Notes on The Knowledge Project podcast episode with Shane Parrish and Kunal Shah.

Lessons to be learned from the Indian business cast

Kunal: I think the first lesson was, they have much lower shame than the other communities. They have very little self doubt when it comes to being shameless. I mean, they’re very hard to offend. They’re okay even if you mock them. As long as you are giving them business, they’re okay with that. Not many people would be okay with that treatment. Right?

In a way, this seems similar to the Jews back when they were the only money managers. Handling money was considered shameful and nobody wanted to do it since it meant a loss of status. The Jews didn’t care, because they had different standards in their communities. They took the business and many got rich from it.

It depends on what you’re optimizing for. If you optimize for money, you can arbitrage from people who optimize for status and vice versa.

The second piece (I learned) is just a natural understanding of where is the value in everything. Why would somebody pay for it is almost intuitively taught from childhood. You just know what are people really paying for. And a natural understanding of which products would have higher gross margins or lower gross margins. (…) they love to break things down to unit economics almost as if the small talk is unit economics, which is quite interesting.

The third lesson is a natural need for spotting trends. So, one of the things that is there, I’m part of the Gujarati community, which is the business community of India. And they have this greeting when the two business people meet. Normally people say, “Hey, hello, how are you? What’s up?” They have one more thing which is called Shu Nava Juni, which means, hey, what’s trending? What’s new. What are the new trends? And they share that on a more regular basis, which makes them spot new trends and be in businesses that other people would take a long time to enter into (…)

Both these lessons are great examples of lenses to see the world. If your primary lens is about unit economics and spotting market trends, you’ll be much better positioned to discover business opportunities. You just walk around and see businesses with great margins or growing trends everywhere. It’s much easier for you to start a successful business in one of those opportunities that other people with different lenses don’t even have on their radar.

And the last lesson was constantly having the need to make their community successful by giving them a soft landing if their business fails. Oh, it’s okay. Come start doing a job. Stabilize and start again.

On the importance of knowing your hourly rate

Kunal: Unless you know your salary and hourly basis, you will never really know what the value of time is.

This is a very helpful heuristic. Give yourself an hourly rate. Based on this rate you can make better financial decisions. If you value your time at 20$ per hour you should make different decisions than if you value it at 200$. In the first case you might drive to a store across town to get a new laptop which is 20$ cheaper. In the second case you definitely shouldn’t.

On the value of inefficiency

Kunal: What creates emotional arousal is rarely through efficient methods. For example, trips to inefficient places will be more memorable than efficient places by design.

What makes experiences worthwhile is the extent to which they’ve been difficult to obtain. The view from a mountaintop is much better if you’ve hiked to its peak instead of taking the cable car. Beer tastes much better after a hard day of physical labor than after sitting on the couch and watching TV.

This principle also transfers to business:

Kunal: So, if you think about a hard-to-scale business, let’s say this great restaurant. You can’t make a chain out of it. It’s just impossible. Right? Because the guy can’t teach all the skills to build five chefs, 10 chefs. Right? But they’re also hard to destroy cause if it really works, there are so many restaurants that work for hundreds of years because they have perfected that. But they can’t build branches, they can’t do.

In general, what is hard to scale is often hard to copy.

On status as the fundamental driver of behavior

Kunal: By design, gross margins exist when you allow human beings to jump their social status, and gross margins disappear when you do not help them increase their social status.

For example, I will keep moving utility provider as long as they keep offering me lower price as long as the time required and the effort required is the same. The department of your brain that deals with that is the CFO of the brain who’s only looking for cost cuts.

But the CMO of your brain is saying that, oh my God, if I crack HBS, I will be able to jump the social status and my income will multifold. And therefore, it is okay to spend your time and money, to get a chance to get into the Ivy League. And therefore, the Ivy league can keep increasing the gross margin with no trouble because they promise, or even if they give you hope.

Kunal frames the reason for gross margins directly related to status. So first, there’s the basic value of goods and services for practical reasons (like having energy or getting from A to B). Competing in such an arena will always be a battle of pricing and lead inevitably to a race to the bottom. However, we gladly pay a premium for an increase in status. There isn’t any tangible increase of utility for us but the increase in status promises benefits in our society and addresses our core human need for recognition.

