E417: $20B Investor on Risk, Uncertainty & Adaptability

Most investors spend their careers trying to eliminate risk. David sits down with Alec Litowitz the founder of Qstar Capital, founder and former CEO of Magnetar Capital, and one of Citadel's earliest partners to explore the difference between risk and uncertainty, why adaptability is becoming the world's most valuable skill, how elite investors make decisions when there is no model to follow, and the cultural principles behind building one of the world's leading hedge funds. Alec also shares lessons from building Magnetar, working alongside Ken Griffin during Citadel's early years, hiring exceptional talent, creating organizations that continuously learn, why ego destroys great investing, and the core ideas behind his upcoming book The Adaptability Quotient.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Alec, I like to start with the idea that seems to tie together your investing career. The difference between pricing risk and uncertainty, what's the difference?

• 0:07Speaker 01

  Risk is a world where you have possibilities and probabilities. And so with possibilities and probabilities, I can do expected value. I can do mean variance optimization. It's a casino. It's rolling dice. I know there's a one, two, three, four, five or six, and I know there's a one-six chance. Doesn't mean you and I know what the next roll is going to be, but we can do the math around it. Uncertainty is slightly different. My focus has been on where is there no model? Where are things changing so much? There just is no model. And if I can go into those spaces and I can resolve the uncertainty, let me try to model where that world's going before everybody else does. Then I think that you can structure much better risk, upside, downside, opportunities.

• 0:49Speaker 01

  And then as other people catch on and it compresses over to risk, that's where you make your money.

• 0:55David Weisburd?

  And you've obviously become a billionaire pricing uncertainty. Give me an example of investment you made pricing uncertainty versus risk.

• 1:04Speaker 01

  So when I had graduated from grad school and I was at investment banking, I was hired in to go work with Ken at Citadel. It wasn't called Citadel at the time. I was there right before. We had a name the firm contest in 1994 and Citadel won. And he had a convertible bond arb business and he wanted me to do risk arb because he was worried about the impact of mergers on convertible bond pricing and particular ones that we hold. So he said, Alec, you gotta, it was February of 94. He said, I have to go be in 10 merger arb deals by April. I didn't even know what a risk arb was. There was no books on it. He's like, you can call the Bear Stearns desk. I talked to the converts desk. They have a risk arb desk. Ask them what to do. So I started talking to them and what I realized, because I'm the son of two psychoanalysts,

• 1:48Speaker 01

  it was always peel the onion back. Nothing was as it seems. So I started with the beginner's mind. I start looking at risk arb. And risk arb, about 92% of announced deals go through. But the market trades at like 87% goes through. So the market's giving you excess return to bear providing liquidity, et cetera. So I could have just said, that's risk. I know the possibilities. I know the probabilities across all these deals. Maybe I just play a bunch of deals, play a lot of them, and I get this extra return and I go home. But then I started asking the question, well, what makes deals break? I'm going to be in some then that break. Why did they break? Turns out they break for two big reasons. One is financing risk and the other is antitrust.

• 2:30Speaker 01

  Can I predict when the market's going to turn down when financing risk blows up? Can't. But antitrust, that was my favorite class in law school. So now I sit and say, so the deals that tended to trade at wider spreads, that more return, those tended to be the complex antitrust deals because people had no model. How do you model if the deal is going to go through or not? What do you do? And everybody basically called ex DOJ, ex FDC lawyers. You'd call them, they used to work there and you'd say, what's the probability of this deal going through? And they would say 70, 30. What do you do with that? If I make an investment and it blows up, can I go back to my investor and go, well, my lawyer said it was 70, 30. Is that good enough? Well, what does the DOJ and the FTC do? How do they do this?

• 3:14Speaker 01

  They're not experts on every industry. Well, they call customers, competitors, suppliers. They try asking, how does this industry work? Is this bad for the industry? Who's at good, bad? So what I effectively wound up building over time, before there was a GLG, before there was a consulting network, I built an internal group of hundreds and hundreds of consultants and industrialized the process of gathering that information. A long time ago, there was a merger between Boeing, McDonald, Douglas. There's three wide body aircraft manufacturers in the world, Boeing, McDonald, Douglas and Airbus. If two of them merge, you basically get blocked. When you go from three to two, you get blocked. But the deal went through. Why did the deal go through? What I realized was, hmm, there's a Paris airshow going on.

• 3:58Speaker 01

  Well, who goes to the Paris airshow? All the manufacturers of the planes, all the buyers of the planes. So I sent someone to the Paris airshow. There were no other arb's. Nobody else was there. And we started talking to the people, looking at the planes, talking to the CEOs, talking to the companies that were the buyers. So if you dial up in the Yellow Pages, can I talk to the person at United that buys the plane? Click, you're not going to get anywhere. So it was, how do I solve? I have this unknown that I need to know. How am I going to go after it? So for me, that's an example of you can peel things apart, figure out where the uncertainty is. The edge is usually greater there. As soon as everybody else figures out if it's going through or not, that edge is gone.

• 4:38David Weisburd?

  Said another way, there's things that are fundamentally unknowable, things that are knowable. You might have a coin flip. So you know that it's going to be 50% heads, 50% tails. That's risk.

• 4:47Speaker 01

  Yes.

• 4:47David Weisburd?

  So that's perfectly priced. But a sports game, you might know that the home team wins 60% of the time. And people just assume that there's no other factors to it. But then as you add more and more factors and as you start to model that out with more granularity, you start to predict, maybe you could predict 65 versus 35. And that's what you've been able to do across your career.

• 5:08Speaker 01

  You said something really important that's very subtle. And that is not all uncertainty is resolvable. And the question is, can I resolve it or not? So let me give you an example of a failure of mine. Okay. Doing almost the alternative of the example I gave of Boeing, McDonald, Douglas. Many, many years later, there was a merger between ABV and Shire. I don't know if you remember, there was this time period where everybody was doing these tax inversion mergers. They were effectively merging into a shell, into a foreign entity that made them pay a lot less taxes. And I sat and said, I'm really good at this regulatory stuff. I know how to look at antitrust really well. Can I figure out whether this is going to get approved or not? And at that point, if you remember, this was in the teen, in the 2014-ish, the Treasury

• 5:52Speaker 01

  came out and said, we're not sure what we think of everybody evading taxes doing this. And everybody started announcing these mergers. Well, I did what I normally do. I tried analyzing that. I think I understood the deal really well. We were talking to everybody we could. And we had a very large bet that the deal would go through. And we had done a lot of great analysis. And I mean a very large bet. When we ultimately were on the wrong side of this, losing a large amount of money. We're not talking tens of millions of dollars. And what I realized that I had done wrong in hindsight, compared to the Boeing, McDonald, Douglas, is the following. In Boeing, McDonald, Douglas, I could call customers, competitors, suppliers. Those are feedback loops. I could poke and get answers back. I couldn't talk to anybody at Treasury and it was just up to a few people.

• 6:37Speaker 01

  So I took my confidence, my skill that we had built up as an organization in resolving one set of uncertainty and said, you can do it so easily. But really, the answer was that uncertainty either couldn't be resolved because it was in the heads of one or two people at Treasury. There was no feedback loops to check on other people. Or I couldn't resolve it. I conflated my confidence of understanding the nuance and following things along with, this is not an uncertainty that I can resolve. Unfortunately, sometimes you evolve your mental models only by going through painful experiences. For me, one of the things is I want to go where uncertainty is, but I want to go where it's resolvable. And the biggest tell on that is do some probes, get feedback loops.

• 7:22Speaker 01

  And if you're hearing nothing back, migrate on to the next opportunity you have where you can resolve the uncertainty.

• 7:30David Weisburd?

