In this podcast, Nate Silver, founder of political polling site FiveThirtyEight and author of the new book On the Edge: The Art of Risking Everything, joins Motley Fool host Ricky Mulvey for a conversation about expected value, presidential polling, and risk.
They also discuss:
- Why Adam Neumann keeps getting money.
- DraftKings's surcharge for winning bets.
- Why bubbles are bigger in meme-ified worlds.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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Nate Silver: In the military, standing still in the middle of battle is like a really bad plan. You either want to attack or retreat. Those are both better moves than just calling and standing still, so being willing to get out of a bad situation and then raise the stakes when you have the advantage and press advantage is, I think, good advice across a lot of walks of life.
Mary Long: I'm Mary Long, and that's Nate Silver. He's the founder of the political polling site FiveThirtyEight, writer of the Silver Bulletin Substack, a professional poker player, and author of the new book On the Edge: The Art of Risking Everything. My colleague, Ricky Mulvey, caught up with Silver for a conversation about risk. They discuss the challenges of predicting a presidential race, the money ballization of casinos, and AI's base case. This conversation runs a bit longer than our typical weekend show, so we're giving you some extra time to enjoy it. No show tomorrow, Fools. Enjoy today's episode, and we'll see you on Monday.
Ricky Mulvey: I want to do the election stuff upfront, and then I want to dive into the book. I think that might be the standard interview procedure for most of this stuff throughout the book tour. You've said that this is a somewhat challenging time from a forecasting standpoint, and in this time, we've delayed our interview by a couple of weeks. In this time, we've had the Democratic nominee swapped out. Trump survived an assassination attempt. We've had a little bit of a market sell-off. What is a challenging time?
Nate Silver: What's challenging about it? It's the first thing you mentioned. It is the fact that Democrats only three weeks ago, or was it two weeks ago, replaced their candidate in midstream. There is not a recent precedent for this. Instead of this interminably long election like we usually have, we have a compressed election over roughly 100 days. There is some intrinsic uncertainty from a modeling standpoint about does that different rhythm change the tempo of when you see candidates rise, or fade, or whatever else. So far, we've seen a lot of momentum in the polls for Kamala Harris. Biden had been way behind Trump, and now Harris is ahead in most national polls, and, more importantly, has pulled into a tie roughly in polls of Wisconsin, Pennsylvania, and Michigan, which is why the election is 50/50. I think we have it 52/48, leaning Harris, but basically 50/50 as of our forecast when we're recording this. But usually, you'd say that momentum is overrated in elections. That's a long news cycle, and that if you rise, it doesn't guarantee anything about the future, but maybe she can just meme her way into the White House. We'll see. It's been an effective campaign so far.
Ricky Mulvey: I know you think a lot about modeling this stuff, and you do a lot of modeling, not just think about it. I'm going to steal a question from your Substack from a subscriber named Tokyo Sexwale [laughs]. Which pair matters more? The stock market or the one RFK Jr. found for this election? I get the joke, but also, you got a third party in there that could mess with your model a little bit more than in the past.
Nate Silver: We actually do model out the third-party possibilities. In fact, unlike Biden, Harris seems to benefit more from the presence of RFK Jr. in the polls. He seems to actually be a little bit more anti-establishment, a little bit more Trumpy. He's probably going to be on the ballot, and he's already registered for the ballot in all but like five states now, basically. I think he's actually a factor that helps Harris a little bit. Some of the anti-vaccine stuff. Again, just the kind of eccentric outsider is more of the Trump archetype and the Harris archetype. But you did mention the sock market. This is a real risk factor for Harris. There is a risk of maybe not a recession but something verging on a recession later this year. It's very hard, even though she might try to distance herself from Biden. It's very hard for an incumbent party to win reelection when the economy is in shambles, which it's not now to be clear. The day we're recording this, my 401k has had a nice little bounce back versus Tuesday, whatever it was, but that's a risk factor, absolutely.
Ricky Mulvey: You mentioned momentum earlier. You've talked about why you're not a big believer in momentum, whether it's sports gambling or for polling. Let's start there at the first part. Why aren't you a believer in momentum? As a sports fan, I'm a big believer in momentum or someone getting onto a hot streak.
