want to do and quitting doesn't pay well. So I moved back in with my mom and I took risks. And I applied to graduate school, started businesses. My first business, I didn't have any money, but my girlfriend was making money. So I could, I could take that risk. Once I had kids, it, and I think this is the correct instinct. I'm like, okay, shit just got real. You know, me and my two sons can't move back in with my mom or it's going to be very uncomfortable. And it absolutely changed my risk profile.

17:03A lot more anxiety, a lot more concern around risk, but I think that was the correct emotion. Would you describe other seminal moments in your life that you want to think about risk before and after? And doesn't this all add up to when you're young is the time to take risks? I think so. So, I mean, I don't have kids. And so that's like one more reason to kind of gamble on your upside and not necessarily worry about a secure paycheck, I don't think. Yeah, I think that heuristic is basically right, that when you're younger, you have more opportunity. I mean, look, I think people sometimes set the bar too low as far as life outcomes that they're satisfied with.

17:39Because my first job out of college, I had a consulting job. I was something called a transfer pricing consultant, which is about as boring as it sounds like and quit that to play online poker, basically, where I was making more money and to work for an internet startup that wrote about baseball statistics. So quitting a safe consulting job is a somewhat risky endeavor, but it proved to be a better decision. But I think people need to have a higher reserve price, to use a slightly technical term, for how they're spending their time. There's also studies. I mean, Stephen Levitt of Freakonomics did a famous paper where he would actually have people literally flip coins to make major life decisions.

18:18So should I move across the country or quit my job or get divorced or get married? And found that when people flipped a coin, they told them to make a change, they wound up being happier on average. The importance of quitting. I don't know if you had Annie Duke on the show, former poker player, who now writes business books, wrote a book called Quit. Getting out of a bad situation while you can, or maybe, you know, half a move ahead is an underrated skill, I think. I think people are too willing to muddle through, not have a long enough time horizon and wind up being mired in an unhappy place.

18:51I think that's a great insight. And I just wanted to stop on that. There's this mythology from Donald Trump down, like never give up. Oh, there's a time to give up. I mean, absolutely. There's a time to leave. And I would say that's where a kitchen cabinet comes in to advise you that, okay, you're banging your head against a wall, you need to move on to different opportunities. Several chapters of your book focus on Sam Bankman-Fried and the crypto world. What do you think people miss about FTX and Sam Bankman-Fried and how it relates to risk? So he is certainly on the extreme right tail of risk-taking, where he literally said in repeated interviews that if he could push a button and gamble for the future of the universe, and either the universe is destroyed or 51 % of the time it winds up being twice as good, then it's a positive expected value bet so he'd make it.

19:39That's a pretty insane way to look at life. And I think people were too unwilling. I think there was a little bit of a kind of boy genius myth around Sam. And there was a little bit of a bystander problem where it seemed like all these people are vouching for him, therefore he must be smart, and therefore people weren't willing to point out sometimes crazy and kooky things that he was willing to say. And it's a little bit of a cult of personality, the cult that the village or the river would think it avoids that actually winds up having with founders like SPF sometimes. I think he was also not a very good risk assessor, despite thinking of himself as one.

20:16You know, I talked to a lawyer right as his criminal trial in Manhattan was taking place. And the lawyer said he should not take the stand. He should cut his losses and try to minimize his sentence at five to ten years. If he takes a stand, he's for sure going to perjure himself, which he did. And he wound up getting like 20 years instead. When I talked to Sam in Palo Alto, you know, six months before the trial, I said, what if you were offered a two-year plea deal? Two years and then some restrictions on what you can do afterwards. So kind of more than a slap on the wrist, but not that much more.

20:53And he said, I'd have to think about it, right? So, I mean, he was 10x off of what the realistic outcome was going to be. He got 20 years, of course. And I think, look, as a poker player, I've seen lots of people in the SBF typology. So kind of smart, nerdy, maybe a little bit on the spectrum, you know, neurotic, Adderall, whatever, quick on his feet. And not all of them are as smart as they're cracked up to be. So I think people need to have more skepticism of him both kind of before, during, and after the bankruptcy. I would argue that's a perfect example of just ridiculously stupid risk-taking.

21:31I can't imagine how frustrated his lawyers must have been. Like, okay, you are doing everything wrong here. I'm curious, have you tried to relate some of your thoughts and analysis around risk-taking to people's relationships or personal life? You said you don't have kids. I don't know if you're in a partnership. But have you thought about approach to risk as it relates to relationships and outcomes? Yeah, I've been in a long-term relationship, no kids. I guess I'd say, frankly, not as much. I mean, I'm trying to keep—it's already a long book. It's like 500 pages. So I'm trying to keep the scope of it somewhat narrow.

22:05I think some of it does apply, that people probably are—settle a little bit too easily sometimes. Sometimes I think the importance of what I call, or not what I call, the importance of optionality, I think is really important in both business and interpersonal affairs. Where are you walking down a hallway where there are a lot of doors open, right? It's kind of a stupid analogy, but I've lived in New York for 15 years now. So my partner and I, we have a pretty good group of friends. And so let's say you don't have plans on a Thursday night. Well, there's a whatever, one in three chance that someone will text you and say, hey, I just made a reservation at this new dinner place, or you want to go to the Yankees game.

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