  I want to get into how you built out the group at Citadel, Magnetar Capital, which now has over $20 billion in your family office in a bit. But as I was preparing for this interview, I spoke to a lot of mutual friends and they've talked about your tenacity and your obsession. Where does that come from?

• 7:48Speaker 01

  Well, I think that's a good question. I think it comes from my childhood. I mean, first of all, I'm the son of two psychoanalysts. And I think I alluded to that before, but I mean, my mom was a PhD in linguistics and it was a pretty intense childhood. I'm very close to my parents, but I mean, to give an example, I would walk by my parents and I would say, are you happy? And my parents would say, Alec, Alec, happy is a strong word. What's your definition of happy? Come over here, let's have a meaning of life discussion. So there was sort of this intensity, I felt like Neo dodging awkward questions like in The Matrix. It was just, it was tough. And it made you think, you're constantly, constantly thinking about what is an illusion and what's reality and what's underneath. So that's one. The second was that I was the youngest of three boys. And part of it is probably nature as well. I mean, I was very competitive.

• 8:32Speaker 01

  I played Monopoly before I could read. Just always interested in sports and competing and trying to win. There was an intensity to just constantly and to be in a constant state of improving, ingesting information, improving, ingesting techniques, tools. It's either good or bad for those around me. I think I've mellowed as I've gotten older. I'm almost 60, but I don't think anybody who knows me would call me mellow. But I actually think I was even more intense when I was younger. So depending on who you spoke to and how long ago they worked with me, everybody would probably say that is born. But I think it really comes out of the nature of my childhood, really.

• 9:06David Weisburd?

  I've seen this in a lot of the world's greatest founders is they had to activate their brain at an early age. They were either hyper-villigent or in Elon Musk's, he was literally bullied at school and beat up. And they had to, in essence, grow up early and they started to develop their mental capabilities at extremely young age.

• 9:25Speaker 01

  It's a good point. And I guess maybe I should add one thing to the environment in which I grew up. One of the things that I did early on, and I think I was forced a little into doing it, and I do think some of the people you mentioned also have this ability. There are people who can be at multiple sort of, I call it telescoping in my book, multiple altitudes of abstraction. So I could be in risk arb and then I could be zooming up and looking down on it, looking at the structure of it. And then you could do that multiple layers up and down. So I grew up thinking things were a system. Everything is a system, right? You need to learn the system. What are the rules of the system? What is the model you have for a system? And so my family was a system. Games were a system.

• 10:10Speaker 01

  School was a system. You go into investing, risk arb's a system. And so I just had this attitude of breaking it apart, building it up at multiple levels. Eventually, well, maybe we'll talk about, but one of the great things about going to Citadel and working with Ken is Ken is a very big systems thinker, right? So I first got there, never done any trading in my life, go into these 10 risk arb deals. So now I'm thinking about trades. But then I'm thinking about the industry of risk arb. I learned pretty early on, well, is it about trades or having an optimal portfolio of trades? Then I, well, wait a minute. What about the business of building a hedge fund? And what does it mean to? Build a firm that can scale portfolios continuously.

• 10:53Speaker 01

  What does it mean to build a firm that can adapt and find new opportunities, go into new areas? So these are just different layers. You can be a trader, you can be a portfolio manager, you can be a business builder. When you grow up in the environment that I did, you were in a constant state of seeing the levels between things, both from my parents and otherwise. I think some of the best investors I know are able to be in multiple places, take something and look at it from multiple angles, all at the same time, and have a pretty good idea where other people are like, well, haven't you seen enough? Are we ready? Sometimes you see something someone else doesn't, and that becomes the load-bearing assumption. Some of the people have that capability of zooming up and out.

• 11:38David Weisburd?

  To go back to Elon Musk, that's something that I think is extremely underrated about him. He sits down with every engineer for five minutes and he focuses on their number one bottleneck. So you talk about going deep in the system, literally rocket scientists working on a specific engine, and he is able to go into the deepest weeds. And then he's able to go at the highest level at the most abstraction, which is, what is that? That is memes on Twitter. It's not even words, it's images that he realizes could affect billions of people. So he has this full stack of the most technical, most specific industry knowledge to the most generalizable abstractions that don't even fit in words, they're literally images.

• 12:20Speaker 01

  I've been investing in SpaceX since 2018, and one of the attributes I saw in him, not knowing specifically where his business would go, you've got the physics level, he says, I'm only bounded by the laws of physics. You've got the engineering level, then you've got manufacturing, then you've got commercialization, then you've got beyond commercialization, regulatory bodies, the public. There's so many layers there. To be world-class at one of them is a challenge. To be able to zoom up and out of that stack, down and up on a moment's notice, at a second's notice, is astonishing. It's very, very rare. Some of the smartest people I know and the most successful people in the investing industry, they can be in a trade, they can be in the portfolio, but they're very often thinking

• 13:05Speaker 01

  about the business of their business, right? And how do I institutionalize in a proper way? One of the other things that, doing what he does, that is incredibly impactful, aside from the focus on him, is that when you can do that in an organization, from the trade level to the portfolio, all the way up and down across the organization, when you are up and down like he is, having that dialogue, you are conveying multiple things, not just his ability and his value add. You're teaching people abstracted back out, not just about what they're doing, but about how the whole organization thinks and acts as an adaptive entity. I think that gets lost on people. If he was up in some ivory tower and not having those interactions, they'd have less

• 13:49Speaker 01

  understanding of, how does he think? How do we all think? And then how does it tie across so that everybody works in this very fast, unbelievably quick iterating? That's a culture, I'm not working at SpaceX, but that is a culture of cognition and adaptation that is quite unique, and it's why he's been so successful, in my opinion.

• 14:08David Weisburd?

  And you built a top financial institution in terms of Magnitour Capital, which today has over $20 billion in assets. What's an example of how were you able to instill that into the culture?

• 14:17Speaker 01

  Well, it goes a little back to what you said before about personality and intensity, but I hope it starts from the top. If you talk to other people, that in many ways I'm demanding, I want excellence. But what I try to be demanding about is also of myself, right? And so part I think of the culture comes from, I don't care if I'm right or wrong, I want the right answer. I have a phrase in my book, and I say it's everybody at the firm. It's better to make decisions right than make the right decision. If I assemble a great group of people and we make great decisions collectively, then we're doing a great, we're doing something really well. There's a balancing act, I think you're probably aware, there's a balancing act as a trader between confidence and humility, right?

• 15:00Speaker 01

  There is something about going to that uncertainty. You don't have perfect information, but having enough of a strong opinion, weakly held, I call it, to actually make a decision and act, but the humility to go, I might be wrong, I'm going to get feedback, and if I get the feedback, I don't care if I immediately change my mind, I don't care. And so I think part of it was that sort of like culture of, I was on the trading desk, I was doing risk card with everybody, I was doing a venture of investing. There hasn't been a business that we've had at the firm at Magnitour, built it and was there for 17 years, and even now I was with Dave Snarderman most of yesterday, pretty close to them, I'm not running it day to day. There is a culture there of sort of collective action, non-silos, where the entity itself

• 15:44Speaker 01

  is learning, updating, not individuals. Some of that, seeing people, how they act, actually executing on it and living it. When someone sees me stand up and go, I just screwed that up, here's what I got wrong, and we're going to just get it best right the next time, as opposed to laying blame on anything. And so for me, it's always been the process, integrity in the process, passion, all of these sort of attributes that make this flywheel work. Ultimately, that rubs off, and then you hire great people and they improve that process. The culture of excellence, I call it collective AQ, the collective ability to create an adaptable organization.