Nate Silver: Maybe sports as part of why. If you're like a Moneyball person and you look at the data, you find that the effects of streakiness are not zero but very small. There's what's called the hot hand fallacy, where people assume that if you hit one free throw, you'll hit the next free throw, and the effect is, again, not literally zero, but much more than people think intuitively. In politics, it partly gets at the dynamics of what stories the media covers. Well, usually Kamala Harris is in this honeymoon period. Typically, you get into a period of more skepticism because the storyline becomes dull. People want to turn the page, but again, with a compressed election cycle, maybe it is exciting enough that you can ride the way further. Although obviously the first debate, if she has one with Trump, it would be a big moment. I wouldn't understand why Trump would not want to debate her. She has been a good debater in the past, and he has not always been a good debater, but he may actually need the volatility, may actually need the variance of momentum swing now, and a debate is an opportune time to potentially take more risk and up end her.
Ricky Mulvey: You've talked about models essentially being worthless unless you're really willing to bet on it. That's why gamblers have good ones. You were on X talking trash to a lot of the pundits who wanted Biden to win. Would you take my $50 bet for Harris to win at -120 right now? That's better odds than you're going to get in a lot of sports books.
Nate Silver: That's pretty close to what the markets say. I'm not sure there's much edge there, necessarily.
Ricky Mulvey: Okay.
Nate Silver: Fifty bucks. That's just recreational stakes if we're talking more money, but no, I offered to bet. Allan Lichtman is a professor of government at American University and had this model that said Biden's going to win. It's a 13-case the election and was trash-talking to me, and I'm like, OK, Allan, I will offer to bet you $250,000 on the election if you really believe what you're saying, and that shut them up. I'm a big fan, and so first of all, I should say I advise a prediction market company called Polymarket, so I'm putting my money where my mouth is, or maybe my mouth where my money is, and vice versa. But look, I'm a big believer in markets in general. I think markets are flying. That's why it's sometimes fun to try to beat the sports books, for example, but people are usually a lot more honest and accurate when they're willing to wager put something on the line.
Ricky Mulvey: To be clear to the listener, this is a money bet of who I think will win. I understand those. I'll give you my Venmo after the show if you want it. How about -150? Are you more interested in Trump with +150?
Nate Silver: I'll take Trump at +150 for 50 bucks. We'll change Venmo. I believe in the model, and so I think Harris is 50/50, or maybe a slight favor, but +150. Come on, man, I'm not going to turn down a +EV wager that that would be off-brand.
Ricky Mulvey: I'm willing to take it. I know it's -EV, but I think this is like in poker if someone's playing against Brado or Rampage. They want to bluff them to get on the vlog. I want to win a presidential election wager with Nate Silver, so I can never shut up about it to my friends.
Nate Silver: Perfect. We're creating good content, and I know I get a +EV bet. It's a win all around, for sure.
Ricky Mulvey: Everybody's happy. You write in the book. Maybe this will be a little bit of the connection, but you say that people in the river are also good at abstraction, skilled at taking data points and drawing out general principles from them. With this election cycle, with this election stuff, what are the general principles you're noticing?
Nate Silver: Look, if Harris wins, or maybe even if she loses narrowly, it's a little bit of a science experiment selection where we actually see how much the candidate matters. That when you have a candidate because people like to say it's all about the fundamental conditions of the economy in X, Y, and Z, but Biden was four points down in the polls to Trump, and she's two points ahead. That's a six-point swing, even as polarized a country as we are. I'm interested to see how much she can maybe overcome the drag that Biden would have represented and also the fact that age was this elephant in the room that Biden wanted to be president until he was 86. Trump now wants to be president until he's what? Eighty-one, or 82, and the fact that people thought they could narrate their way out of this and that it wasn't a fundamental problem, I think, was proven wrong. In some ways, people graciously say, Biden withdrew. Now, Biden was pushed out. He was pushed out because he was going to lose, and the Democratic Party has people like Nancy Pelosi that are smart enough to care about winning. He was pushed out and replaced, and it was a radical risk-taking strategy. Instead of like a near-certain Biden defeat, then they have 50, 50 odds, or 52, 48, or whatever, which is a pretty good trade to make for sure.
