Incentives for the long game
Charlie Munger, who is Warren Buffet’s business partner at Berkshire Hathaway once said “Show me the incentives, I’ll show you the outcome”. According to Munger, a man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior [1].
Instant Gratification
Playing short game gives us instant results. I know that I am going to be happy browsing social media, rather than doing nothing and getting bored. I know that junk food is delicious and cheap and there’s no reason for me to eat salads when I am really hungry. The best part about playing the short game is not just knowing about the reward, but getting an assurance about the same and why would would someone not play such a game where happiness is guaranteed?
Short game drains you out
Short game is essentially a zero sum game, where one makes comparisons and aspire to quickly get better than the person next to them. Players are chasing status and going through this constant euphoria of ebbs and flows, where one moment they are happy and the other moment they are not.
Long game on the other hard is insanely tough. There are no guarantees of success, for a deadly pandemic would hit one day and one might regret not having fun. The purpose of this blog is to not rant about hard work and uncertainties of life, but more to circle back on Charlie Munger’s ideas about incentives, and thinking whether there’s an incentive system to keep playing the long game.
Shortening Feedback Loops
The reason why short game is so addictive is because the feedback loops are much quicker. If someone likes a picture you shared, that makes you feel good, and in-turn reinforces you to improvise and share pictures again. Feedback loops for long games on the other hand are uncertain, where you cannot discount what the future reward looks like, and that is sometimes demotivating.
Learning from this, can we divide our long game into a series of short games, and then divide those short games into a series of routines? Let’s say that I aspire to do something, and I don’t have a clue on how to do so. I can look at other people’s journeys or talk to people and come up with a list of actionable steps? I can also divide these small steps into a series of processes that I can measure, revise, and repeat until this feedback loop starts rotating by itself?
If I want to achieve D, and the plan that I come up is to do A -> B -> C -> D. I can just focus on doing A, and then audit the journey again once A is “achieved”? Things can change and a lot of assumptions that I previously had might not hold true, but that’s okay as long as I trust the process and keep correcting my course?
What would Dravid do?
I like to equate Test cricket with life, with so many parallels where both give you a second chance, test your patience and require you to address one moment at a time. The best batsmen like Rahul Dravid, emphasize on the intense net sessions, where they practice batting against the tough bowlers and not just hit half-volleys to feel good about themselves. He also talks about visualizing game scenarios, which enables him to get into the flow and imagine how facing the opposition would feel like. Dravid knew that he could make the maximum impact by playing out the difficult sessions, blunting the new ball and capitalizing on the bad deliveries, rather than just going out and hitting sixes from the first ball [2].
Can I learn from cricketers the self-belief that I just need to play each ball to it’s own merit and the game’s not over until the last ball is bowled? Can I also learn to switch off when I am at the non-strikers end so that the mental reserves are conserved when I am metaphorically on strike?
Thinking like an investor
Investing is essentially a long term game, where you allocate money into assets for potential economic benefit. I am fascinated by how investors make bets and keep investing their money for hypothetical returns?
Compounding
When you invest in some securities, there would be periodic payouts in terms of interests and dividends. The concept of compounding is to not take the payouts today and rather reinvesting the same so that your total wealth grows exponentially over a given period of time. Compounding looks good on paper, but you never know when a recession is going to hit and whether the asset would continue giving positive returns for a long period of time?
Value investors like Buffet spend a lot of time actively picking their bets. They only invest in industries that they have deep understanding about, look at business models and management teams before finally evaluating if the security is correctly valued or not. Buffet bets aggressively, and exits whenever things don’t pan out according to his hypothesis and instead places his bets somewhere else. He also likes to retain cash, so that he has the ability to invest in right opportunities at the right times.
If estimating returns on money seem difficult, it’s even more uncertain to estimate future returns for intangible assets like careers, skills, opportunities, locations and people. Maybe like Mr. Buffet, can I also undertake an honest evaluation of my skills, interests, values and place my bets in opportunities that I think are going to bring future rewards? Should I also periodically assess if my assumptions still hold true, or exit and place my bets somewhere else if they do not?
Investment Policy Statement
Before making investments, portfolio managers discuss with clients their willingness and ability to take risks, their investment constraints, their values their risk and return objectives and come up with a comprehensive decision making framework called the Investment Policy Statement (IPS). This IPS helps the investor avoid unnecessary risks and simplifies taking decisions, whenever in doubt. Can I also come up with a set of rules and frameworks for the long games that I want to play, and not make those avoidable mistakes?
Security Selection vs Asset Allocation
A set of people think that choosing the right securities can earn substantial wealth, and a set of people believe that choosing the right assets is a better option. A lot of successful people had the best education, have been experts in their fields and are now VPs at some of the best corporations. I am not an expert in anything and I know that I can never compete in this game of specializations. Just like how an investor would invest in assets with low correlation, can I also develop skills that I complement each other so that the net return on the portfolio grows, if not on individual securities?
Disincentivizing Short Games
Despite everything that I talked above, the incentives to play the short game are just too strong. Can I intentionally restrict dopamine seeking behaviors so that the reward system is rewired to not look for instant rewards? There’s a lot of reading material available on mindfulness, exercising, dopamine fasting etc. and I’ll not elaborate it here, but if my brain is not accustomed to always seek the easy way out, perhaps slogging for the long game won’t be so hard?
Playing the long game is a very complex topic, and I don’t think there’s a secret formula that one can apply. I hope this blog serves as an anchor to think and reflect on the incentive system. Do also let me know your thoughts?
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References:
[1] https://novelinvestor.com/charlie-mungers-tendencies-of-human-misjudgment/
[2] https://www.youtube.com/watch?v=QxYDQs08jgg
[3] https://qz.com/1612051/warren-buffetts-advice-on-delayed-gratification/
