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Being Ethical Is Long-Term Greedy.html
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<p>![[Naval-Ep41.mp3]]</p>
<p>If you cut fair deals, you will get paid in the long run</p>
<p>Ethics isn’t something you study; it’s something you do</p>
<p>
<strong>Nivi:</strong> In the “How to Get Rich” tweetstorm you listed
things you suggest people study, like
<a href="https://twitter.com/naval/status/1002107869209096192"
>programming, sales, reading, writing and arithmetic</a
>. One of the items that ended up on the cutting-room floor was ethics,
which you also suggest people study.
</p>
<p>
<strong>Naval:</strong> I was going to put that out as a concession to
people who believe making money is evil and that the only way to make it
is to be evil. But then I realized ethics is not necessarily something you
study. It’s something you think about—and something you do.
</p>
<p>
<strong>Ethics isn’t something you study; it’s something you do</strong>
</p>
<p>
Everyone has a personal moral code. Where we get our moral code differs
for everybody. It’s not like I can point you to a textbook. I can point
you to some Roman or Greek text, but that’s not suddenly going to make you
ethical.
</p>
<p>
There’s the
<a href="https://en.wikipedia.org/wiki/Golden_Rule">Golden Rule</a>: “Do
unto others as you would have them do unto you.” Or there’s Nassim Taleb’s
<a
href="https://www.google.com/search?client=safari&rls=en&q=nassim+taleb+silver+rule&ie=UTF-8&oe=UTF-8"
>Silver Rule</a
>, which is, “Don’t do unto others what you don’t want them doing unto
you.”
</p>
<p><strong>Trust leads to compounding relationships</strong></p>
<p>
Once you’ve been in business long enough, you will realize how much of it
is about trust. It’s about trust because you want to compound interest.
You want to work with trustworthy people for long periods of time without
having to reevaluate every discussion or constantly look over your
shoulder.
</p>
<p>
Over time you will gravitate to working with certain kinds of people.
Similarly, those people will gravitate to working with other ethical
people.
</p>
<p><strong>Being ethical attracts other long-term players</strong></p>
<p>
Acting ethically turns out to be a selfish imperative. You want to be
ethical because it attracts other long-term players in the network. They
want to do business with ethical people.
</p>
<p>
If you build a reputation for being ethical, people eventually will pay
you just to do deals through you. Your involvement will validate deals and
ensure they get done; because you wouldn’t be involved with low-quality
stuff.
</p>
<p>
In the long run, being ethical pays off—but it’s the <em>very</em> long
run. In the short run, being unethical pays off, which is why so many
people go for it. It’s short-term greedy.
</p>
<p><strong>Being ethical is long-term greedy</strong></p>
<p>
You can be ethical simply because you’re long-term greedy. I can even
outline a framework for different parts of ethics just based on the idea
of long-term selfishness.
</p>
<p>
For example, you want to be honest because it leaves you with a clear
mind. You don’t want two threads running in your head, one with the lies
you tell —and now have to keep track of—and the other with the truth. If
you are honest, you only have to think about one thing at a time, which
frees up mental energy and makes you a clearer thinker.
</p>
<p>
Also, by being honest you’re rejecting people who only want to hear pretty
lies. You force those people out of your network. Sometimes it’s painful,
especially with friends and family; but over the long term you create room
for the people who like you exactly the way that you are. That is a
selfish reason to be honest.
</p>
<p>
<strong>If you cut fair deals, you will get paid in the long run</strong>
</p>
<p>
Negotiations offer another good example. If you’re the kind of person who
always tries to get the best deal for yourself, you will win a lot of
early deals and it will feel very good.
</p>
<p>
On the other hand, a few people will recognize that you’re always
scrabbling and not acting fairly, and they will tend to avoid you. Over
time those are the people who end up being the dealmakers in the network.
People go to them for a fair shake or to figure out what’s fair.
</p>
<p>
If you cut people fair deals, you won’t get paid in the short term. But
over the long term, everybody will want to deal with you. You end up being
a market hub. You have more information. You have trust. You have a
reputation. And people end up doing deals through you in the long run.
</p>
<p>
A lot of wisdom involves realizing long-term consequences of your actions.
The longer your time horizon, the wiser you’re going to seem to everybody
around you.
</p>
<p>Envy can give you a powerful boost, or it can eat you alive</p>
<p>![[Naval-Ep42.mp3]]</p>
<p>
<strong>Nivi:</strong> Do you want to tell us about jobs you had growing
up and the one that kicked off your fanatical obsession with creating
wealth?
</p>
<p>
<strong>Naval:</strong> This gets a little personal, and I don’t want to
humble-brag. There was a thread going around Twitter—_Name Five Jobs
You’ve Held_—and every rich person on there was signaling how they’ve held
normal jobs. I don’t want to play that game.