Ricky Mulvey: This is a fundamental question, but you get into how people calculate risk, and we use sort of the same percentages for the chance of making a pair on a flop and the chance of Donald Trump winning the presidential election, even though one is an estimate and one is not. When you're doing the modeling for whether it's sports or presidential elections, why bring it to the decimal point and get to that level of specificity?
Nate Silver: You're right that, on some level, Ricky, it's implying false precision, but I think people shouldn't be afraid of numbers. As a poker player, if you have a hand that's Ace Five suited of hearts, that's a much better hand than Ace Five offsuit, even though you only make a flush rarely. Maybe it's just a matter of being an environment where you're paid to make these precise calculations of risk and trying to reduce any phobia about numbers. Look, I thought for a long time that, you hear it said, people don't understand probability, where in 2016, we had Trump with the 29% chance round to 30, but 29% and Trump won, and people were mad about that. But I think I don't want to hold people's hand too much through this probability stuff. The more exposure you have to it, if you play poker and you understand that if you get all in with three of a kind against a flush draw, you're going to lose 30% of the time still, and you played the hand well and made the right forecast so to speak. I'm not trying to cater to people's biases as much, I guess I'd say.
Ricky Mulvey: Are you tired of people saying you got the 2016 election wrong? I think that's what I heard in those [inaudible].
Nate Silver: I think like a gambler. I think I got it right because you would have a good bet on Trump. It was five or six-to-one in markets. If you actually actualize our two-to-one or three-to-one, then you jump all over that wager. It was mispriced in the market. That really divided my life between the normal people who thought I was an idiot and the degenerates who really appreciated the positive expected value bet they would have had on Trump.
Ricky Mulvey: Let's get to the degenerates in the river. I want to specifically turn to poker in Las Vegas generally. You were around a lot of these high-stakes poker players. Both. You made it to the top 100 of the World Series of Poker last year, and you also play in high-limit games. What have you noticed about the way that high-stakes poker players handle money?
Nate Silver: In some ways, I think they understand more than most people how fleeting money can be. It comes and goes. Literally, like at the World Series of Poker Bluster that you mentioned, doing really well and then had a ham where I had the second best possible hand and my opponents had the very best possible handset of six versus a set of sevens, getting a little too far in the poker weeds, I know. But you understand that hundreds of thousands of dollars can turn on something you have no control over, and therefore, most poker players know how to have a good time. They're going out to the nicer restaurants. We're playing credit card broulette, which means we randomly have the waiter or waitress pick one of the cards, so someone gets stuck with the entire bill because they've chosen a career that is not a steady paycheck. The amount of volatility in poker is very high. There's something a little bit weird and degenerate to choose that lifestyle because, for the most part, if you're good at poker, you likely have very good mathematical, analytical skills, and at least medium-good people skills. People reading does help and things like that. With that skill, you could probably work for a hedge fund, or work for tech company somewhere or something, or start a business, but they like the freedom of the poker lifestyle. They're like uniquely among most occupations. You don't really have a boss. You can show up whenever you want, more or less set your own hours, and so you get a lot of very independent-minded types.
Ricky Mulvey: The variance is something that's incredible. You asked this to Peter Thiel about basically where he would end up. Let's say, for the sake of this question, we're in a simulation. What percentage of simulations do we run where, even with your statistical capability, you're not able to be a professional poker player versus ones where you are, you think?