• 16:25Speaker 01

  Magnitour doesn't look anything like it did when we launched, probably doesn't look that much like it was back 10 years ago. So we're in a constant state of, where's the uncertainty? Once that gets resolved, you move on and find the next uncertainty. But as an organization, one of the reasons why a lot of organizations focus on risk and not uncertainty, is they're built wrong. They're built for a stable environment, they're built to be very efficient at finding and executing on small pieces of risk, leveraging it, hoping their models right, their risk models. But when regime shifts occur, look at the world right now. I mean, if I said to you, real estate, semiconductors, power, you might have said, that's a pretty good diversified portfolio, but it's all correlated to one hypothesis right now.

• 17:08Speaker 01

  So your old risk model that used historic correlations doesn't work going forward. Having a firm of people that are very focused on what is changing, zooming out, asking the right questions is really critical.

• 17:21David Weisburd?

  That's Goodhart's Law that we were talking about. The things that get measured are the things that are known. There's this reversion to measuring things that we know, because measuring the unknown, there's just a higher failure, right?

• 17:33Speaker 01

  And people don't like uncertainty. I mean, humans don't like uncertainty. If we see something uncertain, we like to give an explanation, usually something historical, and we collapse it very, very quickly, too quickly. We're not willing to be open to new possibilities because it's an uncomfortable spot. It's like the Voltaire quote, uncertainty is uncomfortable, but certainty is absurd. It's just, how can you be certain? I'm not certain about almost anything, and yet I've had huge trading positions. I have a very strong opinion, and I keep poking at it until it tells me I'm wrong, but it doesn't stop me from having the position and growing it as I get more conviction.

• 18:05David Weisburd?

  Everyone I talk to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of the information gathering for you every day, and most tools are very good at sounding right. The summary reads clean, but can you trace it back to the filing, the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern. A missed filing, a missed weighted source, a context that got lost somewhere in the retrieval chain, those aren't edge cases, they're how decisions go wrong. AlphaSense is the AI market intelligence platform built specifically for this. They own the content, over 500 million curated documents from broker research and expert

• 18:49David Weisburd?

  transcripts to filings and earning calls, and they own the retrieval layer on top of it. So every answer links back to an exact verifiable source, because the answer is only as good as what's underneath it, and with AlphaSense, you know exactly what that is. The edge goes to whoever could trust their information and prove it. See it for yourself. Start your free trial at alpha-sense.com/HowIInvest. That's alpha-sense.com/HowIInvest. It's a pet peeve of mine when I hear people say, science has proven this. Science has not proven anything. Science has disproven the null. And the only certainty we can know is that, as of today, this is the best working theory.

• 19:30David Weisburd?

  And the lack of humility that sometimes even in the scientific community is a bit baffling.

• 19:35Speaker 01

  Amen. I think you have hit it exactly on the spot. All we try to do is poke at why something's not right, and all we can say is that, this is the best answer we have so far. I say it in the same thing in investing. Every opinion you have, everything that you think is right, is on loan. It's provisional, always subject to being changed by the next marginal piece of information. That can be exhausting. A lot of people say, that's an exhausting way of living through life, that you're always monitoring and on watch. That's what the best investors, they're always on watch. They're always looking at what's coming around the corner that's going to disprove their thesis. It's funny, everybody wants to be, well, what's most important is how you learn, being the fastest to learn. Sometimes it's more important to be the fastest to let go. Let go of an old theory, right? You said, I have it, it's on loan.

• 20:20Speaker 01

  If I get in marginal information, how quick are you willing to let go of that? Or how much do you need to hold on to it and be right? I don't want to be right, I want to be correct.

• 20:29David Weisburd?

  Previously, I had Cliff Asness, CIO of AQR, and I talked about the concept of holding through a market crash. How do you hold? Unwittingly, I didn't realize how much more difficult it was than it even seemed, because what he would do through a market crash is, every day he would wake up, and he would try to figure out what parts of his model, what could he not be seeing? And people would come in and pitch him, this is maybe what you're not seeing, this is maybe why this time is different, this is why this trade's not working. And he would say, no, no, no. So it was the absence of knowledge that he was holding. It wasn't that he knew that he was right, he hadn't yet found that he was wrong. And being able to hold through these heroic trades, especially in liquid markets like AQR, to me is just such an underrated skill.

• 21:10Speaker 01

  I was actually with Cliff yesterday. Watching the World Cup. And yeah, he's got some, he's built an incredible business. He's a great entrepreneur. He's a great investor. And there's another way of saying that, using a different phrase, I guess, which is that people think that when you make decisions, that there's people who are listeners and they're really technically savvy and they understand being Bayesian and thinking where you update your opinions. You're always poking at the opposite of your hypothesis to see if it pops up. It's the same thing advice I give to young people when they're starting careers. It's just as important to figure out what you don't want to do. It's not always going for certainty. A lot of times it's, what is it that I don't want to do? Who, what do I not want to focus on?

• 21:55Speaker 01

  What am I not good at? Who do I not want to work with? That's a perfectly okay way of going about figuring out what you want to do is to find and explore, especially when you're young. So I think you have to be incredibly open. That's all signal, right? I mean, you should want feedback loops and you should be always poking, always.

• 22:13David Weisburd?

  I'm thinking a lot about this concept of playing to win versus playing not to lose. And so few people actually play to win. And the way to actually play to win is constantly take calculated risks and try to improve the model itself versus trying to be right again. Oh, this is a 300th time you've done the same trade. You've gotten the 10% return over and over. That's playing not to lose. And I think so few organizations actually play to win versus play not to lose.

• 22:39Speaker 01

  I might take that. It's a very nice way of describing what I describe in my book, maybe slightly more complex. Could have used your help when I was writing it. But what I say in the book around decision making is when you're not sure of something, what do you do? Well, when you go experiment, you make bets that you can recover from. So in your example, you're not going to spend all of your capital on a new marketing strategy. But if it's not that expensive, you bet. And what you're not trying to do, you don't care about the outcome. What you care about is learning, right? Normally, when you make decisions, you optimize for the outcome. But when you're uncertain about something, you're optimizing for learning. As you learn, you become more confident. And then at some point, as you learn and you're like, wait, I have a better day than

• 23:23Speaker 01

  anybody else, that this new marketing is going to be great. Now you bet much more, right? Because you've resolved the uncertainty. You've realized, I got feedback loops, people are liking this, I'm going to start putting a lot more in. That sounds a lot like a minimally viable product or an A B test, like you probe, you get feedback and you start to pile into something. And I consider that to be a form of learning, updating, that gives you the confidence, maybe before anybody else, to then go bigger. That function of switching the mindset to, initially, when you're going after uncertainty, you're trying to learn, not optimize. As you learn, you begin to be able to invest much bigger because you've resolved it.

• 24:06Speaker 01

  And now you're back into the risk world, only you're the only one with the odds. You're the only one with the advantage because you've figured it out first.

• 24:13David Weisburd?

  Sergey Brin used to say that at Google, the number one criteria, whether a project was successful or not, was whether the organization learned. They were just focused on how does Google as an entity get better versus does this specific project, does this specific product? Because they understood what they were building. They weren't building product number 79. They were building Google Inc. And if Google Inc. could get better, if employees could get better, downstream of that would be better products. And he was able to make that trade off and they institutionalized that across the entire company.

• 24:45Speaker 01

  There are four parts if you're successful at that. One is what I call sensing. So is somebody at the organization coming up with a new idea? So someone has the idea. Then there's communication. They have to be able to communicate and feel comfortable communicating back in to the organization. And there's no fear for saying, I have an idea. It's different. We haven't done it before. And then the organization itself has to update as an organization collectively. And then the organization has to be willing to act and make a change. So it's like four pieces to it. And all of that is about creating an organization that functions adaptively, which you just described. Google does that. It's all four of those pieces together.

• 25:24David Weisburd?