</p>
<p>
I’ve had menial jobs. There are people who had it worse than me and people
who had it better than me.
</p>
<p>
<strong
>Suffering through the wrong thing can motivate you to find the right
thing</strong
>
</p>
<p>
At one point in college I was washing dishes in the school cafeteria and
said, “F this. I hate this. I can’t do this anymore.” I sweet-talked may
way into a teaching assistant job for a computer science professor, even
though I was completely unqualified. The job forced me to learn computer
algorithms, so I could TA the rest of the course.
</p>
<p>
So my desire to learn computer algorithms came out of the suffering I
experienced washing dishes—not that there’s anything wrong with washing
dishes; it just wasn’t for me.
</p>
<p>
I had an active mind. I wanted to make money and earn a living through
mental activities, not through physical activities. Sometimes it takes
suffering through the wrong thing to motivate you to find the right thing.
</p>
<p><strong>Being a lawyer was not what I was meant to do</strong></p>
<p>
Back in the day I had a prestigious internship at a big New York City law
firm. I basically got fired for surfing
<a href="https://en.wikipedia.org/wiki/Usenet">Usenet</a>.
</p>
<p>
This was before the Internet was a big thing. Usenet hosted newsgroups,
and it was the only the only thing keeping me from being completely bored.
I was an overpaid intern wearing a suit and tie. I got to hang out in the
conference room and make photocopies when lawyers needed them.
</p>
<p>
I was bored out of my skull. This was pre-iPhone (thank God for Steve Jobs
for saving us all from unending boredom). I used to read
<em>The Wall Street Journal</em> or anything I could get my hands on. I
would’ve read the back of a brochure to keep from going insane, because
listening to a bunch of corporate lawyers discuss how to optimize details
of a contract is really dull.
</p>
<p>
They wanted me to sit there quietly and not read the paper. They got mad
and said, “That’s rude. That’s misbehavior.”
</p>
<p>
I got called up and reprimanded a bunch of times. I was finally
terminated—sent home in shame from my prestigious internship, destroying
my chance to go to law school.
</p>
<p>
I was unhappy… for all of <em>an hour</em>. Ultimately, it’s one of the
best things that ever happened to me. Otherwise, I would have ended up a
lawyer. Not that I have anything against lawyers; it’s just not what I was
meant to do.
</p>
<p>
<strong
>Envy can be a powerful booster, if it doesn’t eat you alive</strong
>
</p>
<p>
<strong>Nivi:</strong> You mentioned a catering job that kicked off your
obsession with wealth.
</p>
<p>
<strong>Naval:</strong> That was an envy thing. When I was in high school,
I needed a job to pay for my first semester of college.
</p>
<p>
It was the summer of 1990 or 1991. This was the Bush Senior recession—if
anyone listening was alive back then to remember it—so it was actually
really hard to get a job.
</p>
<p>
I ended up working for a catering company serving Indian food. One day, I
had to serve at a birthday party for a kid in my school. So I was out
there serving food and drinks to all of my classmates. That was incredibly
embarrassing. I wanted to hide away and die right there.
</p>
<p>
But you know what? It’s all part of the plan. It’s all part of the
motivation. If that didn’t happen, I probably wouldn’t be as
motivated or as successful. It’s all fine. It was definitely a strong
motivator.
</p>
<p>
In that sense, envy can be useful. Envy also can eat you alive if you let
it follow you around your entire life. But there are points in your life
when it can be a powerful booster rocket.
</p>
<p>Principal-Agent Problem: Act Like an Owner</p>
<p>
If you think and act like an owner, it’s only a matter of time until you
become an owner
</p>
<p>A principal is an owner; an agent is an employee</p>
<p>
Nivi: We spoke earlier about picking a business model that has leverage
from scale economies, network effects and zero marginal cost of
replication. There were a few other ideas on the cutting-room floor that I
want to go through with you. The first one is the principal-agent problem.
</p>
<p>
Naval: So mental models are all the rage. Everyone’s trying to become
smarter by adopting mental models. I think mental models are interesting,
but I don’t think explicitly in terms of mental-model checklists. I know
Charlie Munger does, but that’s just not how I think.
</p>
<p>
Instead, I tend to focus on the few lessons I’ve learned over and over in
life that I think are incredibly important and seem to apply almost
universally. One that keeps coming up from microeconomics—because as we’ve
established, macroeconomics is not really worth spending time on—is what’s
called the principal-agent problem.
</p>
<p>
In this case it’s a principal, who is a person; rather than a principle
that you would follow. A principal is an owner. An agent works for the
owner, so you can think of an agent as an employee. The difference between
a founder and an employee is the difference between a principal and an
agent.
