Archive for November, 2009

10
Nov
09

in praise of small changes

Recently I’ve been posting about the way small changes can make a dramatic difference over time. I really think this concept needs to be applied to education as well. Progressions in difficulty need to be defined, and students need to be put in positions where they can succeed. They must be allowed to succeed, to allow that dose of dopamine, to get their behavioral conditioning going and to build a sustainable habit of fun and learning. So much of human potential remains untapped because we don’t realize the subtle conditions required to bring out that potential. Sometimes working hard is the wrong thing to do, and working easy is the way to go.

Students are frequently misplaced in school. The student that received a C in mathematics because his family life was not stable and hence he could not concentrate not only pays the penalty of that year, but also pays compounding interest in the following years. A C in a prerequisite subject leads to more bad grades because topics are clearly more difficult when you do not even know the prerequisites. For a young student this obstacle requires a Herculean effort to overcome, and I would say nine times out of 10 (or worse), these conditions lead to a downward spiral. Strangely enough, this would imply that a teacher would be doing what’s best for a child by failing them rather than allowing them to pass without having adequately demonstrated ability. Failing a child and allowing them to leave school to focus on resolving family stability issues would be more productive rather than attempting to force a student through the material in my opinion.

In sports, where performance is king, this kind of method has always been obvious. Teachers could learn a lot about how to bring out human potential from coaches. I think this is part of why I’ve always loved basketball.

08
Nov
09

How do you know if someone is a good investor?

I’m trying to determine what I should do with my savings, and purely out of curiosity, I’d like to find the answer to the question, “Can an investor actually outperform the index?”

Which immediately brings me to Warren Buffet and The Superinvestors of Graham and Doddsville. Clearly, they’ve well outperformed the index and all follow a coherent strategy. The question then, is this pure luck or is it skill? I think this question is extremely difficult to answer and no one has a definite answer, and hence the value of charlatanism is high in investment. After all, if there were rigorous ways to define investor performance, then there is the implication that we know what the optimal strategy was, and how close to the optimal strategy the investors got. People pretending to be good investors could not be masked by luck.

But as it is, no one knows. In poker, the correct strategy depends only on what cards the players possess, and from that you can measure whether or not someone made the right move or not. The optimal strategy is certainly evident given full information. The only variable that is hard to define is the human on the other side of the table, e.g. (The optimal strategy may be to bet to receive a call, but the opponent will only call bets of value at most X, therefore you should bet X to extract maximum value, if you bet too much you will extract no value from a fold).

In contrast to investing, the way to evaluate a poker player’s skill is on a play by play basis, and not so much on the return a poker player receives on his play. A good poker player eventually makes enough good decisions such that his return will reflect his good play. The number of decisions a poker player makes during the lifetime of his/her career allows this convergence.

In investing, the landscape is incredibly complex, since anything that can happen in the world can effect a players performance. In poker, this would be the equivalent of poker cards suddenly changing or extra cards being thrown into the deck at random times. The expected value of your decisions changes randomly over time, and hence your initial calculation is frequently wrong unless you’re lucky and the world doesn’t change in a way that effects your decision. If you foresaw 9/11, then I applaud you.

Most people cannot predict the future. So how can we make an investment decision that takes this fact into account? I believe the Value Investment strategy of “margin of safety” plays a key role here. It assumes that the initial calculation of expected value is wrong and looks for room for mistakes. The larger the “margin of safety,” the more likely you will make a good return. As a poker player, I find this to be a sound strategy for making better decisions.

So how do you find the “margin of safety?” This implies that you can draw a line in the sand that says how much a security is worth, and this is probably the most difficult part. A margin of safety on the wrong line is deadly. I’m not sure how Buffet does this now, since I think it is practically impossible to find stocks trading below their “instrinic value” (what a company would be worth if it just sold off all its assets). I think he may be simply buying during times when the herd is afraid.

The other problem is that how many performance-measurable decision events does an investor make during a career? Is it enough to allow returns to reflect skill? I’ll let someone else tackle this one.

08
Nov
09

understanding your passion

Finding out what you are passionate about is typically difficult. I’d say that most people don’t know what they’re passionate about, or what passion is in concrete terms. But generally everyone will agree with the statement that passion is necessary for success. Why? Because passion creates motivation, and motivation is the fuel of hard work and practice.

I’ve come to realize I’ve had passing interests in many things, but I’m starting to believe that the way you can identify your passion is to simply let your mind wander, and see where it goes. If you frequently find yourself daydreaming about art, or writing a book, creating a company, becoming a chef, I think you’ve found the inklings of “passion.”

And I think passion is delicate, it can easily be squashed by negative experiences or it can be nurtured in a virtuous cycle to become something truly special. Which leads me to games.

Recently, there’s been media coverage of the success of social games. If you try to play any of these games (I’ve tried playing Cafe World), you will realize that there is a large component of “leveling up.” In other words, you take certain actions to improve your ability or status in the game, and are rewarded in the game by some form of positive feedback such as more experience points or money or items. There is also progressive difficulty in terms of levels, such that as the player becomes more capable, the goal of reaching the next level is made increasingly difficult.

I was chatting with a friend over dinner recently, and he told me that his theory of what makes games fun is that they are a metaphor for life. We constantly are trying to achieve and improve in life, and tangible rewards, accomplishments, and achievements are forms of positive feedback that push us along these paths. Maybe this is why people escape to video games, because in their own life they have not been able to “level up” – possibly due to outlandish expectations for the next level, or some other environmental phenomena preventing progress and reward for progress.

This leads to the interesting conclusion that to stoke the fires of passion, we must use goal-setting and motivation theory from psychology. Set goals that are reasonably achievable, and in the beginning they should be quite easy. Accomplishing the goal is typically its own reward. Increase the difficulty as you go along such that the task is not too difficult nor too easy. This is the virtuous cycle of what may otherwise be called intrinsic motivation. I think this is also why I’ve frequently heard of professional coaches avoiding putting athletes in positions where they will fail badly or be humiliated, as these elements most likely reduce motivation. People must have goals where they occasionally fail, but if the goals are hopeless then they may lose motivation.

02
Nov
09

Helping teachers better serve their students

There’s a problem in the textbook market – it’s a broken market. The consumers (students) are forced to buy the text for the classes they take as recommended by the professor. This system is problematic because students cannot choose substitutes and hence there is no real competition. This causes textbooks to be expensive and lower quality than they should be. Perversely, professors, by making strong recommendations for textbooks, all act individually for their own benefit to the detriment of the whole group because of these dynamics.

The project I’m working on now, has the potential to solve this problem for courses here at Stanford. The main tool for solving this problem is creating a proper feedback loop between teachers and students that doesn’t currently exist. The interactivity and duplex nature of the web is what’s going to make this happen. Professors, in general, are good people and want to do right by their students, but the problem is they don’t have any real idea of how students are doing or what they think about the course. My personal vision for CourseWare is the realization of this proper feedback loop which can fundamentally change the “broken market” element of education.




 

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