Nate Silver: I think we wind up in a lot more simulations where I'm maybe successful, maybe struggling professional gambler of some kind than the life I've actually wound up in. That suits my skill set more in some ways than being in the media does, and I feel like I've gotten lucky repeatedly to be in the position where I am. The reason why I got into politics in the first place is because in 2006, the US Congress passed a law called the UIGEA that basically outlawed internet poker or outlawed payment processing to internet poker. As a result, I became more interested in politics. I wanted the people who passed that law to be voted out of office. Then 2008 comes along. I'm living in Chicago, went to University of Chicago. Barack Obama, a then fairly obscure, I guess he was a senator, so not that obscure. But like a UFC law professor/United States Senator, runs for office. It's this moment where people want analytics and everything, five years post money ball, and the blog FiveThirtyEight kind of takes off. Then I get lucky that the forecast proved to be right. In 2012, all 50 states were "called by the Mal correctly." That was very lucky. It's supposed to happen one out of 20 times or something, according to their own internal calculations. I felt like I benefited from being in the right place at the right time a lot. I do work hard. I do have some skills, but I've also been very lucky.
Ricky Mulvey: A bit of a sun run, but for polling, if you will.
Nate Silver: That kind of set me up for no matter what happened, you're going to come down from that peak because polling is not always as accurate as it was in 2008 or 2012. There have been lots of years in the past when it's off, and people had, I think, unrealistic expectations, and as much as I tried to downplay them. It wasn't successful. But also, I went and worked for a giant company, and now I'm back to working for myself. I have one great assistant I work with, and it's more of my speed, I think, kind of more of a poker player's mindset.
Ricky Mulvey: I would say you have a smart but high-risk tolerance, given your background. How do you know from the people you've talked to, you talked to military generals, you talked to VCs, you talked to professional poker players? How do you know if you actually have a high-risk tolerance?
Nate Silver: It's how you perform under pressure and under stress. Do you like the idea of playing for stakes that are a little bit uncomfortable for you or do you find that terrifying? It's a careful balance to strike. Everyone says this, I find I play better in poker when it's day three of a tournament, when it's a higher stakes cash game and every decision you make really matters and you're more attentive, you're more focused. If you talk to these people like athletes, and I talk to an astronaut, you experience a stress response when you're gambling or presented with risk, whether it's physical risk or financial risk, your heart rate rises and you have more production of different chemicals in your body, and you can even go into a zone or a flow state or go on tilt as a poker player. Why is my heart beating so fast? Why am I so nervous? You start to overthink things and then play badly. But I find those moments fun. That means I'm a degenerate gambler at heart, I think.
Ricky Mulvey: Do you think that you also talk about how essentially games get just wilder when there's more money at stake? That's a little counter-intuitive. You'd expect people to behave more carefully. Do you think it's just that more people go on tilt even if they have a ton of money when they're playing high-stakes poker?
Nate Silver: I think one thing you learn in the book is that the skill set that's rewarded today, especially in finance and tech, and business, which are increasingly more and more important parts of the economy, it is a risk-taking skill set, where even when you're already successful, you keep making new plans and building more companies and doubling down more and more. If you read the Walter Isaacson book about Elon Musk, his poker strategy is literally going all in every hand until he busts out and then buys more money and then finally busts out for good. If you're playing a high-stakes game, by definition, you're playing against people who are usually financially successful in finance or some type of small business that turned into a real business. By definition, they have high-risk tolerance and they have big egos, too. One reason that games get bigger at the high-stakes is because they take a bad beat and they feel maybe embarrassed by it, even though it's not their fault necessarily. They buy in for more chips than they had originally and then it escalates from there.
Ricky Mulvey: When you're playing and maybe you don't want to give too much away, do you find that your image helps as a statistician? Because you talk about how you don't use game theory optimals basically, it helps you decide at what random points should you bet fold or raise that kind of thing. You basically say that you know it but you don't lean on it. You're not leaning on stats a whole lot. Do you think that's just the play against the image that people have of you?
Nate Silver: I think I played a lot of poker. Always, I had a background as a professional poker player but I played a lot of live poker working on the book starting in 2021. At first, it was a novelty. It's like, statistician, even though I had this background and people didn't know it. Statisticians playing these poker tournaments. For a while, I was able to bluff my ass off. People were like, this guy must be careful in calculating. He's a statistician, he wouldn't bluff. Of course, bluffing is what makes poker poker. Now that's counter-adjusted. Any edge in gambling doesn't last very long. People adapt and adjust. I've actually been trying to play, maybe a little bit tighter recently. I think I went through some phases where I overdid my bluffing, aggression frequency a little bit. But most of all, it is a people game and you're trying to adapt to the room. I most enjoy poker when you're at the same table for the whole day or you have a regular home game where you play against the same pool of opponents once a month or something. Because you can adjust and adapt to your opponents, you have more information, and in principle, if you're a better poker player, you're more able to take advantage of having more information.