  I've really been thinking about this philosophically, just going down this rabbit hole on this playing to win versus playing not to lose. And one of my theories is that it's not actually losing money that people are concerned about. You make 10 million profits, you put in $100,000 into this project. I don't think people are worried about that. I think people are worried about betting their ego and their ego being wrong.

• 25:47Speaker 01

  I think you're right. I talk a lot inside any organization that I've built, this concept of strong opinions weakly held. Part of the reason I want to have a name for it is to separate the decision from the ego, right? Someone has asked me, I'm confused, strong opinion, weakly held, that's an oxymoron. What does that even mean? No, no. The strong opinion is, I've thought about lots of possible solutions to this problem. This is the best one I could see right now. I've looked at the facts. I've tried to look at it clearly, not biased. This is what I think is the best path. But I hold it weakly. If, it's got to get tested in reality. When reality comes, am I holding on to the idea because I came up with it and it's my ego? Or am I holding on to the process?

• 26:31Speaker 01

  Meaning that I want everybody in my organization to attach their ego to being adaptive. If you force people to attach their ego to being adaptive, it requires them to want to change their mind if the evidence changes. Otherwise, they're failing to be adaptive. So there's almost a switcheroo going on there where you make the production function adaptability and not about being right. It's all provisional. We have a strategy. It's working. Eventually, it won't work. Eventually, it'll be arbed out, something will change, the regime will shift. If it didn't work that way, why didn't Coke just sit with Coke? What happened to Diet Coke and Coke Vanilla and Zero Coke? And I mean, they've tried a lot of things. Why did they follow into like snacks?

• 27:13Speaker 01

  I can think of lots of examples, you know, historically of ego getting in the way of people not only innovating, but not wanting to cannibalize their own business. And then you just wind up having someone else cannibalize it because you were afraid. You attached your ego to your business instead of what is it that we're here to do, not am I right or not? I have a real problem with that around my companies I build. I just want people that are high A Q. And that means there is no ego. On a process to get to the right answer, more often than not, have an ego. On the actual, what the right answer is, reality gives you that answer. You're in a possession of an opinion. Reality is in possession of the answer.

• 27:52David Weisburd?

  How did you solve that at Magnetar? Is this primarily a hiring problem? Or can you get people to lower their ego in pursuit of excellence?

• 27:59Speaker 01

  I do think there is something to this sort of natural selection process. We would have very extensive, I'm not going to say here that we're perfect. We hit 100% on hiring. But I do think there's a lot of people selecting similar type of people. You'll hear people talk about hiring people with certain backgrounds. The original partners, me, Ross and Dave, we're all athletes. I do think as an athlete, there's something a bit unique about this, which is right. When you go play a sport, you don't get to have one style and you win against every opponent, right? It doesn't work like that. You will have to adjust depending on your opponent. And so you have to be adaptive. You can train all you want and prepare, but when you get into a situation, it's not always as it was planned.

• 28:41Speaker 01

  So I think people who have that willingness to say, I don't have the right answer. I want to get the right answer. I also think that over time, you get better at interviewing for it. And you can start to sort of test whether people, how do you make decisions? For example, one of the questions I ask a lot is, would you rather be right for the wrong reason or wrong for the right reason? If I started a hedge fund and it was just, I had one huge trade, I made a lot of money, that would be very unsatisfying to me, right? I want to build a business. I don't want to build something. The money comes after building a great business. I don't want to have a great trade and walk home. That's, I didn't leave there. There was no legacy to that. So do you get people like that? Or are you getting people who are, they want to come in, be given capital, they want to make a lot of money and maybe leave, they don't want to get involved with the rest

• 29:25Speaker 01

  of the firm, they want more, how do they want to be incentivized? So we created a culture, a lot of the people at the most senior level were not compensated only on what they did, but on the firm as a whole. They carried that same sort of like, we're all winning, it's all a team. We created a very non-siloed firm because we specifically didn't know where the opportunity was going to be, right? If you're constantly looking for some kind of uncertainty, I, I go back to, one of the first big trades we had going into uncertainty was when energy, when hydraulic fracking and horizontal drilling came about. That was a lot of coordination between the energy group and the fixed income group. And if I had had either group sitting going, well, I'll work on it, but it's my trade. Nobody would even attempt that with me around. It would not have been a good answer. I had very low tolerance for that.

• 30:09Speaker 01

  It was, is it right or is it wrong? Is it good for our clients? We're not going to sit before the games even started and figure out if we win, who gets the attribution? Like, that's not the culture that I'm building.

• 30:22David Weisburd?

  And cultures could be extremely self-reinforcing after a time. So it's easy from employee 100 to employee 101. But how did you start that culture from the very beginning?

• 30:32Speaker 01

  That worked a little like the culture at the beginning of Citadel. And the answer, part of it is the benefit of like, it was small. I mean, it was a small trading floor. We were all sitting right there. I mean, me, Dave, Ross at Magnetar, I mean, go back to Citadel. I mean, Ken, me, James Y, Dave Bunning, we were the first four partners there. I think I was employee six or seven. I mean, we sat right next to each other. Everything was there, being discussed all out in the open.

• 30:56David Weisburd?

  Was there a luck aspect to that, where you just found these six really motivated people and then you're like, wow, like, everybody has these factors now, let's look for more?

• 31:03Speaker 01

  I mean, Ken was the one who found all of us. And I laugh a little, look. When I got to Citadel, it was early 94. Ken had been up and running for two or three years. He was out of his dorm room, but he never, prior to that, he hadn't done, had no experience. I came in, I had been six months in investment banking. James Ye had a PhD in string theory and Dave Bonning was a football player at Harvard. The collective group of us had, I don't know, count the number of months experience. But Ken did a good job of, well, what is it about these people? What is the character? I would like to think that what he saw was people who think a certain way. It didn't matter, high IQ people, it's about how they think, not what they know. And I think that that's a really big distinction. What you know is going to get commoditized, I mean, especially now.

• 31:48Speaker 01

  I mean, knowledge is getting commoditized. We're going to implant IQs at some point. That's why my book is called the Adaptability Quotient. The most important trait coming up, in my opinion, is going to be adaptability. But when I look back at my history of investing for me, and when I look around the people that we had at a cultural level, Ken is incredibly adaptable. I mean, he's incredibly high IQ, but he's incredibly adaptable. And all of those people there were really no ego. We didn't have, we couldn't have an ego. I mean, we didn't know anything. I mean, it was like, we literally didn't know anything. It was hard to have an ego at that point. And so I think when we started Magnitar, that group of us, and I remember the early days at Citadel, there was a sticker that we had on all that, in all the little pod

• 32:32Speaker 01

  areas, and the sticker said hubris kills. And it was literally handed out to everybody. And I think the same thing at Magnitar, whether me, Ross, Dave, or all the senior team of people, by the time you're like that, you're interviewing for it, there was a lot of one degree of separation, I'm going to say. So in the early days of Magnitar, the first 40, 50 people were either people that had left Citadel. I didn't, I never recruited from Citadel. That was on purpose. I have good relationship with Ken, but there were a large number of ex Citadel people that originally joined Magnitar. So I knew a lot of the people. I had already known, they had either worked under me at Citadel or otherwise.

• 33:12Speaker 01

  Of the first 50 people, there might've been 40 people that had come from some fabric.

• 33:18David Weisburd?

  Already saw what excellence looks like culturally. And it was easier with Magnitar than Citadel. You were basically creating this culture of excellence. One of the things about Ken that I think is highly underrated is his ability to recruit and assess talent. And he talks about it. He goes on interviews and he says, the only competitive advantage for Citadel in the long term is talent. Even Renaissance technology, people think about the greatest quant trader of all time. They think their secret algorithm or their model is the thing that actually is the alpha, but it's not. It's hiring the PhDs that create the model. Their model is constantly evolving. And talent is one of these things that's not very sexy. It's not very memeable. No one wants to go and tell their friend at a bar, hey, I just heard Ken Griffin like really invest in talent.

