Ed Thorp on How to Think for Yourself, How to Be Inner-Directed, and The Dangers of Investing Fads

1. 0:00 – 0:15

   Start

   1. TFTim Ferriss0:00

      [upbeat music]

2. 0:15 – 1:33

   The value of long-term thinking and the price of short-term thinking

   1. TFTim Ferriss0:15

      Ed, welcome back to the podcast. It is so nice to see you again, and thank you for taking the time.

   2. ETEd Thorp0:20

      Pleasure to be here.

   3. TFTim Ferriss0:21

      I thought that we could start with a few of the points that I had specced out for our first conversation, and I want to recommend to everyone, if you haven't heard our first conversation, we cover a lot of your bio, a lot of your background, and we get into many, many topics. And we'll create a short link, so if you wanna listen to episode one, just go to tim.blog/thorp, T-H-O-R-P, and you can listen to the first episode. We'll try not to have too much overlap in this. So let's start with the topic of investing, and specifically the value of long-term thinking and/or the price of short-term thinking. And perhaps we can begin there in any way that makes sense to you.

   4. ETEd Thorp1:04

      Well, short-term thinking is, uh, what benefited me when I first investigated the markets. There were people who bought, uh, common stock warrants and held them, and when the warrants only had a couple of years to go, they had much less value than they had many years earlier. But the people who owned them didn't seem to recognize that. So these warrants were vastly overpriced with around two years to go. So I discovered that, and that's how I first began to, uh, cash in with

3. 1:33 – 3:33

   What is a common stock warrant?

   1. ETEd Thorp1:33

      an edge in the marketplace.

   2. TFTim Ferriss1:35

      Could you define, just for people who may not have familiarity, the common stock warrants? What is a common stock warrant in this context?

   3. ETEd Thorp1:42

      Common stock warrant is a certificate issued by, or a security issued by a company, typically a claim on its own shares. Sometimes companies issue them on other companies. And they have shares in the treasury, which they will give up to you if the terms of the warrant are realized. And the warrant is basically like what people know as a call option today, and they were-

   4. TFTim Ferriss2:06

      Mm-hmm

   5. ETEd Thorp2:06

      ... the, uh, the granddaddy of the whole, uh, listed call option movement.

   6. TFTim Ferriss2:11

      Hmm.

   7. ETEd Thorp2:12

      So they led to very big changes in the securities industry.

   8. TFTim Ferriss2:16

      So you benefited from short-term thinking, or at least awareness of short-term implications. What are some other examples of... or maybe combinations of short and long-term thinking? How would you suggest people think about that?

   9. ETEd Thorp2:34

      Here's an example from real estate. I used to have a friend that I walked with quite a bit, and he wanted to sell his house around 1989 or 1990, and at that time, he could have sold his house for, uh, I believe it was, uh, three million, and he wanted to get three and a quarter million. And of course, there was a housing downturn, and I said to him, "Look, get rid of the house now, use the money, and invest it." Well, he wouldn't do it. It took 10 years before he could sell his house and get his price. Meanwhile, this is short-term thinking. He wanted to hold out for a little extra money, and he was willing to hold, hold out however long it took. And he didn't understand that by holding out for the extra money, he was tying up his capital. He was having an opportunity cost, and he was missing maybe a multiple of two or three in the stock market over the next decade. So it cost him tremendously.

   10. TFTim Ferriss3:28

       Hmm.

   11. ETEd Thorp3:28

       The quarter million that he went for probably cost him, uh, six or eight million.

4. 3:33 – 4:53

   Why are people generally poor at taking longer-term (or alternative) perspectives?

   1. TFTim Ferriss3:34

      Hmm. Why do you think humans in general, but let's look at it within the sphere of investing, why people are generally so poor at taking the longer-term perspective or at least considering alternatives to that type of, of short-term focus?

   2. ETEd Thorp3:55

      Well, you know, I, I talk to all kinds of people off and on, I have through my life, and what I found is that most people seem to, uh, be focused on what's immediately around them and what's happening then. For instance, I, I know a very talented woman who is a lawyer for a charitable organization, and she's been in this job for over 20 years, and she is brilliant. She does hard work, and she wants to do good, but the organization is terrible in the way they're managed. So she's a, she's a victim in a high middle management position, and she needs to take her talent and go somewhere else. But getting somebody to actually make that uncomfortable transition is very difficult, even though for an outsider it's totally obvious. So a lot of people, when it's inv- involving them, they can't see clearly. When it's involving one of their friends or acquaintances, they can generally see a lot better or think they can.

5. 4:53 – 8:56

   Conversing about numeracy and common misunderstandings

   1. TFTim Ferriss4:53

      Let's segue, because I think this may be complementary to what we've just been discussing, to numeracy. And, uh, perhaps we could begin with a definition of terms, but it strikes me that this is one of the most valuable topics that I could ask your help in unpacking and exploring. Where would you like to begin? I mean, we could talk about numeracy versus its opposite. We could talk about the fundamentals or basic numeracy. Where would you like to begin a chapter of conversing about numeracy?

   2. ETEd Thorp5:31

      I'm gonna go back to 1960 when I was, uh, teaching at MIT, and I went to a, a wonderful lecture in their big Kresge Auditorium, a public lecture, and it was, uh, on the topic of two cultures and the scientific revolution by a, a well-known Englishman named C.P. Snow. I think Charles Percy Snow, but I'm not positive about that. Anyhow, there were a lot of brilliant people on stage, and what the topic was was how many people, really accomplished people in the humanities don't understand much about science, but there are a lot of first-class scientists that are very good in the humanities and lacking elementary numerical skills or comfort with it. And I'll put in that pot statistics and probability and, uh, game theory and a whole lot of other things that have become much more important in, uh, the last many decades. So when you, for example, uh, talk to an attorney, most often they're really good with words, but they make elementary numerical mistakes. They'll get a decimal place in the wrong place, and they won't realize it. That's one illustration of the sort of things that happen. I think there are some fundamental things that you miss. If you read a news article that's full of numbers, the numbers will often be presented to ridiculous precision, like, uh, 63.8% of people poll said such and such. When you think about the poll, what does that really mean? Uh, it means somebody out there copied down some stuff and did a division and came up with 68.3%. But it doesn't mean that that poll represents what people really believe. It might have been badly worded, the sample might be too small, the sample might have been biased, and so forth. So sixty-- You might read it, if you're not a numeric person, and think that 68.3% is pretty good precision. Well, the real answer ought to be something like, "Somewhere between thirty and eighty percent of people believe such and such, we think." When put that way, you can go on to the next poll.

   3. TFTim Ferriss7:37

      [laughs]

   4. ETEd Thorp7:39

      Another fundamental thing that people do, they mix up... They don't understand the difference between averages and the way things are distributed in a population. An example to drive the point home, there are a hundred people in a bar, and somebody knows who they are and says, "Gee, the average net worth of the hundred people in the bar is a hundred thousand each." An hour goes by, one guy walks out of the bar, another guy walks in. The guy checks again, he says, "The average net worth has gone to a billion and a half." What happened?

   5. TFTim Ferriss8:10

      [laughs]

   6. ETEd Thorp8:10

      Well, one guy walked out and either Jeff Bezos or, uh, Elon Musk walked in.

   7. TFTim Ferriss8:16

      [laughs]

   8. ETEd Thorp8:17

      So the average may tell you virtually nothing about the distribution. And we deal with people often by thinking about averages instead of dealing with the individual person and all their unique qualities and where they might be in the distribution. So when I meet somebody, I don't think about them as, uh, being any particular category. I think that as far as I'm concerned, they're my equal, and they know things I don't know. I probably know things they don't know too, but I can learn from them. And I, I usually try to hear what they have to say instead of telling them what I have to say. This is-- today's an exception.

   9. TFTim Ferriss8:54

      [laughs]

6. 8:56 – 14:42

   How to become more numeracy literate

   1. TFTim Ferriss8:56

      Well, you are in the hot seat, so I think you [laughs] I think you're certainly allowed, uh, to answer more and say more than I do in this context. If we look at, let's just say, the example you gave of how averages can be misleading, and I think people listening, even if they are... let's just say they are smart, educated, but haven't had any particular training in this domain, and they're unsure of how to train themselves or develop this type of awareness. I'll make a recommendation. There's a book called Bad Science by Ben Goldacre, who's a, I believe he's a UK physician, excellent communicator as well. And there are a number of sections in this book that I think are valuable for separating, for instance, absolute versus relative risk. For instance, you might see a headline, as you pointed out in the newspaper, that says something like, "Bananas double your risk of colorectal cancer," something like that. I'm, I'm making this up, of course. And people might panic and stop eating bananas. But if the risk is one in a billion and then it goes to two in a billion, the, [laughs] the risk itself and how you should consider it in terms of your lifestyle choice is pretty minimal. So there are certain resources like that book that I'm aware of. But how would you suggest someone train themselves to become more numerate, or are there other basic concepts that you would suggest they become aware of?

   2. ETEd Thorp10:27

      There are two things that I would encourage somebody to start with. One of them is to understand elementary statistics and how it works. Nothing complicated. There's a series called Schaum's Outline. It's a, sort of a, like a crib book for college courses.