He mentions the correlation between social status and income. Increasing ones perceived social status by getting an Ivy league degree, will lead to an increase in income. In his reasoning, this isn’t because of skill, but because of the increase in perceived status.

On trust and innovation

Shane: We trust people who are like ourselves. And so, the more diverse society is, the fewer people that are like us, the more low trust we are in general. (…)

Kunal: (…) There’s one more nuance. If it becomes too similar, innovation dies. If becomes too dissimilar, trust dies. So it seems to be in an interesting spectrum that you can only have a certain mix that keeps driving things to move forward versus it becomes stagnant and boring and too chaotic.

This spectrum of trust and creativity is interesting. A certain level of trust is necessary to collaborate and do anything meaningful together. However, if there is too much of it we won’t challenge each other and question the status quo. On the other extreme of the spectrum, too much diversity leads to a multitude of perspectives and creative solutions, but it also leads to the erosion of trust and conflict.

Delta 4 Framework

Kunal: I found that the evolution of startups was very similar to biological evolution and nobody was thinking like that.

(…)

All the efficiency exists in the future. So humans are constantly moving from inefficiency to efficiency in one direction, and almost like arrow off time.

And therefore, any product or service that changes you from state A, which is inefficient to state B should unlock something that is called wealth. So I built a simple framework, which sounds simple, but most people still don’t use it is let’s say, I asked you that. What do you think is the efficiency score of booking a cab through Uber on 10 or versus the old method that existed of booking cabs? Whatever that method was. Most people would say, “Maybe this is seven, eight on 10. That is maybe two on 10, one on 10, three on 10.” So the framework was very simple that every time the Delta of efficiency score is greater than equal to four, three things happen. It’s an irreversible behavior. Once you experience a Delta 4 product or service, you cannot go back.

There is obviously very, very high tolerance. That’s the second thing that you may hate Uber, but you’re not going to be like, “Dam it, I’m going to delete this app and I’m going to move to a more inefficient behavior.”

Humans when they discover something Delta 4, they can’t stop bragging about it everywhere. Almost like a secret quote all humans have with each other that every time you discover Delta 4, brag about it and tell everybody about it and move the entire humanity from straight A to straight B, which is more efficient, which reduces their local entropy and moves them forward to a more efficient, medium, which burns less energy in the form of time, money, or wealth to move forward to more efficient methods.

On hunting insights

So I think I find these things super fascinating, and sometimes I believe that I do business only to hunt more insights in life. It looks like my core purpose of life is to hunt insights. And sometimes I have to build things to find insights. Sometimes I have to talk to people and find insights. Sometimes I read people and find insights, but , I can do this all day long nonstop, and I’m constantly trying to meet people. I write to professors all the time. I will write to authors all the time, to get them to respond to me on some hypothesis I have, or some question that I have. I think being shameless is the most important ingredient in ability to connect dots.

This is a big area of growth for me. Reaching out to people you admire is such a big potential multiplier. The insights it could generate the relationships that it could build… It doesn’t take much effort and the only obstacle is fear.

On Envy

(…) envy is hyper local. It’s like wifi. It works only in a local radius, right? I don’t feel envious with Elon Musk. It’s not even in my network. So humans have this unique thing of having envy in a hyper local network.

Pair this with reading about mimetic desire.

Decision Making

Kunal: So I have seen that one good framework of decision making is talking to champions of that field of decision making, somebody who has more choices usually has ability to make better decisions than people who have lesser choices. Let me explain what I mean by that. A Person who’s likely to be able to get anybody to marry them and they have the ability to do that, are likely to be better at taking decisions on how to marry somebody right. And it sounds weird, but choices just make them better, right? Or an investor that can invest in any company is likely to become better on how to pick companies, right? So I think the expertise of decision making is usually in people who have more choices than others. In fact, according to me, the simplest definition of success is also about having more choices than other people, in that perspective field that you think about.

This is somewhat counterintuitive. We tend to dismiss people’s advice who are too dissimilar to us. The guy that could marry everyone because he’s so charismatic and good looking? Well, I don’t look like that guy so it’s completely different for me… The same with the billionaire advising about money. The advice doesn’t apply to me, I don’t have as much capital.

