Brené Brown and Edward O. Thorp — The Tim Ferriss Show

Start (00:00:00)

• Brené Brown, a research professor at the University of Houston, and Edward O. Thorp, a mathematician and professor emeritus at the University of California, Irvine, were guests on The Tim Ferriss Show podcast.
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Notes about this supercombo format. (00:06:22)

• Tim Ferriss introduces the super combo episodes, a curation of the best moments from over 700 episodes of his podcast to celebrate its 10th anniversary and surpassing 1 billion downloads.
• The goal is to feature both well-known and lesser-known guests who have had a transformative impact on Ferriss' life.

Enter Brené Brown. (00:07:25)

• Brené Brown is introduced as a research professor at the University of Houston and a bestselling author known for books like "Atlas of the Heart," "Dare to Lead," and "The Gifts of Imperfection."

Changing in a lasting, meaningful way. (00:07:46)

• Brown believes that lasting and meaningful change requires self-acceptance as the driving force.
• Performance-driven change may work temporarily, but self-acceptance is crucial for sustained transformation.

Is self-accepted complacency possible? (00:08:19)

• Brown challenges the idea of self-accepted complacency, arguing that she has not encountered anyone who is complacent while also being driven by self-acceptance.
• She suggests that complacency and self-acceptance are mutually exclusive concepts.
• Brown acknowledges the existence of complacent narcissists who love themselves but argues that this form of self-acceptance is disabling and hinders lasting behavioral change.
• She emphasizes the importance of addressing self-loathing and negative emotions within oneself to achieve true and lasting change.

My woo confession about a crux skill. (00:11:09)

• Brené Brown confesses that she is considering writing about the importance of developing self-awareness and the inner game, despite the risk of losing a portion of her audience who may be more focused on external achievements.
• She believes that self-awareness is the crux skill that underlies all other forms of performance improvement.
• Brown acknowledges that many high achievers are miserable and she is interested in exploring the reasons behind this.

Narcissism: the shame-based fear of being ordinary. (00:13:22)

• Brené Brown clarifies that narcissism is not about self-love, but rather a shame-based fear of being ordinary.
• She defines narcissism as grandiosity driven by high performance and self-hatred.
• Brown suggests that many people in her audience, including herself, may have narcissistic tendencies.

Efficacy isn’t always efficient. (00:14:22)

• CEOs often seek help with team dynamics and interpersonal issues rather than productivity or efficiency.
• Self-awareness and behavior change are crucial but not always efficient processes.
• People may desire a quick and efficient path to self-awareness, but it often requires time and effort.

Pathology as armor that can’t be discarded. (00:16:04)

• Humans have a fundamental need to be seen, known, and loved, and to see, know, and love others.
• Complacency and many perceived pathologies are often protective mechanisms developed to avoid being hurt.

What are you unwilling to feel? (00:16:44)

• A quote from meditation teacher Tara Brach suggests that the only real question that matters is: "What are you unwilling to feel?"
• Reflecting on this question can be a valuable practice for personal growth and self-awareness.

Discarding armor that no longer serves us. (00:17:20)

• People who have experienced trauma or abuse may develop armor to protect themselves emotionally.
• This armor can become a burden and prevent personal growth and relationships.
• The developmental milestone of midlife often prompts people to confront their emotional armor.
• There are two responses to this confrontation: embracing the challenge and doubling down on denial.
• Offloading pain is easier than feeling it, but it causes more pain in the long run.

Curiosity as midlife’s superpower. (00:21:42)

• Curiosity is the superpower for the second half of our lives.
• It keeps us learning, asking questions, and increasing our self-awareness.
• Trauma is universal, and everyone has experienced some level of it.
• The trauma message in our body is to protect ourselves at all cost.

There’s trauma for all of us. (00:23:09)

• Trauma is not limited to those who have experienced physical, sexual, or emotional abuse.
• People of color and those on the margins also experience trauma.
• Childhood trauma is universal, and everyone has experienced some level of it.

An 80/20 marriage hack. (00:23:49)

• The idea that marriage should be 50-50 is a myth.
• A more realistic approach is the 80/20 rule, where one partner can carry the other's 20% when needed.
• This requires open communication and a willingness to support each other.
• When both partners are at 20%, they need to create a plan to avoid hurting each other.
• When one partner is at a low point, the other can step up and provide support.