   3. TFTim Ferriss10:45

      Mm-hmm.

   4. ETEd Thorp10:45

      And they have a whole set of topics, and one of them is on statistics, which I just gave to my, uh, uh, one of my daughters because she was interested in this exact conversation we're having.

   5. TFTim Ferriss10:55

      How do you spell Schaum?

   6. ETEd Thorp10:57

      I think it's S-C-H-A-U-M.

   7. TFTim Ferriss11:00

      Got it.

   8. ETEd Thorp11:01

      You'll find other simple college outline books for statistics, and what they do is they get down to how to do it as opposed to a lot of theory and, uh, math formulas and that sort of thing. They, they give you a few basic formulas, and they show you how they work. And that's really-

   9. TFTim Ferriss11:16

      Mm-hmm

   10. ETEd Thorp11:16

       ... all you need to get started. And then if you're curious and like it, then you'll teach yourself more. If not, what you have will serve you well. That's the first thing. The second thing is elementary mental calculations. People have their little Apple phones or calculators, and they can find all kinds of things out on that. But if they, uh, hit the wrong key, they won't often know that what they've gotten is garbage instead of the right answer. And you can figure out a lot of things in your head very easily if you get used to it. So, uh, I would learn how to, uh, multiply small numbers in my head if I were someone, and probably how to make other calculations, like w- in finance, compound growth calculations in your head are very useful. And, um, my book has a little section about that called The Rule of 72. The-- That's only the tip of the iceberg, but if you learn that and you like it, you can go a lot further. And another pretty neat thing that I've come across is, uh, if somebody asks you, "What, what day of the week was Fourth of July seventeen seventy-six?" for example, you can figure it out in under a minute in your head, and it turns out to be a Thursday. So this is a well-known thing in the literature. I happened to stumble across it for myself, but that thousands of people figured all this out long before I did. But I find it's very handy, and I tend to remember the calendar that way. I don't actually look at calendars, but if somebody says, "Well, you know, what day is Christmas?" I might say, "Sunday," and, uh, after thinking about it for a little while.

   11. TFTim Ferriss13:00

       Hmm.

   12. ETEd Thorp13:01

       But I don't have to go tap my calendar and find out.

   13. TFTim Ferriss13:04

       Do you know what that method is called of determining the, the s- the day of the week for a specific date? I remember Michael Conway, who was a mathematics professor at Princeton, uh, could do this also very, very quickly. But if I-- if someone wanted to learn how to do that, how would you suggest they learn how to do that? Or, or is there a particular name of the method?

   14. ETEd Thorp13:28

       There is, and, uh, I'm trying to think. Uh, since it was discovered independently by many people, I'm not sure it has one name.

   15. TFTim Ferriss13:38

       Mm-hmm.

   16. ETEd Thorp13:38

       But I'll just tell you briefly how it works.

   17. TFTim Ferriss13:41

       Great.

   18. ETEd Thorp13:42

       For every date in a month, like, uh... Well, let's see. Today is, uh, Tuesday, June fourteenth, twenty twenty-two. So fourteen is the day number that you assemble. There's... Each month has a number of its own. The number for June is four. Where this comes from requires a little investigation, but the people who write the books explain it all to you. You just have to memorize how it works. So you have twelve month numbers, and then every year has a number that goes-- every year of a particular century has a number that goes with it, and there's a way to figure that out pretty easily. And then, uh, every century has a number. And so-

   19. TFTim Ferriss14:24

       Hmm

   20. ETEd Thorp14:24

       ... the calendar repeats every four hundred years, so you only need four century numbers. And then it rolls over and repeats again. So you add up all these numbers. You throw away sevens and see what's left. And if, let's say, a three is left, then it's a Wednesday. If a two is left, it's a Tuesday, and so forth.

   21. TFTim Ferriss14:41

       Hmm.

7. 14:42 – 17:03

   It’s Raining Man

   1. ETEd Thorp14:42

      This was made pretty well known to people quite a long time ago in a, a movie called Rain Man.

   2. TFTim Ferriss14:48

      Right.

   3. ETEd Thorp14:48

      Have, have you ever heard of that movie?

   4. TFTim Ferriss14:50

      I have. I have, absolutely.

   5. ETEd Thorp14:52

      He had two super skills. One of them was to deliver the day of the week for any calendar date, so we know how to do that. And the other one was to count cards at blackjack and win, and we know how to do that. [laughs]

   6. TFTim Ferriss15:08

      [laughs]

   7. ETEd Thorp15:08

      And by the merest chance, my wife and I were flying out on an airplane, first class, heading from, I think, LA to New York one time. And we looked across the aisle, and there was Dustin Hoffman and his retinue, and I, I thought, I thought about it. I said, "Should I go over and tell him that I know how to do all the Rain Man stuff?" "No, don't bother him. They're having a good time over there." [laughs]

   8. TFTim Ferriss15:32

      [laughs] So let me mention a few things just for people who want to explore this. So the first is we will find links to this particular method, and I'll put them in the show notes at tim.blog/thorp. I'll just put them i- with the first and this now second episode. I wanna come back to The Rule of 72 in just a s- a moment because I think that'll be fun to, to just explain briefly for folks. Rain Man, so the basis of Rain Man is someone named Kim Peek, P-E-E-K, who also had some pretty astonishing capabilities. He could read a book by flipping the pages, and the fixation points of his two respective eyes would be on the two respective pages in a given spread. So he had some, some remarkable capabilities, but a lot of these capabilities, as you pointed out, can be learned and learned very quickly. For instance, if you want to multiply a two-digit number by eleven... It, it can get a little more complex than this, but if it's thirty-four times eleven, it's three hundred and seventy-four. How do I know? Because it's three plus four, seven. You stick it in the middle, and it's really straightforward. So you can develop these, these heuristics, these, these shorthand methods. And another... I'll just-- I'll give a reference to another guest. Ed Cook has been on this podcast. He is a, or was, a competitive memory champion, so he could memorize a shuffled deck of cards in sixty seconds or less, that type of thing. And we talk about various methods and mnemonics for memorizing long strings of digits, things like that. So people can check that out, and I'll link to it in the show notes.

8. 17:03 – 21:03

   The Rule of 72

   1. TFTim Ferriss17:03

      Ed, would you mind elaborating on the Rule of 72?

   2. ETEd Thorp17:07

      Sure. It's well known in real estate circles. If you want to know how long it takes something to double, how many years or how many periods, let's say. You take the interest rate per year, let's say. Uh, suppose the interest rate is eight percent. If you divide seventy-two by eight, you get nine, and so the doubling time for eight percent compound growth is nine years. Let's suppose that, uh... Now, with eight percent, the rule's very accurate. If you use numbers below eight percent, the doubling time turns out to be a little shorter than the rule tells you. And if you use numbers above eight percent, it, it gets a little longer the further away you get a- above eight percent. But it, it's pretty good for a first pass. So for instance, uh, there's a house on the beach that I looked at in, uh, nineteen seventy-four, and so that was, uh, forty-eight, forty-eight years ago. Can it be that long?

   3. TFTim Ferriss18:09

      [laughs] Yeah. Your, your mental mathematics can be better than mine. I'll, I'll, I'll accept 48. [laughs]

   4. ETEd Thorp18:17

      Okay. So you can use rules like the Rule of 72 and their offspring to use that time period to see what the compound rate of growth was for investing in that house. Now, the house now sells for 300 times what it did then, so you end up with a pretty good rate of return when you apply these rules. Anyhow, the rule can be used to calculate all kinds of stuff like that, and the easiest way to use it is to calculate doubling things. For instance, uh, let's say that I invest in the stock market, and long term it goes up 10% a year. Long term, but it might be... there might be bad, very bad periods and, and super good periods mixed together. But over a very long time, if it goes up 10% a year, then I can figure out how long it takes to double, and it'll be about 7.2 years. A little less 'cause we're higher... the 10%'s higher than 8%. So call it s- call it seven plus a small amount. What happens if you let it run for 100 years? Well, seven into 100 is about 14. That's 14 doublings, and one of the handy mental things that, uh, you'll find is very useful is to know what, uh, the doubling powers are, two, four, eight, 16, 32, 64, 128, and so on. And, uh, for 14 periods, we're looking at about... Well, 10 doublings is about 1,000, and four more is about another 16 more multiplying, so you get up to around 16,000 times. So that's what the nominal growth at 10% over a century is, 16,000 multiple.

   5. TFTim Ferriss20:03

      [laughs]

   6. ETEd Thorp20:05

      So it tells you something about the power of compounding and why investing for the long term really pays off.

   7. TFTim Ferriss20:11

      [laughs]

   8. ETEd Thorp20:13

      It also tells you why wasting money really pays off, uh, in the negative way.