• 34:02David Weisburd?

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• 34:47David Weisburd?

  on projects. It could help rewrite an email flow, build an ad campaign, or draft outbound outreach. And unlike most AI tools, you're not locked in into one model. Perplexity Computer orchestrates leading AI models behind the scenes and automatically chooses the right one for each step. For a limited time only, you could try Perplexity Computer for free. Head to pplx.ai/invest. That's pplx.ai/invest to try Perplexity Computer today. Most AI tools are still answering questions while Perplexity Computer is completing full projects. One thing that I've learned from talking to hundreds of investors, founders, and business leaders is that planning for the future isn't just about growing assets, it's also about protecting the people who matter most. Life comes with a lot of important milestones.

• 35:31David Weisburd?

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• 36:15David Weisburd?

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• 36:47Speaker 01

  Totally agree with you. And with respect to Ken, there was a recent article, a New York article, and I think I was quoted in the article saying this, which is, of course, ultimately, the trades are the source of the returns, but he's not building trades. He's building a business that produces with the right people, the cutting edge opportunities, with the right portfolios, made out of the right trades. It's just, Ken's, he's thinking about scale and that back to that zooming out in abstraction levels. And it always starts with the people. And I'm not sure he would say he picks 100% of the right time. We had a pretty unbelievable group in the early days, but if you talk to Dave and James just as same as you talk to Ken, and you go back to those days, there was no, I said, no ego, because there was none to be had.

• 37:31Speaker 01

  I mean, none of us were pursuing, oh, we're here, Ken, here's our expertise, we can deploy it. We didn't have any expertise. But isn't that part of like, the beauty of it? Is that it's a, it matters, and I think it matters how you think, not what you think. In a moment now where knowledge is downloadable, like how you answer questions? How do you resolve things? How do you solve problems? How do you go to the cutting edge where things are uncertain and go resolve that? In essence, my book effectively is, hey, AI is going to outperform you in math and coding. But there's a lot of things in life that are not convergent problems where you can test itself whether it's accurate. It can go test whether the model works or the math works.

• 38:13Speaker 01

  But when you go into divergent problems, which is how life works, that's where humans are still the best. How do you figure out and resolve the answers to those problems? That goes to how people think. And one of the reasons I wrote the book is, ideally, if you take Ken, or you take a lot of people that worked with me, other serial entrepreneurs I know, my hope is that what I did in the book is hand people a guidebook, but this book is what goes on inside the head of those people. This is actually how they go about making decisions, in my opinion.

• 38:43David Weisburd?

  Earlier on, talked about being intense and pushing people. There's a famous Johnny Ive, Steve Jobs dialogue where Johnny Ive comes to Steve Jobs and says, I just think the team's tired and I can't push them. And Steve Jobs tells him how disappointed he is that he didn't realize how vain he was, how vain Johnny Ive, and how much he cared about what his employees thought of him. This was like this big learning lesson that so many people don't push their employees, not because they're good people or they're good managers, because they're afraid of their employees not liking them. One of the things that I'm working on personally is how do I get the most out of my employees? And how do I push people to be their very best, even when they may not like me? What advice would you have for me?

• 39:27Speaker 01

  If you go back historically and you talk to people, certainly at Magnitar when we grew big, I think there's been times where I've gotten that wrong, or people would sit and go, I was too tough, or.

• 39:36David Weisburd?

  Can you give me an example?

• 39:37Speaker 01

  Back in the day when I was on trading desks, and you're doing, you have one of the biggest risk guard portfolios in the world, I mean, individual billion dollar plus positions. I always have had this sense of urgency. It's a long process. Mergers take six, nine months. But you have this question of, when is there a marginal piece of information, who's going to get it, that says either the deal's going to go through or not? And I'm not talking about information you're not supposed to get. I'm just talking about building a mosaic and then getting something that you're like, oh, no. So I always had this very intense urgency. And so I would constantly be on the desk talking to people like, did you talk to the CEO about the deal? Yes. Well, this new piece of information came out, call him again. Well, I spoke to him yesterday. You want me to call him again?

• 40:22Speaker 01

  Yes. I want to know if that changed something. So I would poke people like that. And there was one time where there was utility merger. And utility mergers did have a habit of breaking a lot because of the impact on consumers and price increases. And there was a very, very smart investor who's gone on to build a very large hedge fund. And he was the one sort of primary on the deal. And I remember sitting in one of our weekly meetings and we were talking about all the deals and we were going through it. And he was describing something and we were like, looking at the deal, looking at the spread, and a couple of us who had been around, he was newer, very smart. And we were talking about it and he was sort of describing stuff and it was almost like, we were like, there's something missing, like, something's not right, something's

• 41:05Speaker 01

  not adding up. And eventually, he wound up saying something. And literally, two or three of us that had been around a long time were like, deal's gonna break. Like, are you serious? That someone said that? Okay, this deal's gonna break. It was just something somebody said that was just like, what does that mean from all the experience that we had had? And one of the things that I did at that moment was, of course, it was a lesson, he was younger, whatever. But I think that we had, he was too slow in communicating the information back. We wound up getting out of the deal, the deal did break. But what I did early on, sometimes on the trading desk, is when I was angry, not, I wouldn't yell at the person, but I call it, like, I don't want to be ad hominem. It's not about

• 41:46Speaker 01

  you, I'm not gonna attack you. But I'm gonna attack the ideas and the importance of sensing a problem and then communicating it quickly and getting that loop going. We were in a big group meeting and I was unhappy with the pace of how, we had a big position, it's gonna take us a while to get out. Like, the sooner we know that, the better. And I think you'll learn later on that you're probably better off, like, having that discussion with the person outside, by themselves, instead of in front of everybody. I mean, he learned a lesson and we all learned more in that little process. It wasn't what I said, I think, in that example. It was, probably could have had, pulled him out sideways separately and just said, let's go through this for a second, this is what I want you to learn

• 42:28Speaker 01

  from it. I think, when you're on the trading floor, there's just this feeling, like, every second matters and there is no, like, I can't, I don't have time to do it really softly, I just have to get this out and like, immediately go right now and trade it. So like, there's no, I mean, we just wasted 45 minutes, like, I really could have used this, I don't know if the deal's breaking tomorrow or in a week. I think that some of that, there are probably times where I felt, when I was younger, this maybe excessive sense of urgency and transparency, no matter where we were and what we were doing. And I think part of that is because I'm very tough on myself. I mean, everybody who, if you ever ask people, I'm very tough on myself. And you, when you're younger, it's like shrapnel. It just kind of falls around you. And then as you get older, you're like, wait a minute, I don't need to be overly

• 43:12Speaker 01

  sensitive. I like, I have to communicate. I'm not afraid to tell people and give people feedback. I mean, probably everybody would tell you, I'm not afraid of that. The manner and how you do that. And the reason why that lesson matters a lot is, if my point to him was, here's how you have to give me information. If you're too difficult on the person for how they did it, they're just not gonna share anything with you in the future. So you've gotta be really careful around that, as an example, probably, of how I learned over time.

• 43:37David Weisburd?

  Said another way, your intuition on the urgency of the trade was right, but your intuition on the urgency of the communication of feedback. How much of creating a culture of excellence is hiring versus developing, if I gave you 100 points?