Decisions in a family-focused family. (00:25:34)

• The family decided to prioritize family well-being over individual interests.
• They agreed on a system where each family member can participate in two extracurricular activities.
• Decisions are made through a voting system, but the parents have veto power, which is rarely used.
• They have open conversations with their kids and respect each other's opinions.

Parenting from compliance to commitment. (00:27:20)

• The speaker believes in a parenting approach that moves from compliance to commitment.
• Children should initially comply with rules out of respect for authority.
• As they grow older, parents should provide explanations and reasons behind the rules to foster commitment to family values.
• This approach encourages children to make responsible decisions even when parents are not present.

Enter Edward O. Thorp. (00:29:47)

• Edward O. Thorp is introduced as a legendary blackjack player, hedge fund manager, mathematics professor, and author.
• He is known for his books "Beat the Dealer" and "A Man for All Markets."
• His Twitter handle is @EdwardoThorp.

Edward’s background, and what drew him to apply mathematics to gambling. (00:30:10)

• Edward O. Thorp, a mathematician, developed a winning strategy for blackjack during the 1950s.
• Thorp's strategy involved extensive calculations and was tested using large computers at MIT.
• After gaining validation, Thorp presented his findings at a conference, where it received unexpected attention.
• The success of Thorp's strategy led to widespread media coverage and the publication of his book on the subject.
• Thorp and his team successfully used the blackjack system to make a substantial amount of money in a short period.

Edward’s first blackjack trip to Vegas, reference materials used, and his meeting with Claude Shannon at MIT. (00:37:20)

• Edward started with a $10,000 bankroll and added $11,000 after 20 hours of serious play.
• He used a card with a set of rules for hitting, standing, doubling down, and pair splitting to play blackjack optimally.
• Edward was able to get time with Claude Shannon because Shannon was intrigued by his ideas about beating roulette.

Edward and Claude Shannon's collaboration on building a roulette-predicting machine. (00:37:20)

• Shannon was an ingenious inventor who built various machines, including robots and chess-playing machines.
• Edward and Shannon decided to collaborate on building a machine to predict the outcome of roulette games.

Edward and Claude's Method to Beat Roulette (00:40:29)

• Edward and Claude devised a method to beat roulette using the first wearable computer.
• The computer was worn by one person who entered information about the ball and wheel's position and velocity.
• The computer would instantly tell the other person where to bet based on musical tones.
• The person betting would quickly put down money on five neighboring numbers on the wheel.
• The method had a massive edge of 44%, resulting in huge piles of Dimes.

Despite being 89, Edward looks great for his age; he discusses his approach to staying in shape over the years. (00:42:32)

• Edward O. Thorp, at 89, shares his approach to health and fitness.
• He accidentally got into fitness at 20 after seeing people weightlifting and made a bet that he could double his strength in a year, which he achieved.
• In his 30s, he realized he was in poor cardiovascular shape and started running, eventually participating in 10-mile races and marathons until a back injury forced him to stop.
• Now, he maintains his fitness by walking, stretching, and doing core strengthening exercises.
• Thorp emphasizes listening to one's body and following the rule of "better than none" and "more up to a point is better than less" when it comes to exercise.
• He suggests starting with what one enjoys and gradually building on it, rather than making excuses.
• Thorp recommends race walking as a lower-impact alternative to running for an aerobic workout.
• As he has aged, his strength training has evolved to include bodyweight squats, dumbbell squats or lunges with an emphasis on one leg, pull-ups, and back exercises on the mat.
• Thorp's consistent focus on core strengthening has contributed to his longevity and overall fitness.

Edward explains how he got into finance and investing, and the people he met along the way. (00:50:38)

• Edward Thorp, a successful blackjack player and author, ventured into investing after gaining financial stability.
• He focused on studying common stock purchase warrants and realized their mathematical valuation potential, giving him an edge over others.
• Thorp collaborated with Sheen Kassouf, an experienced investor, and they co-authored the book "Beat the Market," launching their separate businesses.
• Thorp employed low-risk warrant hedges that consistently yielded a 25% annual return, attracting attention on campus and leading to account management for various individuals, including the dean of the Graduate Division.
• Through the dean's connection, Thorp met Warren Buffett, who was closing his partnership due to overpriced markets. Impressed by Thorp, Buffett entrusted him with his money, beginning a friendship and admiration for Buffett's future success.
• Inspired by Buffett's hedge fund, Thorp established his own highly successful hedge fund that operated for 20 years with exceptional returns and minimal risk.
• Thorp developed a mathematical model for valuing warrants and options in 1967 but kept it a secret for his investments.
• Fisher Black and Myron Scholes improved upon Thorp's model and published it in 1973, revolutionizing the options market.
• Thorp's traders initially had an advantage due to his prior knowledge and shortcuts in using the model, but the Tomic Clos partnership eventually caught up in 1988.
• Thorp emphasizes the significance of publishing research to gain recognition and contribute to the advancement of knowledge.
• Edward Thorp met Warren Buffett in 1956 and was impressed by his high rate of return, long-term success, intelligence, and ability to evaluate companies.
• Thorp believed Buffett had a significant edge in investing and was compounding his wealth at a rapid pace.