   9. TFTim Ferriss20:17

      [laughs]

   10. ETEd Thorp20:18

       A small example, just at the low end. Suppose a guy buys, uh, two packs of cigarettes every day, maybe spends... I don't know what they cost, I don't pay attention to that, but let's say it costs $15 for two packs. So if he put that $15 a day in the bank, and then every few months went and bought an index fund in the stock market with the money that he'd saved up, in maybe 60 years or so he might have half a million dollars just because he gave up the two-pack-a-day habit. He'd also probably have seven more years of life, and he'd probably also feel a whole lot better. So this is just a little thing that you can change with a huge, uh, long-term impact. But short-term thinking said, "Well, you know, it makes me feel good. I'll just have another pack today, another pack tomorrow. I'll get over it sometime."

9. 21:03 – 29:14

   Making the best financial decisions with unknown variables

   1. TFTim Ferriss21:04

      Well, let's come back to your friend, just to use a... I suppose it's not entirely hypothetical, it's a real case, but your friend who, uh, could have sold his house for $3 million but wanted to hold out for the, the $3.25 million or-

   2. ETEd Thorp21:18

      Right

   3. TFTim Ferriss21:19

      ... however much it was, and it ended up taking 10 years. So you're dealing with, or we are dealing with, he or she is dealing with knowns and unknowns in whichever path they take in the decision tree, whether it is hoping for the extra 250K in an unpredictable real estate market, but also dealing with unknowns in putting, let's just say, the $3 million into the stock market. Because as you said, there could be a bad stretch. There could be-

   4. ETEd Thorp21:49

      Mm

   5. TFTim Ferriss21:49

      ... a really bad stretch of any number of years. How would you... If you had been having a conversation with this friend and they listened to your advice and they said, "Well, I read a book on indexes, and yes, I understand S&P 500 and retained earnings, and over time X, Y, and Z over the long term. But what if I put it in and I have five, six, seven bad years or however many bad years?" How would you walk them through the decision process, understanding that we can't control outcomes necessarily, only the decision process. But if they voiced that, they said, "I'm open to it, but I'm afraid that I'm gonna put it in and then the stock market's gonna crash because there'll be some terrorist attack or who knows what," how would you walk them through making the best decision given the knowns?

   6. ETEd Thorp22:34

      I'd tell them that if you put it into something risky that has good long-term history and good long-term prospects, then you're gonna get shaken up a lot along the way. So you have to be prepared to hold for quite a long time to ride out the, uh, speed bumps that you're gonna cross. If you're not prepared for that, then you're gonna make all kinds of bad decisions along the way, like getting out at the bottom. So let me know first whether you're prepared to do that or not, and if you're not, you know, uh, you're on your own.

   7. TFTim Ferriss23:06

      What would you consider the minimally viable long term? How many years in this particular case? If they said long term, sure, what's long term?

   8. ETEd Thorp23:15

      For him? He was, uh, 50 or so.

   9. TFTim Ferriss23:18

      Yeah.

   10. ETEd Thorp23:18

       And, uh, he was still working, and he had other, other assets, so he didn't depend on, uh, what happened to this money alone. If it was down, if the market were down, uh, by 50% at some point, that wouldn't hurt him. He could wait.

   11. TFTim Ferriss23:34

       Mm-hmm.

   12. ETEd Thorp23:35

       Some people can't wait, and so those are the people that have to, uh, do things differently if they don't have enough capital. I was listening to Thomas Piketty, uh, talking about his new book, which is very interesting, and one of the things he said was that the poorer part of the country, maybe the lower half, have insignificant capital resources. So if they're out of a job, they've got to get another job right away because they're living paycheck to paycheck. And so they don't have the luxury of being able to make better choices. They're being forced to make immediate choices that aren't good. So this long-term investing advice is for somebody who's not being forced to make immediate choices and don't think that they're going to be forced to do that.

   13. TFTim Ferriss24:19

       So in the case of your friend, 50, still working, would you say the long term that he should be prepared to buckle in for is 10 years, 15 years? Where would you p- put that number if you had to peg a, a number just for the sake of conversation if you were actually having this conversation with, with him at the time?

   14. ETEd Thorp24:41

       Okay. I'm talking to a person who's 45 years old, I believe. Is that right? [laughs]

   15. TFTim Ferriss24:45

       Right now, yeah.

   16. ETEd Thorp24:46

       Okay.

   17. TFTim Ferriss24:46

       I'm close to 45, yes.

   18. ETEd Thorp24:48

       Oh, almost 45. Pardon me. [laughs]

   19. TFTim Ferriss24:50

       Almost 45.

   20. ETEd Thorp24:51

       Okay, so I would say look at the rest of your life, how do you project it? Are you gonna live to be 80, 90, 100? You, you don't know.

   21. TFTim Ferriss25:00

       Oh, God, I mean, I, I hope I live to be... The, the... And I know averages can be misleading, but let's just say the median death age of males in my family seems to be 85 to 88, so you've already outrun that. I'm hoping to outrun that, so I'm aiming higher, but let's just for the sake of argument say 85.

   22. ETEd Thorp25:24

       Well, if you follow all kinds of healthy habits, which it seems to me that you do, and-

   23. TFTim Ferriss25:30

       Mm-hmm

   24. ETEd Thorp25:30

       ... you're up on the latest things that you believe actually have merit, not just any fad, and, uh, you haven't had any major issues, means you probably got good genes.

   25. TFTim Ferriss25:43

       So far so good.

   26. ETEd Thorp25:45

       And you have economics behind you. Economics, wealth is associated positively with longevity, and it's obvious why. I mean, it's not fair, but if somebody has advantages, they can avoid problems that people that don't have those advantages are forced to face.

   27. TFTim Ferriss26:00

       Mm-hmm.

   28. ETEd Thorp26:00

       So anyhow, I, I would say that the odds of you reaching 100 are substantial.

   29. TFTim Ferriss26:07

       I, I, I love this. Yes.

   30. ETEd Thorp26:09

       [laughs]
10. 29:14 – 31:05

    How to have fun learning about probability and statistics

    1. ETEd Thorp29:14

       it heavily.

    2. TFTim Ferriss29:16

       So let me pause for just a moment to mention and ask a few things. So the first is the Schaum's Outline of Statistics is spelled exactly as you said, S-C-H-A-U-M apostrophe S, and covers any number of subjects, so I'm excited to dig into that. Someone very close to me is actually going to be taking statistics in grad school soon, and they're very intimidated, so this, this will be ordered today. My question for you is to develop more numeracy and basic familiarity with probabilities/statistics. Something that comes to mind for me, and this is from recently interviewing a poker player, is that perhaps by encouraging people to play poker or blackjack, you could enable them to absorb some of these principles while having fun or doing something that has an objective outside of just becoming numerate. Are there any approaches like that or that come to mind that you might suggest to people who would like to absorb And cultivate some of these principles and numeracy. Aside from reading a book on statistics, are there other games, other activities, anything that comes to mind?

    3. ETEd Thorp30:41

       There's a mathematician out at, in the Claremont Colleges named Arthur Benjamin.

    4. TFTim Ferriss30:46

       Mm-hmm.

    5. ETEd Thorp30:46

       And, um, I think he has a book called Mathemagic.

    6. TFTim Ferriss30:49

       Mathemagic.

    7. ETEd Thorp30:50

       And he also has a course on The Great Courses. I don't know... I haven't followed The Great Courses for a while, but I've seen that he has such a course. And you can learn how to do a lot of math in your head by looking at his

11. 31:05 – 40:18

    How to get an edge in hedge fund investing (with book recommendations)

    1. ETEd Thorp31:05

       stuff.

    2. TFTim Ferriss31:06

       Wonderful. Mathemagic, Arthur Benjamin. All right, I will link to all of that. What I thought we might do next, we were talking about a, a fairly common and simple example of your friend with the real estate decision. We discussed in our last conversation a number of things related to hedge funds, and there were questions around Citadel, and listeners wanted to know how one might get an edge in hedge fund investing. What would you like to say to that, or any comments you'd like to, to add to satisfy some of those folks?

    3. ETEd Thorp31:49

       The hedge fund world has gotten very big. When I was in it, there were only... When I first started, there were only a couple hundred hedge funds. And a hedge fund, in its original usage, meant a private limited partnership that invests in typically financial products and, uh, it could be things like, uh, real estate, loans, equities, commodities, very wide-ranging. It's kind of a catch-all for private limited investment partnership. The typical structure is that there are a group of limited partners. There could be a hundred, two hundred of them, and a, a managing general partner. And the limited partners just collect whatever returns they get, and the managing general partner charges a fee, typically, uh, so much per year plus a percent of the returns. So that, that's the basic structure. And Citadel, that I talked about last time, isn't such a thing. It, it is a collection of businesses, and only one part of those businesses is the private limited investment fund that I happened to be a limited partner in. So just a clarification on that. Now, the asset class of hedge funds is very large. It's now about three trillion dollars, which is like two percent of the entire net worth of the United States, and it has perhaps ten thousand or so hedge funds in it. Some of them very large, like your guest, Ray Dalio.

    4. TFTim Ferriss33:27

       Mm-hmm.