</p>
<p>A principal’s incentives are different than an agent’s incentives</p>
<p>
I can summarize the principal-agent problem with a famous quote attributed
to Napoleon or Julius Caesar:
</p>
<p>“If you want it done, Go. If not, Send.”</p>
<p>
Which is to say: If you want to do something right, do it yourself;
because other people just don’t care enough.
</p>
<p>
Now, the principal-agent problem pops up everywhere. In microeconomics,
they try to characterize it this way: The principal’s incentives are
different than the agent’s incentives, so the owner of the business wants
what is best for the business and will make the most money. The agent
generally wants whatever will look good to the principal, or might make
them the most friends in the neighborhood or in the business, or might
make them personally the most money.
</p>
<p>
You see this a lot with hired-gun CEOs running public companies, where the
ownership of the public company is distributed so widely that there’s no
principal remaining. Nobody owns more than 1% of the company. The CEO
takes charge, stuffs the board with their buddies and then starts issuing
themself low-price stock options, or doing a lot of stock buybacks because
their compensation is based directly tied to the stock price.
</p>
<p>If you can work on incentives, don’t work on anything else</p>
<p>
Agents have a way of hacking systems. This is what make incentive design
so difficult. As Charlie Munger says, if you could be working on
incentives, don’t work on anything else.
</p>
<p>
Almost all human behavior can be explained by incentives. The study of
signaling is seeing what people do despite what they say. People are much
more honest with their actions than they are with their words. You have to
get the incentives right to get people to behave correctly. It’s a very
difficult problem because people aren’t coin-operated. The good ones are
not just looking for money—they’re also looking for things like status and
meaning in what they do.
</p>
<p>
As a business owner you are always going to be dealing with the
principal-agent problem. You’re always going to be trying to figure out:
How do I make this person think like me? How do I incent them? How do I
give them founder mentality?
</p>
<p>
Only founders can fully appreciate the importance of a founder mentality
and just how difficult and gnarly principal-agent problem is.
</p>
<p>When you do deals, it’s better to have the same incentives</p>
<p>
If you are a principal, you want to spend a lot of your time thinking
about this problem. You want to be generous with your top lieutenants—in
terms of ownership and incentives—even if they don’t necessarily realize
it; because over time they will and you want them to be aligned with you.
</p>
<p>
When you do business deals, it’s better to have an aligned partnership
where you both have the same incentives than a partnership where you have
the advantage in the deal. Because eventually the other person will figure
it and the partnership will fall apart. Either way, it’s not going to be
one of those things that you can invest in and enjoy the benefits of
compound interest over decades.
</p>
<p>
If you’re an employee, your most important job is to think like a
principal
</p>
<p>
Finally, if you’re in a role where you’re an agent—you’re an employee—then
your most important job is to think like a principal. The more you can
think like a principal, the better off you’re going to be long-term. Train
yourself how to think like a principal, and eventually you will become a
principal. If you align yourself with a good principal, they will promote
you or empower you or give you accountability or leverage that may be way
out of proportion to your relatively menial role.
</p>
<p>
I’m always impressed by founders who promote young people through the
ranks and allow them to skip multiple levels despite their lack of
experience. Invariably it happens because this agent—who’s way deep down
in the organization—thinks like a principal.
</p>
<p>
If you can hack your way through the principal-agent problem, you’ll
probably solve half of what it takes to run a company.
</p>
<p>
Nivi: The reason I asked about this one first is because I feel like I
never see the principal-agent problem in my work. I tend to work in small
teams where everybody is highly economically aligned, and the people have
been filtered for a commitment to the mission, and everybody else who
doesn’t work out moves on to another role elsewhere.
</p>
<p>
Naval: These are all heuristics that you have designed to avoid having to
deal with the single biggest problem in management.
</p>
<p>Deal with small firms to avoid the principal-agent problem</p>
<p>
Another example of a heuristic that helps you route around the
principal-agent problem is to deal with the smallest firms possible. For
example, when I hire a lawyer or a banker or even an accountant to work on
my deals, I’ve become very cognizant about the size of the firm. Bigger
firms—all other things being equal—are generally worse than small ones.
</p>
<p>
Yes, the big firm has more experience. Yes, they have more people. Yes,
they have a bigger brand. But you’ll find the principal and the agent are
highly separated. Very often the principal will sell you and convince you
to work with the firm, but then all the work will be done by an agent who
simply doesn’t care as much. You end up getting substandard service.
</p>
<p>
I prefer to work with boutiques. My ideal law firm is a law firm of one.
My ideal banker is a solo banker. Now, you’re making other sacrifices and
trade-offs in terms of that person’s resources—and you are betting big on
that person. But you’ve got one throat to choke. There’s no one else to
point fingers at; there’s nowhere to run. The accountability is extremely
high.
</p>
<p>
If you are an agent, the best way to operate is to ask, “What would the
founder do?” If you think like the owner and you act like the owner, it’s
only a matter of time until you become the owner.