• 43:51Speaker 01

  I'm gonna say it's fairly split, but maybe a little more toward hiring, to be honest. I alluded to my parents being psychoanalysts. And one of the good pieces of advice they gave me early on, that I believe, other people might disagree with me, is your character's your character, but you can change your behavior. And so, it just becomes really important, I can teach people AQ, I mean, it's where I wrote the book. And I can't teach IQ and EQ, but I haven't found that the best investors are all the highest IQ people. Helps if you have high IQ. But I always say, IQ and EQ helps inside a frame, but AQ says, am I even asking the right question? Am I in the right arena at all? If you have an IQ, you sometimes are the most convinced, best at convincing yourself that you're right

• 44:35Speaker 01

  when the world's changed. So it can be a detriment. It was a little like that, the example I gave earlier. Like, I was convinced that I had, I was doing it right, but I wasn't seeing the field for the right way. There's a part of that, which is, you really want to find people with the right character. And look, you can interview, you can do lots of things, you can have an extensive process. Sometimes you find out, the character wasn't what you thought it was. And I think there's no room in any organization for people's character that is not right. And so, I don't think I can teach that. You might then say, okay, so is the rest about training? And I think it's split. And that is, I can teach you knowledge, and you can get experience, but you have to come in with this sort of, like, what we talked earlier, like, not ego, a willingness to learn, a willingness to

• 45:20Speaker 01

  be wrong. There's sort of the certain clay of a person that, not just their character, but their character is evidenced in their behavior, that they've done well in school, they're probably confident, but they don't come in assuming they know everything, right? Because, this is a bad cliche, but it's true, which is, if someone comes in, and they're a nice person, good character, but they come in and their cup is already full, I have the answers. There's no room for them to be taught anything. And in an organization, especially around investing, the feedback loops have to be very, very fast. Ken used to say, like, a very fat pipe. Like, you have to be able to communicate very quickly and be like, okay, got it, got it. We gave that example just a second ago, of like, it's gotta happen pretty quickly sometimes. To the extent that you're with someone and

• 46:02Speaker 01

  you have to, like, massage other attributes to eventually get to the learning, that gets very difficult. So I would say it's somewhat more about what they're like, but then, there's a lot of room afterward with the right clay. Like, even if somebody doesn't know anything about what they're going to be doing, if they have the right character and some of the right attributes and openness, I think it's very possible to learn the rest.

• 46:27David Weisburd?

  Can you teach drive?

• 46:28Speaker 01

  I think drive comes from within. I mean, this is a little bit of the psychoanalyst parent in me. I don't think drive comes externally. And if it does come externally, like, it can come externally, like, I have to appease my parents. Eventually, it backfires. Matters why you have it. I'm a psychoanalyst, I've seen one for quite a long time. A lot of drive comes from your early years, and you have to come to grips and try to understand with what drives you. Incentives are important for behavior, and I may differ with a lot of people around this. I do believe incentives are important. And I've been well compensated, but I never did anything because it was the money. My drive was just a drive to want

• 47:13Speaker 01

  to ultimately win. It didn't matter whether I was right or wrong. I think that was innate from my childhood. I don't love the idea that somehow, this external incentive is gonna give you the right kind of drive. That stuff decays over time, or then you make money, like, it's people like me and other people, why are we still around? Or you mentioned Cliff earlier, like, why are people around? They have money. Because that's not what's driving them. It's the result of what the drive creates and capability, but it's not why they did it. I don't think Musk is driven by, he's driven by money only so that he can capitalize his next thing that he wants to do. So it's a nice result to have, it's a metric. So I view drive as something that I prefer to find out, and I do, when I interview

• 47:58Speaker 01

  people, every time, I want to go back to the beginning. Go back to your family, go back to your childhood. I mean, I'm not, aren't you a psychoanalyst? I just, I want to understand what motivates, how did they become the people they are? I want to know the origin story. I always ask that.

• 48:13David Weisburd?

  What are you looking for from their childhood?

• 48:15Speaker 01

  I'm wanting to understand how much of perspective they had on their own child going through it. And so, there's a lot of people that, either they've had trauma, I mean, all of us have had trauma. Even my kids, I love them, I've got four sons, but invariably, I've inflicted some of it. You think you're not when you get older and then, you just do, no matter what. But there's something about that abstraction, like, are they aware of it? In their childhood, and even if it happened later, I've reflected on it. Like, I want people who reflect on things.

• 48:46David Weisburd?

  Why?

• 48:47Speaker 01

  Because it means that they're looking at it from a different angle, and remember what I said.

• 48:50David Weisburd?

  They're able to go, their higher level thing.

• 48:52Speaker 01

  So, exactly. So, in my book AQ, which is Adaptability Quotient, it's a decision-making process. It all starts, there's three phases, metacognition, simulation, and experimentation. What is metacognition? It's the ability to step out and you are now in the frame, right? You are part of the system. So, if you can't separate yourself from the system, you don't think you have any biases. The ability as a child to sit and go, I experienced this, but I also saw it and was able to look at it objectively, is the beginning of, you know, what I call adaptive optics. Like, if everything you see is through your lens and you don't know your lens, everything's distorted. We talked earlier about, I've

• 49:34Speaker 01

  seen something back to the organization. How do I know that your lens is reasonable? Do you know it's distortion? In other words, you can have all the sensing and signal come back into the organization, but if everybody's got all these optical problems, you don't know, is that reality you're saying, or is it some distortion? So I like people, I'm not saying that I have perfect optics. I just have had an entire lifetime of, with my parents, seeing a therapist, to at least ask the question. And sometimes you have a blind spot, of course. But I want people who ask, who understand, there's the world as it is, and there's my perception of the world. And that first occurs and it's most impactful. Tell me about your childhood and what you thought about your childhood and

• 50:17Speaker 01

  how you think about the childhood. I think that ability to zoom out is incredibly important. If they haven't done that, then they're willing to hide, not hide on purpose, but hold something back, and that itself is a blind spot.

• 50:31David Weisburd?

  One of the patterns I've seen in some of the most effective people, we talked about half of it, trauma in childhood, but the second one is actually you have to resolve that trauma at some point because then it becomes, what got you there won't get you to the next level. It ends up sabotaging your relationships, your career and all these things. And it creates this paradox, which is, what do you do with your kids? Do you traumatize them and then give them therapy? How do you solve that paradox?

• 50:54Speaker 01

  Oh, my God. Have you solved it? That's such a good, deep question. I do think that there is, that friction, and which I'll call trauma, look, there's real trauma. I didn't have real trauma.

• 51:05David Weisburd?

  Trauma is a loaded term.

• 51:06Speaker 01

  It's a loaded term. I mean, some people have had horrible childhoods. When I hear about it, or I learn about it, it makes me hurt. I didn't have trauma like I've seen other people had, but everybody has trauma, right? And I've spent decades trying to understand, why did I become the way I am? What was I? I think, for example, my dad had a very difficult childhood, and it was a very disrupted family. And I think part of what we talked about earlier, my zooming out ability, was that I saw my dad and I was very aware of him and his childhood. And so in some ways, I got to be a child, but in some ways, I tried to not get in trouble as a manner of taking care of him.

• 51:47David Weisburd?

  There's a caretaking aspect.

• 51:49Speaker 01

  Yes. And coming to grips with, what did that mean for me? How does that change how I interact with people now? And it definitely does, and I notice it. So now, going back to your question, like, well, what do you do with your kids? Well, the first natural thing is, I don't want to cause trauma to my kids. Why do I want to cause? But friction that I had in my childhood was part of what made me, I was so system oriented, right? Like, a lot of people, your guests, like, didn't have to do much for school. School was a system. I figured out how to game the system. And so, everything was a model, a model. I systematized it. And when you were born into, oh, I saw that. The negative of that, and I tell this to people sometimes, unfortunately, if any of my friends are going to listen to this, is sometimes I'm in the moment, and sometimes I'm not in the moment.