Thorp explains how Buffett turned a struggling textile company, Berkshire Hathaway, into his private mutual fund. (00:59:41)

• After closing his investment partnerships in 1968, Buffett acquired Berkshire Hathaway and used it as his personal investment vehicle.
• Many of Buffett's former partners chose cash over shares in Berkshire Hathaway, missing out on its tremendous growth.
• Berkshire Hathaway's share price increased from $12 in 1964 to nearly $500,000 in 2022.

Thorp discusses his decision to invest in Berkshire Hathaway in 1982 despite missing out on its initial growth. (00:59:41)

• Thorp recognized Buffett's investing acumen and believed in his long-term strategy.
• He bought Berkshire Hathaway shares at $982, even though he had missed out on the significant price appreciation from $12 to $982.
• Thorp's investment in Berkshire Hathaway proved to be a successful decision.

Edward discusses the frameworks he would teach in an investing seminar for modern students, including those without a strong math aptitude. (01:04:14)

• Teaches a hypothetical investing seminar for undergraduate or graduate students with varying mathematical abilities.
• The answer to long-term investing is simple but requires personal understanding and work.
• The simple answer is to buy and hold equities, specifically in the US, which have historically compounded at around 10-10.5% for the past 200 years.
• Buying and holding the index outperforms most other investment strategies due to lower trading costs, reduced volatility, and avoidance of investment advisor fees and taxes.
• The efficient market theory claims that outperforming the market is impossible, but there are instances where it can be done, such as Warren Buffett and Edward's hedge fund.
• However, achieving outperformance requires substantial time, effort, and attention to detail, and only a small group of skilled individuals consistently succeed.
• Without a significant advantage, investing based on stories or actively managed mutual funds is essentially betting against the odds.
• Despite the challenges, self-education in investing is valuable for gaining knowledge, potentially finding winning strategies, and learning about the world and life in general.
• Lessons learned from investing can be widely applied to other areas of life.

Edward shares lessons learned from investing that are transferable to other areas of life. (01:09:08)

• Edward Thorp discusses how lessons learned from investing can be applied to other areas of life, using risk as an example.
• In investing, avoiding significant risks is crucial as they can result in losing all capital and make it challenging to recover.
• Thorp applied this principle to the COVID-19 pandemic, considering the high mortality rate for unvaccinated individuals aged 85 and above.
• To mitigate this risk, he took precautions such as wearing a mask, avoiding crowds, and carefully assessing the risks associated with various activities.
• Thorp believes his cautious approach has been beneficial for him and his family.
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Edward, a long-term thinker at 89, offers advice for those who struggle to think beyond the short-term. (01:11:18)

• Edward Thorp, at 89, provides advice on long-term thinking and investing.
• He suggests investing in equities and holding them for a long period, such as 15-20 years or more.
• For those with a shorter time horizon, he recommends the 4% rule: spend 4% of your capital each year or less to make your money last throughout your retirement.
• For an even longer time horizon, such as an endowment fund, he suggests the 2% rule: spend only 2% of the capital per year to ensure the money grows in perpetuity.
• He also discusses the importance of staying invested during market downturns and not letting fear drive investment decisions.
• For intermediate-term investments (5-15 years), a modified version of the 4% rule may be suitable.
• Short-term investments depend on individual needs and financial situations.
• Edward categorizes people into different wealth ranges: poor (with limited savings and retirement challenges), middle class (able to save a moderate amount), and scared (easily swayed by market fluctuations).
• He advises the middle class to invest in equities and stay invested during downturns, while the scared may need more conservative strategies.

Edward explains how he discovered something suspicious about the Madoff brothers’ business practices 17 years before others caught on. (01:15:56)

• Edward Thorp discovered a suspicious investment scheme involving S&P index options that appeared to generate consistent monthly profits but was actually fraudulent.
• Thorp warned the McKenzie company about the scheme, potentially saving them from significant losses.
• Thorp later discovered that Bernard Madoff's investment firm was also a fraud through a comprehensive network analysis.
• Despite evidence and warnings, many investors continued to trust Madoff due to his reputation and the belief that others had thoroughly checked his operations.
• Thorp emphasizes the importance of independent thinking and analysis rather than blindly following the crowd or relying on popularity as a measure of truth.