</p>
<p>Kelly Criterion: Avoid Ruin</p>
<p>![[Naval-Ep44 1.mp3]]</p>
<p>Don’t ruin your reputation or get wiped to zero</p>
<p>Don’t bet everything on one big gamble</p>
<p><strong>Nivi:</strong> Let’s chat about the Kelly criterion.</p>
<p>
<strong>Naval:</strong> The Kelly criterion is a popularized mathematical
formulation of a simple concept. The simple concept is: Don’t risk
everything. Stay out of jail. Don’t bet everything on one big gamble. Be
careful how much you bet each time, so you don’t lose the whole kitty.
</p>
<p>
If you’re a gambler, the Kelly criterion mathematically formulates how
much you should wager per hand, even if you have an edge—because even when
you have an edge, you can still lose. Let’s say you have 51-to-49 edge.
Every gambler knows not to bet the whole kitty on that 51-to-49
edge—because you could lose everything and won’t get to come back to the
average.
</p>
<p>
Nassim Taleb famously talks about
<a href="https://medium.com/incerto/the-logic-of-risk-taking-107bf41029d3"
>ergodicity</a
>, which is a fancy word for a simple concept: What is true for 100 people
on average isn’t the same as one person averaging that same thing 100
times.
</p>
<p>
<strong
>Ruining your reputation is the same as getting wiped to zero</strong
>
</p>
<p>
The easiest way to see that is with
<a href="https://en.wikipedia.org/wiki/Russian_roulette"
>Russian roulette</a
>. Say six people play Russian roulette one time each, and each winner
gets $1 billion. One person ends up dead and five people get $1 billion.
Compare that to one person playing Russian roulette six times with the
same gun. They are never going to end up a billionaire—they will be dead
and worth zero. So risk-taking—especially when the averages that are
calculated across large populations—is not always rational.
</p>
<p>
The Kelly criterion helps you avoid ruin. The number one way people get
ruined in modern business is not by betting too much; it’s by cutting
corners and doing unethical or downright illegal things. Ending up in an
orange jumpsuit in prison or ruining your reputation is the same as
getting wiped to zero—so never do those things.
</p>
<p>Schelling Point: Cooperating Without Communicating</p>
<p>![[Naval-Ep45.mp3]]</p>
<p>
People who can’t communicate can cooperate by anticipating the other
person’s actions
</p>
<p>Use social norms to cooperate when you can’t communicate</p>
<p><strong>Nivi:</strong> Let’s talk about Schelling points.</p>
<p>
<strong>Naval:</strong> The
<a
href="https://www.lesswrong.com/posts/yJfBzcDL9fBHJfZ6P/nash-equilibria-and-schelling-points"
>Schelling point</a
>
is a game theory concept made famous by Thomas Schelling in his book,
<a
href="https://books.google.co.id/books?id=7RkL4Z8Yg5AC&printsec=frontcover&dq=The+Strategy+of+Conflict&hl=en&sa=X&ved=0ahUKEwin7MHuw6njAhX58HMBHe2OC3YQ6AEIKjAA#v=onepage&q=The%2520Strategy%2520of%2520Conflict&f=false"
><em>The Strategy of Conflict</em></a
>, which I recommend.
</p>
<p>
It’s about multiplayer games where people respond based on what they think
the other person’s response will be. He came up with a mathematical
formalization to answer: How do you get people who cannot communicate with
each other to coordinate?
</p>
<p>
<strong>Use social norms to cooperate when you can’t communicate</strong>
</p>
<p>
Suppose I want to meet with you, but I don’t tell you where or when to
meet. You also want to meet with me, but we can’t communicate. That sounds
like an impossible problem to solve—we can’t do it. But not quite.
</p>
<p>
You can use social norms to converge on a Schelling point. I know you’re
rational and educated. And you know I’m rational and educated. We’re both
going to start thinking.
</p>
<p>
<em>When will we meet?</em> If we have to pick an arbitrary date, we’ll
probably pick New Year’s Eve. <em>What time will we meet?</em> Midnight or
12:01 a.m. <em>Where will we meet?</em> If we’re Americans, the big
meeting spot is probably New York City, the most important city.
<em>Where in New York City will we meet?</em> Probably under the clock at
Grand Central Station. Maybe you end up at the Empire State Building, but
not likely.
</p>
<p>
<strong
>You can find Schelling points in business, art and politics</strong
>
</p>
<p>
There are many games—whether it’s business or art or politics—where you
can find a Schelling point. So you can cooperate with the other person,
even when you can’t communicate.
</p>
<p>
Here’s a simple example: Suppose two companies are competing heavily and
hold an oligopoly. Let’s say the price fluctuates between $8 and $12 for
whatever the service is. Don’t be surprised if they converge on $10
without ever talking to each other.
</p>
</body>
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