• 52:33Speaker 01

  I'm above it. And like, I'll be at a dinner with friends, and sometimes I'm right there and I'm enjoying it. And sometimes it's like I'm looking down at the dinner. And I don't like that, but it's very hard to stop the framing, because you have this fiduciary duty to investors, and you're in a constant state of observing and framing, right? And so, my point being that, if I got that partly from trauma, what do I do with my kids? Do they? And I think the answer is, is that, this is the irony, irony where I was coming to, which is, no matter what you want to do, they're going to suffer some. There is friction there. So it doesn't even matter if you sit out and go, well, maybe I'll just smooth it out for them. I don't want them to have the same thing. Good luck. There's just trauma, no matter what you do in any level.

• 53:18Speaker 01

  You were talking about an example earlier, and I gave you a work example, but let me give you a one quick home example. And that was that I had a son, my third son, and he had said to me and my wife, he's going to take, he was going into high school, he's going to take accelerated Spanish. And I was proud, and I called my parents, and I'm like, yeah, Nick is going to take this accelerated Spanish. I find out later, because I overhear him talking to my wife, that he's not taking accelerated Spanish. And that he had heard me talking to my parents, and even at the time, knew that I was not telling the truth. Because he, it turns out, even at the time, knew he wasn't taking it. In the past, when I was younger, pre-therapy, I would have been really upset. I would have been like, how could you listen to me say something? It was wrong, whatever. I didn't. I stopped.

• 54:03Speaker 01

  I paused. And a couple of days later, I was driving him back from a sports practice, and I said to him, you know, Nick, I want you to know that I know you're not taking accelerated Spanish, and that you heard me talking to my parents. But I'm not mad at you about that. I'm mad at myself. I'm mad at myself because I've obviously done something that made you uncomfortable telling me. And this isn't about you, this is about me. So I want to talk to you about that. How can I fix you being comfortable talking to me? So, he had trauma, but that's an example where, well, what was it that he felt uncomfortable talking to me? He told my wife. So, I don't want a relationship like that with him.

• 54:47Speaker 01

  It doesn't mean I'm not going to be demanding or want him to succeed, but I have to have a relationship for anything to blossom from that. So, I guess my answer was, I tried, I'm going to make all these changes, I'm going to do it better. It's not that easy to do that.

• 55:01David Weisburd?

  You asked me what I thought. I'll give my two cents. I think heavy localized trauma is the solution. So, I have my first kid expecting in October, and I'm thinking about, how do I take him to third world countries so that he could have eight weeks of a difficult experience, so that he could internalize that for the rest of his life? I'm definitely going to take him into investment banking, which I think is like, two years of like, my actual military service. I think sports is a great one, because you can't shield them from wins and losses. I know in the US now, you have participation trophies and all these things, but real sports, where there's winners or losers, I think that's a good way to localize the trauma.

• 55:42David Weisburd?

  I also think there's a greater question, which is, should you be optimizing on excellence, or do you just optimize on your kids being happy and not having trauma?

• 55:51Speaker 01

  That dichotomy is something that I've had a lot of dialogue with my kids about. Because when they were younger, I would, maybe, very open, transparent, we'd travel all over the world, and we'd ask, my oldest son especially, would say like, well, at one point, I said to him, what do you want, what do you want out of life? What do you want to be, whatever? And he said, I want to be happy. And I literally, like, I didn't say anything. I went back to my wife. What did we say to that? Like, how are we going to, what are you going to say? No? And I don't know, I forget how we got it, but at some point later, a year later or something, he's like, I want to be happy, but obviously, like, that doesn't mean, like, do nothing, sit around and be happy, just like goofing around, like, you have to have a family, you have to make money, you have to...

• 56:33Speaker 01

  So, it was like, turning into a constrained optimization at some point, pretty quickly. And this is the advice I've given my kids. And I said, you have to have a passion. I don't care what it's for. You don't have to go into my career, you don't have... But, life without passion is being the keeper of your own decisions. I ended my book at the very, very end, there's a poem at the beginning and a poem at the end. And the poem at the end, Victus, is sort of, I'm the captain of my fate, it is up to me. And so, I can't put something there for you, you have to decide. But, a life without integrity, but also just passionless, so, I always have said to the boys, you have to be the best you can be. I've never been number one in anything. I think it's really difficult to be number one in the world at anything.

• 57:15Speaker 01

  And what I've said to them, I've been very clear expressing to my, we're getting to family now, but what my utility curve is the following. I want to be a good father, a good husband, a good friend. I want to be successful at business. I want to be in physical shape. I want to have spiritual or your mental... So, when I, I think about it like a trading, like, the microstructure at any given moment, I might be too much on one, but I'm very aware of that. But I want to be, as best I can, across the board. I could have been even better at work and richer. I would have sacrificed something that, for me, I was unwilling to do it. I was personally not willing to do it. When you look at times, you know, I was at Citadel, then I left, and I did Iron Man triathlons, that was like, an all-in thing.

• 57:57Speaker 01

  So, I've tried to convey that to them as, like, you have to figure out your balance, and decide what matters to you. You don't have to meet my utility curve, but it's not enough to have none. It's not enough to have no passion.

• 58:11David Weisburd?

  Kids are also, they observe behavior versus your words. So, a lot of people think, well, this is what I'm going to tell my kids. It's not really how behavior and behavior change works. It's their perception. One of the greatest things you could give your kids is this understanding of self-actualization, and the fact that there's ups and downs, but how rewarding it is to just pursue excellence for its own sake. Just being excellent at something, doesn't have to be even for money. One of the things that's really missing in the US, and of course, US has it more than almost any other country, but this, there's a lot of complacency, and this is where the immigrant culture really helps the US, is just, people come in and they just want to be their best self. And there's a lot of complacency in third, fourth, fifth generation Americans.

• 58:56David Weisburd?

  And I think just teaching your kids, pursuing excellence for its own sake, whether it is running a marathon, or whether it's starting a business, or whatever it is, that itself is just so rewarding, even if there's a lot of hiccups along the way, and even though it could be challenging.

• 59:10Speaker 01

  I think that's well put. I think there's one other thing that we didn't talk about that should have added, and that is that, I think this is one of the most challenging times to be young. I grew up, my formative years, I was born in the 60s, but I was a teenager in the 80s. No wars, no digital. It was an incredible moment. I think great music, that's me personally. But, I think now, about the environment, and one of the things that I would be remiss if I didn't say is, and it's in my book, I talk a little bit, ironically, there's a pretty well-known sociologist, Pierre Bordeaux, and my mom actually wrote a great paper, and I was writing my book, and she shared it with me, about psychoanalysis and what this guy had written, but here's what the basic gist is.

• 59:54Speaker 01

  When I was younger, the ecosystem, the environment, was your parents, your teachers, it could be your religious organization, your local street, the neighborhood. That has drastically changed. What Pierre Bordeaux talks about is habitus. It's the environment in which, so now, part of the education and growing up your kids are getting is digital.

• 1:00:20Speaker 01

  We just didn't have it before. So, social media has created part of the environment in which, if you allow your kids to have access, in which they are raised, not by you, but by something else. And I think that what we did in the world, in the US and otherwise, a lot of that was an act of omission. People just started using it. There was no containment of it. A lot of it was driven by engagement. Well, engagement in social media meant the extreme opinions were more engaged, and therefore we polarized people by giving these really wide opinions. It's why we at Northwestern created the Littlerweiss Center for Enlightened Disagreement, which is, if you actually do the analysis, people think the other side's like this, but they're really not as far apart.

• 1:01:02David Weisburd?

  Like 3%, right? 3% from each side are actually crazy, and people think it's like 70%.