    5. ETEd Thorp33:28

       Or like Citadel, and, uh, then they, they range in size all the way down from the multi-billion dollar ones down to a few million dollars, and they often start at a small level like that. It's pretty hard to run one now and start it up because of all the costs if it's less than a few million dollars. So the hedge fund world used to be a much better place for individuals to invest. Now it's better for institutions. I'll give you an illustration. The hedge fund that I was in for thirty or so years in the hedge fund part of Citadel, they... in the first, I don't know, seventeen years or so, we were making twenty plus percent annualized net to us after all the fees.

    6. TFTim Ferriss34:10

       [chuckles] That's incredible.

    7. ETEd Thorp34:12

       It was incredible. Now, it wasn't so good for me because I was taxable, so I might be getting, uh, fourteen percent, thirty-five percent combined state federal tax rate. But then for an institution, it was, uh, fabulous, uh, a, a tax-exempt institution like a university endowment fund. And then maybe from two thousand and eight to two thousand and fifteen, returns were somewhat less. I, I don't remember the exact numbers, but let's say they were, uh, fourteen percent, and now I'm in the fifty percent tax bracket. Taxes went up, so I'm only getting seven percent. So the market long term is riskier, but it's gonna give me ten percent, and I don't have to do any work. Uh, all I do is, uh, invest once. I don't do any paperwork, that sort of thing. And so at that point, for me, the market's probably a better choice. But for the tax exemption investor, they're still getting fourteen percent. It's a wonderful choice. So that's sort of how the hedge fund world changed for the really good hedge funds. For the not so good ones, they as a group have gotten sort of less and less attractive for people. Now, you might say, "Who should invest in hedge funds today?" I would say wealthy tax-exempt investors, whether they be individuals or institutions. You might say, "Well, how many of my listeners have that pedigree?" Maybe not very many. But when you think about all the people who are listening to this, a lot of them are probably on the boards of tax-exempt entities like university endowment funds. And so they can advise them if they want to learn about this sort of thing and see whether some of these hedge funds are good choices. I might say the collection of all hedge funds together taken as a pool are not attractive. That is, if there were an index, a cap-weighted index of hedge funds, it would not be an attractive asset class anymore, in my opinion. But th- there are, there are exceptions, like the Citadel operation.

    8. TFTim Ferriss36:14

       Yeah.

    9. ETEd Thorp36:14

       Well, I shouldn't say Citadel. Like, the hedge fund part of Citadel. The whole business is, is beyond me. It's, you know, it's like I invested in the Amazon bookstore initially, and now Amazon has all these other things. I don't have anything to do with all the other things as a passive investor. I'm, I'm still invested in the bookstore.

    10. TFTim Ferriss36:34

        [laughs] Uh, I'll also mention just in passing that if you were to look at the venture capital industry, let's call it, as a whole, it would make a terrible index. Uh, they, they tend, uh, if you were to average it all out, it would-

    11. ETEd Thorp36:48

        Mm

    12. TFTim Ferriss36:48

        ... it would perform under the market more times than not. But there are, there are standouts. I wanted to recommend two books, and if you have any opinions on these... Actually, I suppose it's more of an author recommendation than anything else, but for people who want to gain some familiarity with the history of hedge funds and what constitutes a hedge fund, in other words, a fund that has hedges versus those that are, say, unidirectional but nonetheless call themselves hedge funds, et cetera, uh, there's a book called More Money Than God by Sebastian Mallaby that I found very entertaining, and he has written a new book, which I've not read, believe it's called The Power Law, which really delves into venture capital, and there are some striking similarities. So I will, I will just leave those two aside. Ed, I would love to ask you next about a few books that I have here in front of me, the titles of, that is, that were in some notes I had for our last conversation, and it relates to expert advice, predictions, and more. But there is a book here which I've not read but I've heard of before called Extraordinary Popular Delusions and the Madness of Crowds.

    13. ETEd Thorp38:02

        Yes.

    14. TFTim Ferriss38:02

        Is this a book that you would recommend?

    15. ETEd Thorp38:04

        Yes. It was originally written, I think, back in 1851. I forget who the author is. I... The name Charles Mackay comes to mind, but I don't know if, uh, that's the publisher or the author, and, uh, you're finding out now.

    16. TFTim Ferriss38:20

        I am. You know, The Madness of Crowds. No, you got it. Charles Mackay. Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, M-A-C-K-A-Y.

    17. ETEd Thorp38:31

        And I'll, I'll say this about it. It's not wholly accurate. I've seen the critiques and corrections of it, but it's a great read, and it, it gives you the flavor of, uh, crowd madness. It might be good reading for people who are involved in cryptocurrency now, for instance.

    18. TFTim Ferriss38:48

        [laughs]

    19. ETEd Thorp38:50

        Or in GameStop.

    20. TFTim Ferriss38:51

        [laughs] And, uh, I, I will also just mention for folks that there is a looks like a decent Wikipedia page for this book, which covers some of the main tenets and anecdotes and stories within it. It was first published in 1841. What would you hope people to get out of this? Let's just say that they are in the midst of buying and selling cryptocurrency, and they say, "This Ed Thorp seems like a very bright guy. I'm gonna take his advice and read this book." What would you hope them to gain from reading this book?

    21. ETEd Thorp39:32

        I think the first fundamental thing is if everybody's heard about it already, there's historically at least no reason to believe that you have any kind of edge.

    22. TFTim Ferriss39:46

        Makes sense.

    23. ETEd Thorp39:47

        You're basically rolling dice or buying lottery tickets. And just as in the gambling casinos where a person does... where most people do not have an edge, you hear stories about lucky winners, and that draws in more people who want to play. But if you look at all of them as a group, including the good players who actually have an edge, if you look at all of them as a group, they lose, and that's how the casinos survive. If, uh, they didn't lose as a group, the casinos wouldn't be there.

12. 40:18 – 48:06

    Ed’s methods for losing (or maintaining) weight and looking 60 in spite of being almost 90 years old

    1. TFTim Ferriss40:18

       Right. Well, let's, l- let's segue, uh, to a, to a slightly... well, a completely different subject area, which is physical and mental fitness. Uh, we, we covered some of this in our last conversation, but there's certainly more specifics that we can explore here. So just, just to ensure I'm doing my fact-checking, are you still 89 years of age, or have you, have you already turned a, a new, a new birthday?

    2. ETEd Thorp40:52

       Still 89, but getting close. [laughs]

    3. TFTim Ferriss40:55

       [laughs] All right. So I will reiterate for people who didn't hear the first episode, you look like you're 60. It is remarkable. Uh, certainly something to aspire to and removes any excuses I might have. And I have notes in front of me with a number of things that I would love to discuss. The, the first is developing awareness, and [laughs] I have a note here about recording or... recording your weight. What is your suggestion for people, and is this something that you have done yourself?

    4. ETEd Thorp41:33

       Yes. W- first of all, I had a relative who was significantly overweight, and he, he wished to lose weight. And so I said, "The first thing you do, I'm not gonna tell you what to eat or how to eat it or anything else. The first thing you do is you get on the scale every morning, and you write down the date and how much you weighed, and just observe that number and do that day after day." Well, it turned out he didn't really want to lose weight, and so he... after a while, he stopped doing this. [laughs] And so I got after him and got him to do it again for a while, and then he quit again, and his weight would go down and bounce back up and go down and bounce back up. But when he was writing it down, it seemed to alter his behavior, and he would... his weight would slowly drift downward. So I've made a habit myself of getting on the scale, maybe not every morning because I don't need to anymore. But for a long time, I'd get on every morning and just observe what I weighed, and I've been pretty well bracketed between 151 and about 158 for as long as I can remember. And if I get near 158, I, uh I say, "Well, you know, I don't need that dessert tonight," or, "That beer, we'll have it some other time."

    5. TFTim Ferriss42:49

       [laughs]

    6. ETEd Thorp42:50

       Or, "How about a great big healthy salad today instead of, uh, a burger?" [laughs] And, uh, it's enough to shift me down. And then I have another little thing that I check. You know, there, there's a simplistic notion of, uh, apples and pears in people.

    7. TFTim Ferriss43:08

       Mm-hmm.

    8. ETEd Thorp43:09

       I don't know, have you heard about this one?

    9. TFTim Ferriss43:10

       I have. Mm-hmm.

    10. ETEd Thorp43:12

        An apple is somebody that tends toward getting a big potbelly when they gain weight, and I come from a family of apples. And, uh, this is not healthy because you get all this fat around your internal organs. So one of the things I put on my list early was never get that potbelly. So all I have to do is I can look down, if I see anything that isn't flat down there, I know I weigh too much. [laughs] That's another awareness leads to change things. Those two feedbacks are more than enough to control my weight for a lifetime, and I rarely have to use them. But anyhow, I would say that a person can develop their own feedbacks, whatever those are, and use them. And measurement is important because you want facts on which to base what you do instead of, uh, hopes, beliefs, wishes, so on.

    11. TFTim Ferriss44:02

        I remember a T-shirt that I was given a long time ago by the, uh, director James Cameron. It was actually an original staff shirt-

    12. ETEd Thorp44:12

        [laughs]

    13. TFTim Ferriss44:13

        ... for the film Avatar, and the very top of it said, "Hope is not a strategy," [laughs] which I liked.

