Michael Mauboussin: The Single Biggest Mistake Investors Make In Decision-Making | 20VC #945

Michael, this is such a joy to do. Obviously, I heard so many good things from our mutual friend, Bill Gurley. I've read every book that you've written. So, thank you so much for joining me today.

Thank you, Harry, I'm really pleased to be with you today. And I'm a big fan of- a big fan of your podcast.

That is very, very kind of you. Uh, I can't believe I actually get to do it for a job, to be honest. But I want to start with you. Um, you're- you're a celebrity in venture circles, um, and I want to start with a question from Bill Gurley which is, like, "What do you do, Michael?"

(laughs)

"And how do you spend your time today?"

Yeah, exactly. Well, my title is Head of Consilient Research for Counterpoint Global, which is part of Morgan Stanley Investment Management. We're a long-only, um, investment management firm. Uh, also have, uh, s- ventures, investment, uh, fund as well. But my job is really three parts. One is to work with our team on investment process, so things like, how do we think about markets, how do we think about valuation, competitive strategy, decision-making. The second part of the job is really doing research and, uh, that is thinking about topics and, and writing about them. And then finally is external things, things like conferences or, or podcasts or things like that. And the way I like to describe what I do is input and output. So try to find something that's interesting, spend some time to understand it, and then communicate it both internally and externally. So it's a, it's, for me, is a very fun and gratifying job and, uh, allows me to, uh, to pursue a lot of interesting things.

You said about input and output there, and that makes me think about kind of decision-making and process. But you've said some brilliant things before, especially on kind of luck and randomness. And you said randomness and luck are related, but there's a useful distinction between the two. What's the distinction between luck and randomness, Michael?

Yeah. It's a great question. I mean, let's start by defining luck. And, and by the way, this gets into philosophy very fast, but just to be, try to be practical, I'm gonna say luck has three conditions. It happens to an individual organization, so to you or your company or your favorite sports team. Second is it can be good or bad. Don't mean to subme- suggest that it's symmetrical, but there's a positive side and potentially then a negative side. And then third, and this is important, it's reasonable to expect a different outcome could have occurred. Right? So if we replay the tape of time, reasonable to expect a different outcome. So the way we think about randomness versus luck is randomness would be at the system level and luck would be more at the individual level. So for instance, every year in my class, I do a little exercise to demonstrate this point. I flip a coin and I ask the students to guess whether it's gonna be a head or a tail, right? We do a s- a bunch of them in a row. So what I know is, given the size of the class, that someone's very likely to get four or five in a row correct. The coin tosses themselves, assuming... I actually (laughs) I actually do it with a simulator 'cause I'm so bad at it. But, uh, the coin toss themselves, I'm gonna deem to be random. But if someone, if you're the one that calls four or five in a row correctly, I would call that to be l- I would call that luck. So one would be system level, one would be more individual level. And so when you think about investing, there may be a lot of randomness in the system, and some people are gonna be in the position to be lucky and hence they'll, r- their track record, for example, may look good as just beneficiaries of a, of, of a random system.