• 1:01:06Speaker 01

  Exactly. The, now what's happening, you know, remember, like, algorithms there highlighted the extremes. I call this the double whammy. What's happening now? AI now, you go, you get an answer. What does it give you? The mean. It gives you the best expected answer out of the distribution. So, wait a minute. Emotionally, you're getting me charged up by going to the tails. Cognitively, you're giving me the mean.

• 1:01:32David Weisburd?

  It's also optimizing on your satisfaction, not on the truth.

• 1:01:35Speaker 01

  That, yeah. So, you're the psychopath.

• 1:01:37David Weisburd?

  I wrote it into my Claude that's to basically seek truth and not seek my personal happiness. Yeah, to reprogramming.

• 1:01:47Speaker 01

  Yeah, you're programming in, you want a steel man to make the best version of the opposite argument for me, which, by the way, is exactly what you're supposed to do, because what is my book argue? My book argue is, you have these two tools, you could use them to augment or atrophy. How do you augment? Give me things I didn't think about. How would I expand the set of possibilities? As opposed to going, just give me the answer. Tell me what you think the answer is. What did you, that just narrowed the set to one, right? Even back with Google, even if you only went one page deep, you took the information, human information, and you had to synthesize it. AI now synthesizes it and generates, we're now in the post-human-only narrative, right? There's going to be way more written material that was not generated by humans now going forward.

• 1:02:32Speaker 01

  So, back to, what are we doing in the environment that the kids are growing up in? I feel like we just went through this 20-year experiment at social media that relates to how kids are raised. Two of my kids were digitally native, two were not. There's a difference in them, right? Two didn't grow up with the flip flops digital on, and two of them grew up with whatever the flavor of the day was on social media. Recognizing the system that you're parenting in matters, because there's the part that you can control, and then there's the part that, do you want your kids to use social media by act of commission? Here's how you should use it, here's how I would like to see it used, or maybe depending on the age, prevent them, or do what I'm, or do you want them to just use it however they do? And how is social media good? Connect to somebody you didn't know before?

• 1:03:14Speaker 01

  Organize a meeting of people and cooperation you couldn't do before? Those all expand the set. But if I turn around and sit and say, instead of a date, swipe left, swipe right. Instead of going out with you, I'll go on a trip, and then you thumbs up. We've got this, instead of connection, I gave you attention, the models, it gave me back, supposed to give me back connectivity, but it gives me, we have more loneliness, gives a very thin version if it's used to atrophy. It gives power if it's used to augment. AI is the same thing. My book is saying, here's how you use it to augment. You got to do some work, but it's incredibly powerful, two of you do that.

• 1:03:50David Weisburd?

  You've had one of the most remarkable careers in finance, from Citadel to starting your own firm with Magnitar, growing it to $20 billion, to now running one of the top single-family offices. If you could go back, right before you joined Citadel, and give yourself one timeless piece of advice, what would that be?

• 1:04:07Speaker 01

  And I know this runs almost counter to the trading side, which is just that, is to realize how young you are, and that there's time. I think I did, maybe growing up in my childhood, and trying to appease, and a lot of people who go into the best firms, you know, Citadel was incredible at the time, you're straight age, you do everything right, and there's this fear of like, I don't want to get something wrong, I don't want to get something wrong. And Ken was never like that. He didn't stop anybody from making mistakes. It was more in me, and I would say to myself, like, measure this over a long period of time. I was not efficient. I was very much, sort of, everything was perfectionist, and I think as you get older, you realize, you would have even been better if you could work the same amount.

• 1:04:52Speaker 01

  But where do you work, right? I almost just wanted to cover everything, because I didn't want, I didn't know what was important or not. I feel like I would have said to myself, absorb a little more about optimization, and not so worried about every little thing. Some things, I call them shallow failures. Some things just don't matter, and spending time on that is actually a waste relative to this other thing that you should be spending time on. I wasn't that efficient with my time. I worked a lot trying to do certain things that, at the end of the day, didn't matter. And then the other thing that I think that was a really important lesson for me was that, being fairly academic, and then going in and being in risk art, and being in market-neutral

• 1:05:35Speaker 01

  strategies, it is very easy to sit and say, I don't care what happens in the macro world. How do people who are macro traders do it? I don't know. I mean, how many bets do you get to make a year? Like, I don't think I could do that, or you only get a certain number of bets a year. I was always into this, let's have thousands and thousands of bet, you know, Sharpe ratio is edge times the square root of n, and it was the long-short equity business I built at Citadel, is that model. And it takes something like a 2008, where, and I realize now, just zoom out, when regime changes occur, all that safety you feel in that model, that this is how things work, doesn't matter. So, it doesn't matter if you can predict whether that macro world's going belly up

• 1:06:16Speaker 01

  or not, but it has to be in your decision tree with some probability. You don't get to assign it zero. And so, the way I phrase it now is, I have a reverence now. I lived through the seven rate increases in 94, the LTCM and Russian crisis in 98, 2000, 2000, 2003, you know, and I will say this, why, all those things, the first 100, I think it was nine-plus years, so, 108, maybe it was, I think it was nine years, three months. So, let's say 111, 110 months, I lost money in five, and through all those crises. And so, when I got out and I did my Ironmans, and was thinking about Magnitar, and we went a slightly different direction, focused on uncertainty, but it was pretty easy at that

• 1:06:58Speaker 01

  point to go, well, I did pretty well during all those environments, all the models had worked. And then you get to 08, and you're like, sometimes they don't work, actually. And that was that perspective, I just didn't have it. I now look back at myself and go, you were indignant. You were like, I'm right, I got all the details, I've got all the math, fresh math major at MIT, and I'm like, I figured this out. And it's like, no, no, you haven't figured it out. I would just want to say, like, have more respect for, the market is what tells you you're right or wrong. You don't get to live within a world that it's a boat in the sea, and no matter what size the wave is, you're fine. No, that's not how the world works.

• 1:07:34David Weisburd?

  It goes back to what we've talked about throughout the entire interview, which is, have a beginner's mind. No matter how successful and how much validation you get from the market, you have to always go back to this beginner's mind.

• 1:07:43Speaker 01

  You said it really well earlier. Everything you think you know is provisional. It's all opinions, all the way down. It might be an informed one, it might be working for a while, but it's on loan. It's always on loan. And instead of that being a problem, uncertainty is amazing. It's, everybody hates it, but uncertainty is possibility. Uncertainty is knowledge. I mean, go back to my nerdy self, like, the father of information theory, Claude Shannon, would say, if you come to me and I say what you already know, it's of zero nutritional value. You can't possibly learn from it. If I say stuff that's completely orthogonal to what you think, we may disagree, but it

• 1:08:24Speaker 01

  has the most potential energy to convert into something you might update with, right? If you sit around and go, I can't be updated. I got it. I can't, there's no way to improve in any way. So, I just keep thinking about that mental image that, when you say to your AI, steel man, tell me the opposite, it's the most possible you can learn. If all is a psychopath, there is, you can feel better, but it's like eating bad food. There's no good thing going in you. It's just going to make you sick later, because at some point, it's going to come back and hurt you. I think that, it was true in the math of information theory, and it's true in the world right now. It's just, we go into this tribal, vertical, social media, we try to find people who tell

• 1:09:07Speaker 01

  us we're great, and we're, et cetera, and at the end of the day, like, that long-term is a massive negative. If you come in every day to learn, and have a better model for the world, especially one that's changing this quickly, I consider that to be, that's my excitement. Like, what did I snap? Like the Matrix, I just got uploaded a new model for that. I get super psyched, I get really excited for that.

• 1:09:27David Weisburd?

  I like, this has been an absolute masterclass. Thanks so much for jumping on.

• 1:09:31Speaker 01

  Thank you, thank you so much for having me, I really enjoyed it.

• 1:09:33David Weisburd?

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