Emotions in decision-making

And I think that usually does not fail, but I believe that a lot of people are making decisions through emotion, which is a hit or miss thing, but problems to solve are, or to feel are through emotions. Right? So for example, a lot of times founders are like parents, who sometimes just know intuitively something is wrong with their kid or their startup or their company. But emotions are not good enough to solve the problem, but they are very good at knowing intuitively something is off.

So I think (…) using emotions to detect symptoms is great. Using emotions to solve or make decisions is terrible.

On the value of reading biographies

Kunal: I think the only good use of reading a autobiography or biography is to be able to answer this question, that would Elon do this? Would Steve do this?

Shane: To the other point about asking yourself, what would Steve do or what would Elon do? One of the reasons I find this so helpful is that it, the source of all of our biases are blind spots. We can only see through our frame of reference, but the world exists outside of our frame of reference. And when you ask yourself, what would Warren do? Or what would Steve do? Or what would Kunal do? What you’re really doing is you’re getting out of your own head and you’re seeing the world through a different lens. And that in and of itself starts to reveal blind spots. And the source of all bad decisions is blind spots. Because if you knew what was going to happen, you would obviously never make a poor choice. Everything makes sense based on how you see the world.

And so what you’re really doing is you’re shifting your frame of reference, which is the only thing that I’ve ever seen helpful at avoiding cognitive biases in the future. Because cognitive biases are so good at explaining why we made a mistake, but retrospectively in the past, here’s why you screwed up. And it’s like, well, that’s great. How do I use this information to make better decisions in the future? And it’s like, actually that’s really tricky. The smarter you are, the more likely you’re not going to be able to do that, checklists don’t matter. When I talked to Daniel Kahneman, he said the exact same thing. He’s like, I’ve studied this for 60 some years and I’m no better at avoiding them. And I’m like throwing my hands up, going well, what the heck? But what I have seen being super useful at avoiding them is to think less of them as cognitive biases and think about frames of reference.

Do I have the right frame of reference to see this problem? And how can I shift my frame of reference to see it through a different lens through somebody else’s eyes. And that comes down to curiosity too, right? And truth seeking, because I want to see the world through your eyes. I want to see what it looks like, see what you think. I don’t have to agree with it. And I think that’s where people instantly tune out they’re, oh, I don’t agree with the way that you… No, I want to understand how you see the problem. What interconnections you see what variables you see and it’s through that reflection that I’m going to get more insight into the problem.

Kunal: It’s funny, you were saying this. All the people who are seemingly very good at decisions, they tend to have multiple personalities in thinking about situations. They can almost think like five different people at the same time and they can become different people and see blind spots of that.

Shane: And explain the problem exactly through the lens of that person.

A culture of high performers

Shane: Well, it is so fascinating, right? Because there’s attracting high slope individuals, there’s retaining high slope individuals. And then there’s a sort of natural selection where if you allow a certain number of people who are average or low slope, if you will, to permeate the organization, it changes the environment. Basically another way of saying high performers want to work with high performers.

And if people see, if you’re working with somebody who is a high performer, you are better, right? The standards are raised, even if you’re an average, you’re slightly above average now because you want to work harder. You’re learning more, you’re excited to go to work. It becomes less of a job and you’re more all in, but the minute a high performer is surrounded by people who are mediocre performers. They want to leave, they get frustrated, they get cynical. There’s a clock on how long that they stay in that organization or a clock on how long they stay engaged.

Kunal: Yeah. And therefore, companies who obsess for revenue per employee naturally retain talent density a lot more by design because they do not kind of regress to mean if you will, in many ways. Because mean is unfortunately very, very boring for high performers, because imagine you are in all hands or a town hall and the quality of questions have become so terrible. You’re like, whose company is this?

In my personal experience, high performers will also get worse in such an environment. Their standards get a bit lower, they care and try a bit less. If they stay at the company they’ll inevitably regress to the mean. If you notice this yourself, it’s time to switch to a different culture, or you’ll be suppressing your potential.