    14. ETEd Thorp44:20

        Yeah.

    15. TFTim Ferriss44:20

        Which I liked quite a lot. And your weighing, just to get specific, is before breakfast and without clothes, or what you would recommend. Is that, is that accurate?

    16. ETEd Thorp44:31

        I do two things. When that's convenient, I do that. When it's not convenient, I just happen to go to the scale, maybe before a shower in the middle of the day, and I weigh myself and put that down as a little side fact. And of course, I'm gonna weigh more in the middle of the day than I did first thing in the morning, so I know that. So maybe I weigh 152 in the morning, but when I put my little side thing down, it might say, at 3:00 PM it might say, uh, 154 and a half.

    17. TFTim Ferriss44:58

        Mm-hmm.

    18. ETEd Thorp44:59

        So I know that roughly speaking, about each third of the day corresponding to each possible meal, I gain about one pound.

    19. TFTim Ferriss45:06

        Hmm.

    20. ETEd Thorp45:08

        So I can mentally correct back to the beginning of the day.

    21. TFTim Ferriss45:11

        Mm-hmm.

    22. ETEd Thorp45:13

        I don't have to weigh myself every morning if it's not convenient. But I get other feedback.

    23. TFTim Ferriss45:18

        Right. Absolutely.

    24. ETEd Thorp45:20

        The whole thing about health and fitness as I see it is you wanna do things that are preventative, and you want to make sure you're not missing something important because it's the things you miss that are gonna do more damage than the positive things are to save you. I mean, you can work out and be fit and have high aerobics and so on, but if you're not going in for, uh, uh, routine colonoscopies and, uh, skin cancer checks and so on, you're leaving a, a big risk factor open for yourself. So you, you gotta try to get rid of the risks that, uh, you can cover.

    25. TFTim Ferriss45:57

        Do you have a checklist for yourself? Or how do you ensure that you are not missing gaps or blind spots?

    26. ETEd Thorp46:06

        I think about it and I talk to people, and I, I pick up information all over and I, my list expands. You know, there's a, there's a lot of, a lot of topics on the list. There's, uh, physical fitness of various kinds. There is, uh, mental health. There's, uh, supplements, which I don't take much of because the evidence isn't strong enough in my mind for them. Other, other people will disagree, but I'm, I'm not heavy on supplements. Only if I think they've really been proven. One thing that I've, I found that really worked well was, uh, bone supplements.

    27. TFTim Ferriss46:42

        Mm-hmm.

    28. ETEd Thorp46:43

        And, uh, I was able to reverse osteopenia and turn it into, uh, uh, excess bone after, uh, several years.

    29. TFTim Ferriss46:52

        Bone supplements meaning, say, calcium, magnesium, K2 blends, things of that type?

    30. ETEd Thorp46:58

        Yeah.
13. 48:06 – 49:30

    Favorite beer

    1. TFTim Ferriss48:06

       pounds of 143. [laughs] There are a few bullets here I would love to hear you expand on. The first is limit alcohol to a total of a few drinks a week. So this makes sense to me. Do you drink alcohol yourself? If so, what do you drink?

    2. ETEd Thorp48:22

       I typically drink maybe a half a beer three or four times, uh, a week.

    3. TFTim Ferriss48:28

       Mm-hmm.

    4. ETEd Thorp48:29

       And maybe when I have company, a glass of, or two of wine.

    5. TFTim Ferriss48:33

       Mm-hmm.

    6. ETEd Thorp48:33

       That's pretty much it. And I think it's too much. [laughs]

    7. TFTim Ferriss48:37

       You think that's too much?

    8. ETEd Thorp48:39

       Yeah.

    9. TFTim Ferriss48:40

       [laughs] Do you have a favorite beer or favorite wine that you tend to consume if, if, if you're rationing in that way?

    10. ETEd Thorp48:48

        Well, I never drank beer until a few years ago, but we went over to Ireland and we visited the, uh, Guinness Brewery, which has a long, colorful history.

    11. TFTim Ferriss48:55

        Mm-hmm.

    12. ETEd Thorp48:55

        Really interesting. And, uh, the stuff was really great. So I [both laughing]

    13. TFTim Ferriss49:03

        I did not see that coming. Wow. All right. So y- you picked up beer, uh, a few years ago, so at the eighty-five, eighty-six, something like that.

    14. ETEd Thorp49:11

        Yeah.

    15. TFTim Ferriss49:11

        I love that. So I, I, I probably need to go the, the [chuckles] in the opposite direction with some of my alcohol consumption.

    16. ETEd Thorp49:16

        [laughs] Go where there are no breweries.

    17. TFTim Ferriss49:19

        Yeah. Yeah. I- I'm actually pretty good these days. My girlfriend doesn't drink very much at all, and she's like twenty pounds. So, uh, we, we tend not to drink too much. One is reduce stress.

14. 49:30 – 50:24

    Music as stress reduction

    1. TFTim Ferriss49:30

       Now, this is also something that at face value I think will make sense to a lot of people, but begs the question of specifics. How do you reduce stress? What have you done to reduce stress in your life that you've found to have a meaningful impact?

    2. ETEd Thorp49:46

       One thing that really works for me is listening to music, and also another thing is just going for walks and thinking about whatever. My mind just kind of runs free and I'll... Maybe, uh, maybe after this conversation I'll go for an hour walk and I'll think about the things we said and what I wished I said but forgot and so on, or [laughs]

    3. TFTim Ferriss50:05

       [laughs] Is there a type of music that you gravitate towards?

    4. ETEd Thorp50:09

       I happen to like classical, but I also like guitar and, uh, I like a lot of old songs and, uh, music from the movies.

    5. TFTim Ferriss50:18

       Mm-hmm.

    6. ETEd Thorp50:19

       Reminds me of pleasant times I've had. I like, uh, soft jazz

15. 50:24 – 59:41

    Avoiding unnecessary risks

    1. ETEd Thorp50:24

       too.

    2. TFTim Ferriss50:24

       I do too. I've developed a, a real predilection and this eagerness to, to consume more jazz and, and blues. I'm not sure, maybe it's my, maybe my proximity to a lot of that in Austin and recently spent time in New Orleans, but I'm on the same page with those. There's, there's a bullet here, "Avoid unnecessary risks." Could you expand on that? What type of risks have you trained yourself to avoid?

    3. ETEd Thorp50:53

       Well, they're really everywhere. So I have a laundry list of them that gets longer and longer as I think about them more. Uh, here's a for instance: COVID. Good current example. People are wandering around now, uh, mostly without masks, and they're acting like, uh, it's over. But I don't see any reason to catch it, and one of the... It's not gonna do me any good if I do catch it, and especially being eighty-nine, high risk group. The death rate there is probably close to twenty percent in the eighty-nine, uh, year old category. Now, I'm healthier and I probably have better medical access than most people, so it might be only two or three percent for me, but that's too big. So I try to be careful, avoid crowds, no commercial travel unless it's forced upon me.

    4. TFTim Ferriss51:40

       Mm-hmm.

    5. ETEd Thorp51:41

       You just can't avoid it. The key thing is don't share air with people that might possibly be ill with COVID, and some of them don't know it. So anyhow, that, that's an avoidable, a largely avoidable risk if you're willing to limit your activities. Now, uh, what I'm hoping is that they'll have a broad spectrum antiviral that will allow us to get a shot and put an end to all this. But government seems very slow in getting its act together, and that's-- there's no telling how long it's gonna be. That's one risk. Another one is, uh, travel. Let's say that I want to go from Orange County, California to New York City. I could fly out of Orange County Airport nonstop to Newark and take a somewhat less convenient for me flight. Or I could, uh, I could connect, land somewhere, take off again on the way. A, a so-called direct flight, but it's not nonstop. Or I could go to LAX and get all kinds of flights with, uh, much greater time ranges. If I go to LAX, I'm going to spend forty-plus miles in a car two ways. The risk of driving in a car is roughly a hundred times per mile what it is flying an airplane, which is a gigantic difference. Now, airplane risk, most of the risk is takeoff and landing. So I won't take a direct flight if I can help it because there are more takeoffs and landings. So my optimum is to go to Orange County, take a le-- somewhat less convenient flight, avoid takeoffs and landings, and, uh, so there's a, a small risk reduction. You might say, "Well, how much risk reduction is there?" It's maybe, you know, a chance in a million, but with a little thinking, I can get rid of it. Here's another example. I don't know if we talked about this before or not. It was about, uh, a story I heard by, uh, Benjamin Stein on his program. He, he is the, uh, son of Herbert Stein, famous economist, and Benjamin Stein himself is economist, but also he's partly comedian on purpose. He and, uh, Milton Friedman, a well-known name, were walking in New York City and they came, they came to one of these cross streets where the light was red, but didn't seem like anybody was, uh, going back and forth. So Benjamin Stein stepped off the curb and Milton Friedman said, "Benji, wait a minute." And Benjamin Stein said, "No, it's safe to go." And Milton Friedman said, uh, "You know, Benji, probably it is, but maybe it isn't. Why should I risk the rest of my life to save twenty seconds?"

