#28 Michael Mauboussin: A Decision Making Jedi

**Shane Parrish** (0:07)
Hello, listeners. Welcome to the Farnam Street Podcast called The Knowledge Project. I'm your host, Shane Parrish, the curator behind the Farnam Street blog, which is an online community focused on mastering the best of what other people have already figured out. The Knowledge Project is where we talk with interesting people to uncover the frameworks that you can use to learn more in less time, make better decisions, and live a happier, more meaningful life.
On this episode, I have Michael Musabin. Michael is one of my favorite people to talk with. This dude is a true polymath. He's the Director of Research at Blue Mountain Capital Management. Prior to that, he was the Head of Global Financial Strategies at Credit Suisse and the Chief Investment Strategist at Legg Mason Capital Management. He's also the author of three books, including one of my favorite multi-disciplinary reads, More Than You Know, Finding Financial Wisdom in Unconventional Places. As you'll see, when the two of us get together, we geek out over decision making. This conversation will not disappoint.
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Michael, welcome back to the show.

**Michael Mauboussin** (2:20)
Thanks, Shane. Great to be with you.

**Shane Parrish** (2:22)
You were the first podcast guest we ever had on The Knowledge Project, which was almost two and a half years ago.
Bring me up to date. What have you been working on in the last few years since we chatted last?

**Michael Mauboussin** (2:32)
Well, Shane, I think it's a lot of the same stuff. And really what I've been trying to do is deepen some of the themes that we've been working on. So just a couple examples. One, I think we talked briefly about some of Kahneman's work on the inside versus the outside view and really the application of base rates to improve the quality of forecasts and decision making. And in that regard, we really try to do some deep dives, especially in corporate performance, to understand a large sweep of history in terms of corporate performance for sales growth and gross profitability, earnings growth, and so forth.
Some of the more recent stuff I've been working on that's fun, I've been doing a lot of research on the concept of comparing things. And it turns out, right, comparison is actually something that comes quite naturally to us as humans.
And it's been a deep study of cognitive psychology for decades, but not surprisingly, we're not very good at it. So that's another area where I've been doing a really big deep dive. But more of the same, a lot of work on decision making, but again, thinking about the sweep of things from how are markets efficient or inefficient, thinking a lot about still issues around valuation, and thinking a lot about what makes for a good business and sustainable competitive advantage.

**Shane Parrish** (3:57)
Where have you landed on with base rates? And talk to me about a little bit of the nuances that you've come up with in terms of how you apply them to make more effective decisions.

**Michael Mauboussin** (4:07)
Yeah, it's really super. So just to take one step back, the concept here relates to a notion that Daniel Kahneman popularized, but it's been around for a while, and he calls it the inside versus the outside view. So the inside view basically says, if I present a problem to you, the way we all tend to cope with it is to gather lots of information, to combine it with our own experience and inputs, and then we project into the future. And almost all problems we deal with in that fashion. And what psychologists have come along and said is, you know, what you should probably do is start with something called a base rate, and basically asking the question, what happened when other people are in this situation before? And I should mention, it's not a natural way to think, because you have to find the base rate and defer to it, and you have to sort of leave aside your own experience and inputs, and we all are sort of slow to discount our own views of the world. So, that's the basic idea, and I think there are a couple of things that come out of this that are extremely rich.