Exploring mental models of externalities, the tragedy of the commons, and fundamental attribution errors. (01:24:33)

• Mental models are useful tools for understanding the world and can help explain unintended consequences of actions, known as externalities.
• Externalities can be positive, like buying fire insurance which benefits neighbors, or negative, like pollution from driving cars that contributes to global warming.
• The Tragedy of the Commons is a mental model that describes how individuals acting in their own self-interest can collectively harm the common good.
• The fundamental attribution error is a human tendency to make assumptions that are not fully justified by the evidence and is linked to our evolutionary "fight or flight" response.

Edward recommends reading and listening material for those who want to enact positive change in the world, politically or evolutionarily. (01:33:48)

• Edward recommends reading Ian Shapiro's book, "The Wolf at the Door," to learn how to form coalitions that can win and pass things that will stay in place.
• He also recommends reading Ray Dalio's book, "The Changing World Order," to understand the rise of China as an Empire and the decline of the United States as an Empire.
• Francis Fukuyama also has some fantastic writing that is worth exploring.
• Edward suggests reading up on the history of China to understand the three-dimensional chess of geopolitics.

Edward shares which investors, besides Warren Buffett, impress him and why. (01:39:07)

• Jim Simons of Renaissance Partners has achieved remarkable success since 1989 with a private operation that uses Ph.D.s, computers, math, and codebreaking.
• Simons's risk-adjusted record is considered the best in the world from that time forward.
• The book "The Man Who Solved the Market" provides more information about Jim Simons's approach.
• Edward Thorp does not currently have anyone he would give money to invest.
• Hedge funds generally charge too much for the general partner and leave too little for the limited partner.
• The income generated by hedge funds is highly taxed for taxable investors, making them only suitable for nonprofits or tax-exempt investors.
• Edward Thorp gave money to Ken Griffin's Citadel from its inception and was possibly the first investor after Frank Meer.
• Thorp knew Frank Meer from the past and had a good impression of Ken Griffin's intelligence and energy.
• Citadel planned to follow the same strategy that Thorp had used when he shut down his hedge fund, Princeton Newport.
• Thorp eventually exited Citadel due to the significant tax implications on his returns.
• Investing in an index fund provided better returns after considering the taxes and paperwork involved with Citadel.

Edward discusses how he balanced growing a business with personal life and what led him to wind things down. (01:43:08)

• Edward Thorp discusses his motivations for entering the investment world and his approach to balancing work and personal life.
• He emphasizes the importance of enjoying the journey and spending time with loved ones rather than focusing solely on wealth accumulation.
• Thorp shares his experience of starting out during the Great Depression and how he saved and invested part of his earnings from delivering newspapers.
• He highlights the trap of excessive wealth accumulation and the burden of managing multiple properties and personnel.
• Thorp explains that he decided to wind down his hedge fund when it became more of a chore than a source of enjoyment.
• Thorp describes the moment he realized he was no longer having fun and decided to exit the business.
• He emphasizes the importance of recognizing when work becomes a burden and having the courage to make a change.
• Thorp draws parallels between his experiences in academia and the investment world, highlighting the bureaucratic aspects that can detract from the fulfilling parts of the job.
• He concludes by expressing his preference for migrating towards fulfilling activities rather than being tied to a set routine.

Edward defines independence and shares how he spent his time after winding down the investment side of his life. (01:48:12)

• Independence means having the freedom to do what you want with your time.
• After winding down his investment career, Edward spent his time reading, traveling, exercising, enjoying his family and friends, and learning new things.
• Accumulating capital is one of the keys to achieving independence, as it allows your money to grow on its own.

Edward shares what he’s particularly curious about learning at the moment. (01:49:46)

• Edward is currently focused on learning about what's going on in American society and mapping out possible scenarios for the future.
• He believes that individuals should learn to think for themselves and question the information they are presented with in the media.
• Edward thinks that teaching people to think for themselves is the best way to improve society.

Reflecting on a conversation between Joseph Heller and Kurt Vonnegut, and other parting thoughts. (01:51:56)

• Brené Brown and Edward O. Thorp discussed various topics on the Tim Ferriss Show.
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