    6. TFTim Ferriss54:34

       [laughs]

    7. ETEd Thorp54:36

       And that's the sort of decision that a lot of people don't make. They'll, they'll run that red light 'cause they can just barely get through. Once in a while, one of them gets T-boned. So there are risks everywhere like this, and you can-- if you think about them a little bit and make it a habit, you get rid of piles of them.

    8. TFTim Ferriss54:53

       Hmm.

    9. ETEd Thorp54:54

       There's a book called The Unthinkable, I think by Amanda Ripley, and she talks about horrible things that people-- horrible situations people have found themselves in. For example, the Twin Towers in 2001. And people made various decisions, some of which saved their lives, others caused people to lose their lives. So she has, uh, three steps: denial, where this can't be happening; deliberation, where you say, "Well, you know, it is happening. What am I gonna do?" And then there's decision, "Okay, I'm gonna do something now." So I, I kind of look at it a little-- I'm a little more, uh, proactive. I say that there's a-- for me, there's awareness, and then there's analysis, and then there's action. So what, what kinds of th- of things could happen? Well, besides the Twin Towers, you might find yourself in a burning theater. You might find, uh, your building shaking from an earthquake. You might see a... We hope none of these things happen. You might see the sky light up like a thousand suns, and you figure out that, uh, there's, there's been a nuclear detonation. So multiple things, or a huge volcanic explosion somewhere or a tidal wave. There are a million and one very remote things. But then there are things in everyday life. Somebody starts shooting, you're in a crowd. You have very little time to decide what to do. I mean, what I'd do is drop to the ground first thing and then figure out what to do next, because you're a smaller target. And then see how you can help. But people have these things suddenly thrust upon them, and if you have some thought about h- how you'd act in some of those things, like I know what I'd do in my high-rise office building if there was an earthquake. If you have some idea of, of how you'd act ahead of time, it helps prepare you so that you can, uh, probably have a better chance of coming out of it with less loss or damage. So that's another approach for big risk. The sort of things most people don't like to think about and prefer to think about happy things.

    10. TFTim Ferriss57:10

        You know, it's, it's having been through a number of natural disasters and also crisis situations, for instance, in Austin, Texas, but also in San Francisco, it is always astonishing to me, and maybe I just have a healthy, sometimes unhealthy degree of paranoia about low probability events. But if you look at even recent history, like the Loma Prieta earthquakes in San Francisco, or you look at the freezes in Austin that, uh, paralyzed the city, prevented transport trucks from delivering goods, ended up disrupting water supply. I'm amazed how few people have a week or two worth of backup water. [chuckles]

    11. ETEd Thorp57:57

        Mm-hmm.

    12. TFTim Ferriss57:57

        It's just an example of something that you can remedy with a few hundred dollars, you know, less than they spend on a given weekend at restaurants. But just how few people have that type of contingency planned for even after they have had a really close call. So I re- I remember in Austin, deep freeze lasts a week, and I had some involvement during this entire thing with a sort of disaster response, and it was pure luck that we had the thaw when we did. If it had lasted another day or two, it would have been catastrophic in terms of lives lost for a number of reasons. But even after that happened, I spoke with a number of acquaintances who had been in dire straits, and I asked them if they had bought backup water and a few other things, and they said, "No, that was a one in a hundred years type of storm. That'll never happen again." [laughs] Uh, it's just puzzling. Are there any other risks from, say, an exercise perspective or a behavioral perspective, a day-to-day, kind of week-to-week perspective that you have removed by doing this type of analysis for yourself, things that you used to do that you no longer do?

    13. ETEd Thorp59:13

        Yeah, I used to run on roads when I was training, and I soon changed that because I read about what the statistics were for runners being hit by cars on roads.

    14. TFTim Ferriss59:24

        Hmm.

    15. ETEd Thorp59:24

        Uh, even if you run on the side in the bike paths, it's too much risk, so I went off-road. And now when I walk, it's the same thing. I don't walk on roads. I, I walk off-road, except in a, a community where there's basically no a- no action, and I can see and hear everything.

16. 59:41 – 1:01:53

    The age-guessing experiment

    1. TFTim Ferriss59:41

       What is the age guessing experiment?

    2. ETEd Thorp59:44

       Oh, yeah, that was a funny thing. About, I think when I was about eighty-two or so, people kept saying, "Gee, you look like you're sixty." I said, "Well, that's very flattering, but, uh, you know, it's nice to hear. I wonder how much truth there is in this. So can I measure this? Has this got any fact behind it?" So what I decided to do was approach strangers at convenient places, like a waiter in a restaurant where I'd never eaten before, and I'd say, "I have five dollars here. I'd like you to answer a question about me, assuming you know nothing about me. And if you are close, I'll give you the five dollars." And the question was: how old am I, uh, within five years? So I did this with a wide range of people, uh, about twenty people altogether over several months just to entertain myself.

    3. TFTim Ferriss1:00:37

       [chuckles]

    4. ETEd Thorp1:00:38

       And I had a lot of fun with it. I-- In one restaurant, when, uh, somebody guessed, uh, like fifty-three, I said, "No." And they said, "Well, my friend wants to guess." And I said, "Friend, do you want to go higher or lower?" So friend thought a while, and I think they went higher. So they said something like, uh, sixty-five or so, and I said, "No." And I tried again, 75, no. But one, one woman came pretty close. She was, uh, an old lady in a senior citizens library. She was, [chuckles] uh, about 83, and-

    5. TFTim Ferriss1:01:16

       Hmm

    6. ETEd Thorp1:01:16

       ... I asked her the same question, and she looked at me and she said, "I think you're about 72." I said, "No, you're out five years."

    7. TFTim Ferriss1:01:23

       [laughs]

    8. ETEd Thorp1:01:24

       And, uh, then I said to her, "See that kid walking along there? How old do you think he is?" Kid was about 18 or 20. She said, "Oh, I think about 40."

    9. TFTim Ferriss1:01:32

       [laughs]

    10. ETEd Thorp1:01:36

        Anyhow, the mean, the mean was in the 50s then, but, but that was several years ago.

    11. TFTim Ferriss1:01:43

        [laughs] Well, I mean, that just sounds like a fun game to play also.

    12. ETEd Thorp1:01:49

        It's very entertaining. And you can play it with any other kind of question

17. 1:01:53 – 1:10:44

    Other-directed vs. inner-directed and takeaways from The Lonely Crowd by David Riesman

    1. ETEd Thorp1:01:53

       too.

    2. TFTim Ferriss1:01:54

       Ed, it strikes me that you have developed an ability, and perhaps this is somewhat innate as well, but to think for yourself and to attempt to start from first principles whenever possible. I'd love to pick up on a thread that I was hoping to explore last time, which is other-directed versus inner-directed. And there's another book title, I believe it's a book, called The Lonely Crowd.

    3. ETEd Thorp1:02:21

       Yeah, by David Riesman.

    4. TFTim Ferriss1:02:23

       That's right. That's right. Could you speak to this and provide, uh, any, any elaboration that you think is, is helpful, and if there are any resources or approaches that you might suggest to people who want to become more inner-directed?

    5. ETEd Thorp1:02:41

       First, about The Lonely Crowd, uh, it, it basically explores the idea of people who are, quote, "inner-directed," you'd call them maybe introverts, but that's not quite-- it's not quite the same thing. And people who are other-directed, who, who tend to overlap with extroverts. And, uh, other-directed people tend to get their direction and their values and their, uh, ratification from the people around them. So they tend to do-- they tend to conform, and they tend to, uh, go with fads, and, uh, they tend to go with the majority vote on things. And inner-directed people tend to be more self-deciding about things. They tend to be more associated with i-introverts, but not exclusively. There are a lot of, I'll call them inner-directed, uh, extroverts. They-- By inner-directed, I think of yourself as having your own independent moral and ethical compass and kind of set of rules for living and guiding yourself. And an other-directed person tends to pick those up from others. Others basically indicate to them what the right things to do are and what the wrong things to do are. So it's an interesting, uh, line of thought. There's a way to get into this a little bit. There's, uh, a book. I'm trying to think of the name of it. It is a personality typing scheme started by a mother and daughter, and they have four major personality dimensions. One is introvert, extrovert. The next is sensing versus-

    6. TFTim Ferriss1:04:22

       Oh, is this Myers-Briggs?

    7. ETEd Thorp1:04:23

       Yes, it is. That's it. Thank you.

    8. TFTim Ferriss1:04:25

       Right. The Myers-Briggs type indicator. Mm-hmm.

    9. ETEd Thorp1:04:28

       Yes. And so that is, I think, very useful, even though it's simplistic. It kind of breaks people down into sixteen major categories, depending on which choice they are in each of four dimensions, two times two times two times two. And then it gives you a general description of a pure type, like INTJ is a pure type. And so the general description will be a scientist/mastermind or something like that. And, uh, ESTP is promoter. So all, all kinds of things come with promoter. But, uh, E is extrovert, S is sensing, which means more thinking and more, I guess, I guess more sensitive to people around you and, uh, how they do things and how they act. You can read them. So if you look at these categories, you realize that they-- individual people aren't in-- aren't any one of these sixteen types. But if you run into a person, you'll often find that one of them is very much like one of those sixteen types. And when you find that out, you can understand a lot of things about them, uh, very quickly. Sometimes it'll be a mixture of two of the sixteen types. And again, it's not too hard to figure out a lot of things about them. And if you type yourself and you're anywhere near one of the, uh, sixteen pure types, you will be-- your hair will stand on the back of your head to the extent either of us have any hair. [chuckles] Uh, it will stand.

    10. TFTim Ferriss1:05:59

        [laughs] You have a lot more hair than I do. [laughs]

    11. ETEd Thorp1:06:03

        I've been growing it and growing it. So-

    12. TFTim Ferriss1:06:05

        [laughs]

    13. ETEd Thorp1:06:08

        So any case, it's incredible sometimes the insights that you'll suddenly get into somebody that you know. You say, "Oh, they're, they're this kind of person. They're, they're artistic, and artistic has these things that go with it all the time almost." So you learn quite a bit quickly about people, not everything, and you run the risk of stereotyping, taking a prototype from a group and using that to represent everybody in the group. And of course, there's a huge spread among the people in the group. What we talked about before, about averages and distributions, the same idea. But anyhow, it's a useful introduction to thinking about other people and realizing they're different from you. They're not better, they're not worse if they're a different type. They're just different. And you need to try to understand where they're coming from, and it helps one do that a bit. So I'd recommend that as a kind of pop psychology introduction to understanding people better.

    14. TFTim Ferriss1:07:02

        What is your type?

    15. ETEd Thorp1:07:04

        It's INTJ. [laughs] Mostly

    16. TFTim Ferriss1:07:06

        INTJ. I did the typing a long time ago for Myers-Briggs, and I'm also an INTJ. [laughs]

    17. ETEd Thorp1:07:11

        Oh.

    18. TFTim Ferriss1:07:11

        Which is not to imply I have [laughs] your personality or your skill set, but-

    19. ETEd Thorp1:07:16

        Well, that shows you how different people in category can be.

    20. TFTim Ferriss1:07:18

        Yeah.

    21. ETEd Thorp1:07:19

        And of course, we're not, we're not pure either. I mean, you know, we're 90% I, and... or something like that, or 80%, whatever it happens to be, instead of 100%.

    22. TFTim Ferriss1:07:28

        I think I'm, uh, it's, you know, introverted, intuitive, thinking, judging. I'm probably 99% judging, which I'm not sure always helps me. [laughs]

    23. ETEd Thorp1:07:35

        [laughs]

    24. TFTim Ferriss1:07:37

        Uh, that's a joke. It's a joke. But The Lonely Crowd, just to pick up on that, what is the, the takeaway, or what would you hope people, in an overarching way, to glean from The Lonely Crowd? Is it, is it the personality differentiation that you're describing along the lines of a Myers-Briggs, or is there, uh, more to that book that you would hope people would notice?

    25. ETEd Thorp1:08:06

        I think the biggest takeaway for me was simply the notion that people who are, quote, "other-directed," unquote, which means that they pick up their cues about what to do, and how to behave, and what's good and what's bad from the crowd, those people are kind of afloat without a compass, and it's harder to be that kind of person. And those people are lonely-

    26. TFTim Ferriss1:08:28

        Mm-hmm

    27. ETEd Thorp1:08:28

        ... because they don't really have anything inside that helps them feel a sense of worth and, uh, helps them make decisions that are clear-cut-

    28. TFTim Ferriss1:08:41

        Mm-hmm

    29. ETEd Thorp1:08:41

        ... and, uh, that they feel like they can really count upon. So they're kind of adrift, in a way.

    30. TFTim Ferriss1:08:48

        Yeah. I'd love to tie two things together because I'm al- I always wonder for myself, how does one develop this as a skill as opposed to an inborn attribute, let's say? Or is it developable, right? If, if I wanna learn to swim, I can improve my stroke, but I'm never going to have the same phenotype as Michael Phelps, right? I'm just not gonna have these, these crazy anomalous flipper feet, for instance-
18. 1:10:44 – 1:13:47

    How an 89-year-old maintains hair growth

    1. TFTim Ferriss1:10:44

       Yeah. Uh, so I'll add some, some more resources, uh, in addition to those that you mentioned into the show notes for this episode so people can pick up on that. And people will harangue me if I don't follow up on one comment that you made, which was, "I've been growing and growing my hair." So how does an 89-year-old grow and grow their hair?

    2. ETEd Thorp1:11:05

       Well, I, I stumbled into so- one thing accidentally, which may or may not work for everybody. It, it only applies to men, by the way. There's a drug called finasteride or Proscar.

    3. TFTim Ferriss1:11:16

       Mm-hmm.

    4. ETEd Thorp1:11:16

       Have you, have you heard of this drug?

    5. TFTim Ferriss1:11:18

       I have, mm-hmm.

    6. ETEd Thorp1:11:19

       If you have an enlarged prostate, which most older men tend to get, you want to keep that thing from getting larger and larger because it squashes other things down there-

    7. TFTim Ferriss1:11:32

       Mm-hmm

    8. ETEd Thorp1:11:33

       ... like your bladder, for example. So you have to go to the bathroom more often if you have a huge prostate. I've often, from the opera, gone into the restroom at intermission, and there's guys who are standing there for [laughs] five minutes. [laughs]

    9. TFTim Ferriss1:11:50

       [laughs]

    10. ETEd Thorp1:11:51

        I know they have enlarged prostates.

    11. TFTim Ferriss1:11:52

        Hmm.

    12. ETEd Thorp1:11:53

        So slowing the growth of your prostate's a good thing. So f- finasteride does that. However, it just so happens that it also promotes hair growth, and it's the best thing I've ever heard of for promoting hair growth. It doesn't promote massive hair growth, but it's noticeable, and it also just causes you to retain your hair.

    13. TFTim Ferriss1:12:12

        Mm-hmm.

    14. ETEd Thorp1:12:13

        So I noticed more hair right away when I started taking it.

    15. TFTim Ferriss1:12:16

        How long have you been taking it?

    16. ETEd Thorp1:12:18

        Probably 20 years.

    17. TFTim Ferriss1:12:20

        20 years. Do you have much baldness in your family?

    18. ETEd Thorp1:12:24

        My father was bald.

    19. TFTim Ferriss1:12:25

        Okay. All right.

    20. ETEd Thorp1:12:26

        He had male pattern baldness.

    21. TFTim Ferriss1:12:28

        See, my father is not bald, but... and my mom is not bald, but I certainly, at this point, am bald. Maybe I'll pick up the finasteride. For people wondering also, finasteride is also sold as Propecia, so it's well known as Propecia as well. It's a 5-alpha reductase inhibitor.

    22. ETEd Thorp1:12:43

        I think you get a higher dose if you get finasteride prescribed. I won't swear to that, but I'm pretty sure that's true, 'cause I knew about the over-the-counter versions-

    23. TFTim Ferriss1:12:53

        Mm-hmm

    24. ETEd Thorp1:12:53

        ... but they were maybe a fifth as strong at the time I checked.

    25. TFTim Ferriss1:12:57

        That makes sense. And of course, I'll just mention because it's a good idea, speak to your doctor. Neither of us are doctors. We don't play them on the internet, so please speak with your medical professional. There are possible side effects with this and, and most drugs.

    26. ETEd Thorp1:13:10

        Yep, absolutely

    27. TFTim Ferriss1:13:12

        Proscar, finasteride. Look it up. Good Wikipedia entry. Is there anything else that you would like to mention on the health side of things? And we can potentially, and we can, we can discuss this another time, but look at adding something on Tim.blog that might outline some of this in greater detail. But is there anything else that you think is, uh, we would be remiss not to mention, or that we should include in the conversation of health and longevity?

    28. ETEd Thorp1:13:41

        I think we've pretty well covered it from my standpoint.

    29. TFTim Ferriss1:13:43

        [laughs] Yeah, I think we've covered quite a bit. [laughs]

19. 1:13:47 – 1:16:26

    Using scrap time

    1. ETEd Thorp1:13:47

       [laughs]

    2. TFTim Ferriss1:13:48

       There's really one more thing that I have highlighted here that I'd love to hear you expand on, and that is using scrap time. I've- I've never seen this expression before, although I can sort of intuit what it might mean. How do you use scrap time or recommend people use scrap time, and what is that?

    3. ETEd Thorp1:14:10

       I just made it up for this conversation.

    4. TFTim Ferriss1:14:11

       Oh, you did? Great.

    5. ETEd Thorp1:14:12

       'Cause I was thinking about things.

    6. TFTim Ferriss1:14:14

       [laughs] Perfect. This is an exclusive, a worldwide exclusive.

    7. ETEd Thorp1:14:19

       [laughs]

    8. TFTim Ferriss1:14:21

       [laughs]

    9. ETEd Thorp1:14:22

       Well, a lot of people complain that they're bored or they get impatient when they're stuck somewhere. For example, let's say I'm at, at a long traffic light. I, I happen to have to drive through about three or four two-minute traffic lights. Sometimes they catch me, sometimes they don't. This is the couple days a week I go in for a few hours to my office. So when I'm at the traffic lights sitting there, what do I do? I could say, "I wish this light would change," or maybe I could... "Maybe I should have run that light." No, I n- I don't do that. [laughs]

    10. TFTim Ferriss1:14:54

        [laughs]

    11. ETEd Thorp1:14:55

        Instead, I say, "You know, I've got a couple minutes here. I can do whatever I want. Well, my neck's a little stiff today. Why don't I do a few neck exercises or a few shoulder shrugs or whatever?" And by the time I'm, uh, well into that, the two minutes is gone and I'm ready to go to the next traffic light. So the scrap time turns out to be a payoff rather than a, a negative, and I don't care about being caught at lights. Not at all. Or a, a doctor's office. I go into the doctor's office, they say, "Well, we were gonna take you at 10:30, but, uh, there's been a delay. The doctor had to, uh, do an operation and he won't be here for a while. He- he'll be back at 11:00." If I don't have something else scheduled, I say, "Okay, fine." I... If I have anything on my phone, I do that. I use the scrap time. If I run out of stuff like that, I try to get some exercise in, some stretches, some limbering up and so on. And it's amazing. When I start doing that, they take me in a lot quicker than they would otherwise. [laughs] Because everybody knows this guy's being forced to wait and wait and wait. It's not why I do it. I try to do it as subtly as possible. But, uh... Or I'm sitting there in the, uh, the doctor's room number seven waiting for him to show up. Same thing. More scrap time.

    12. TFTim Ferriss1:16:05

        Hmm.

    13. ETEd Thorp1:16:06

        I can get 10 or 15 minutes. I... Leg raises, pushups, all that kind of stuff in.

    14. TFTim Ferriss1:16:11

        [laughs] You know, another advantage I can imagine is that they see you doing all this and they're like, "This patient is, is scaring the other patients. We have to get him through the system as quickly as possible."

    15. ETEd Thorp1:16:22

        [laughs] It might be.

    16. TFTim Ferriss1:16:23

        [laughs] They move you along.

20. 1:16:26 – 1:19:13

    A big change in Ed’s later life that increased its quality

    1. TFTim Ferriss1:16:26

       Ed, I'd love to know, and if, if there's no answer that comes readily to mind, that's fine as well. But I'm 45 and I'm wondering... Well, roughly 45. After... So I'm thinking, you know, I, I am roughly at the, the midpoint to my, my next target, which is to get to your age and then from there to 120 or who knows where.

    2. ETEd Thorp1:16:48

       You know, by then the world will have changed a lot and your odds will be a lot better.

    3. TFTim Ferriss1:16:52

       One can hope. A boy can dream. So I, I hope that is the case, and that we're not living in some dystopian future where no one has any reproductive health. So I am, I am hoping for the, the upside case. Let's assume that is true. What are some of the, the new beliefs or changes in beliefs that most positively impacted your second half? And of course, um, this is self-serving and it's, it's possibly a hard question, but how did your thinking or priority or beliefs change kind of after the, after the midpoint that you think, retrospectively looking at it, have most benefited you or those around you?

    4. ETEd Thorp1:17:36

       I started running probably when I was about 40, just a mile or so, uh, on a Saturday. And then I... As i- we talked about last time, I built it up. Then I started actually running marathons when I was 47. So I got into running very late, but, uh, marathoning taught me quite a bit about life in a way, 'cause I began saying to myself, "You know, life is a lot like running a marathon."

    5. TFTim Ferriss1:17:57

       Hmm.

    6. ETEd Thorp1:17:58

       And, uh, if you look at it that way, here I am at that age then back in, uh, roughly around 50. Here I am at the midpoint perhaps of a marathon. So if you're running a marathon, you don't sprint because you'll burn yourself out early. You are careful not to step in potholes. There are all kinds of other things that you need to take care of in order to get to the finish line, and you eventually learn, some of us learn, how to get through the wall without there being a wall anymore.

    7. TFTim Ferriss1:18:28

       Hmm.

    8. ETEd Thorp1:18:28

       Which took, it took me seven marathons to figure that one out. And so I thought to myself, "Well, the same thing about life. You... I- if you plan ahead, you can avoid a lot of problems that, uh, sink other people." Knee replacements, heart clogging up, catching diseases because you don't do proper vaccination, going to countries where there are horrible diseases to catch in the first place and you can't protect yourself fully maybe, that sort of thing. So thinking long term is one thing that running a marathon teaches us. And so I, I tend to think long term anyhow, but that was a great reinforcement.

    9. TFTim Ferriss1:19:12

       Hmm.

21. 1:19:13 – 1:24:01

    New reflections, future hopes, and parting thoughts

    1. TFTim Ferriss1:19:13

       In the last, say, five to 10 years, is there anything you've profoundly changed your mind about? Or it could be recently. I don't need to put a timeframe on it

    2. ETEd Thorp1:19:23

       To me, the value of being around good people and not being around a few bad people is, uh, much higher than it ever was before. And the people in my life I consider the most important, and my actions with good people the most important thing.

    3. TFTim Ferriss1:19:43

       Hmm.

    4. ETEd Thorp1:19:43

       You know, I enjoy other things, but I think at this age, you've basically done most of the stuff that you're gonna do of any general broad significance. And so it's a time to reflect and to think about life and enjoy it, and if you have any... if one has any wisdom to, uh, uh, share it to some extent.

    5. TFTim Ferriss1:20:05

       Hmm. Well, you seem as sharp and as lively as ever as far as, as far as I can tell. I mean, you, you [chuckles] certainly have more vitality. However, I know that's a bit of a maybe an, an italicized word, but life force than a lot of the 40-somethings I know.

    6. ETEd Thorp1:20:22

       Well, thank you.

    7. TFTim Ferriss1:20:22

       So whatever you're doing, keep, keep doing it. And, uh, is there anything else, Ed, that you'd like to add before we bring this conversation to a close?

    8. ETEd Thorp1:20:34

       Hmm. I think an important thing for everyone is to think about the world and society as us instead of me-

    9. TFTim Ferriss1:20:48

       Mm-hmm

    10. ETEd Thorp1:20:48

        ... and to try to act that way a- and to think longer term. Think about how the things one does affects the people around them, not only right away, but down through the years. And it, it might seem like it doesn't matter, but it does in a way, and a lot of these things will... that you make better now for the future will, uh, actually benefit us a lot sooner than you might think otherwise.

    11. TFTim Ferriss1:21:15

        Hmm.

    12. ETEd Thorp1:21:16

        Pollution, for example. You know, climate change is, is coming along. It's coming along pretty fast, and people might say, "Well, what do I care about what happens 50 years from now?" But it's happening in increments. It'll be a little worse next year and a little worse the year after, and so on, and you might not wanna be around when it's really bad 50 or 100 years from now. But you might not care because you're only gonna be alive another 10 years, let's say, if you're a pretty old person. But still, these things come along sometimes faster than you think and in ways that you don't expect. And so it's, it's wise, I think, to just try to make the world a better place in any way you can, even though you might not reap all the benefits.

    13. TFTim Ferriss1:21:57

        Hmm. Yeah. Hear, hear. I've... I recall a conversation a friend had with an engineer I won't name, very famous founder, and they were, they were discussing artificial intelligence, and the two questions were, for anyone who this particular founder would speak to about AI, he said, "Number one, I ask them, 'Do you have kids?' And number two, I ask them, 'Do you know how to code?'" And the, the do you know how to code is kind of self-explanatory. It's engineering bi- bias, which is understandable. But the do you have kids was to evaluate if they are thinking sufficiently long term.

    14. ETEd Thorp1:22:33

        Uh-huh.

    15. TFTim Ferriss1:22:33

        That was just one of the hurdles that he hoped people would pass. And if not for your own kids, if you don't have kids, then just think about your closest friends and their kids or their grandkids. I mean, there are many ways to look at it. Ed, I so enjoy our conversations. I know we've only had two long-form conversations thus far. I hope this is, is just the second of more. And people can find you certainly online, edwardothorp.com. Your books, Beat the Dealer, Beat the Market, and A Man for All Markets, subtitle From Las Vegas to Wall Street: How I Beat the Dealer and the Market. Is there anything else you would like to point people to? Any other recommendations that you would like to make, requests of the audience other than what you just requested?

    16. ETEd Thorp1:23:21

        No, I think, uh, we've covered everything. Thank you. It's been a pleasure.

    17. TFTim Ferriss1:23:24

        All right. Well, thank you so much, Ed, as always. And for people listening, we will include resources, everything we discussed, links to all of the books and concepts and so on at tim.blog/podcast, or better yet, just go to tim.blog/thorp, T-H-O-R-P, and we will add, uh, as many helpful things as me and my team can think up and cull from this interview. And until next time, be a little kinder than is necessary, think long term, become a little more inner directed, learn a little bit more about probability statistics-

    18. ETEd Thorp1:23:57

        [chuckles]

    19. TFTim Ferriss1:23:57

        ... and mathemagic. I w- I will link to that, and thanks for tuning in

Episode duration: 1:24:22