Ricky Mulvey: More generally, you've seen gambling booms and busts in poker. There was one, it was with the Chris Moneymaker era of the World Series of Poker. Now we're in a new one. You write, quote, "Teenagers in the United States and other Western countries are undertaking far less risky behavior, drugs, drinking, sex than they did a generation ago and yet literal gambling is booming." Why do you think these risk appetites have shifted so much and moved, especially toward gambling?
Nate Silver: I think part of it, not to get too anthropological but we no longer have the same forms of physical risk. You can't really be an explorer and discover a new continent or a new country. Even in the military, a lot of war is becoming drone warfare now or virtual. I think there's an excess demand for risk-taking or among people who have this gene and that Las Vegas is an output for that. Where you go to blow off steam, you have a boring job as a consultant or something, which I used to be, so not criticizing, and then you have your annual Vegas trip to get way too drunk and chase down members of your preferred sexual orientation, and then gamble a little bit more than you probably should. At the same time, we are in a world where there is not a lot of certain answers where institutions are not trusted very much and people feel like they have to navigate their own way and make their own rules and make their own living and that can cause other people to go into more of a shell. You can withdraw. You can go very online or into some niche sub-community because younger people are not drinking or having sex or doing drugs like they once did, which I guess may be good if you're a focus-on-the-family person or something. But also things like free speech; there's less tolerance for free speech among younger voters, which is being thought of as a risk-on strategy. Speech can actually have consequences. But it seems we're in a society where we have a bifurcation of risk-taking tendencies where some people really like to gamble and some people play it really safe. You probably want some mix of both in society. You want people experimenting and moving things forward. You also want people saying, wait a minute, that's not a good risk to take. But that seems to be a little bit out of whack that balance potentially.
Ricky Mulvey: You said, restricting speech is a risk on strategy. I would imagine that the people who think that they're restricting speech.
Nate Silver: No, I think free speech is a risk-on strategy. People blow things up for free speech sometimes if you say things that offend them. But it's part of the classic strategy of liberalism. Part of the book is about the United States and the traditions of constitutional liberal democracy and free market economics in which the United States was founded that came out of the Enlightenment and what it's led to 300 years later is plenty and wealth but also inequality and uncertainty and a very dynamic society where if you're not adjusting, you risk being left behind.
Ricky Mulvey: A lot of it is about the anthropological forces about how people handle money, perceive risk, that kind of thing. You go behind the curtain on Vegas, and you also look at the money embolization, essentially, of casinos. What you found, one of the things you talk about is that people who are problem gamblers, thinking specifically of generalized slot machine players actually don't want to win. What do they want?
Nate Silver: They want to keep playing. I talked to an anthropologist, maybe the world's only gambling anthropologist named Natasha Schull very smart woman at NYU, who did her PhD thesis on low-end casinos in Las Vegas and found them to be a fascinating anthropological environment. What she found is that people just want to be in what she calls the machine zone, where you're literally pulling a lever or pushing a button repeatedly and you can shut out outside distractions. She would find things like, people would play at a slot machine so much and be so addicted to it that they would literally urinate in their pants and things like that. When you win a jackpot with a slot, then that causes a big disruption in your machine zone state that literally, an alarm rings and an attendant comes over with a tax form, and everyone stares at you and you draw attention to yourself. Whereas, casinos are designed at least as a slot machine side of it so that you can be anonymous and hide, almost. This is different at the higher-end resorts where you have more open spaces but a lot of low-end casinos are very dingy and maze-like. You can hide off in a corner and press your button on your slot machine for five hours at a day. These people for better or worse are people who may actually be risk averse. They're very different than the poker players or the guys playing craps. One line that Natasha has is that it's one place where there's certainty because they know they're going to lose in the long run. They know at the end of the day if you play slot machines for 40 hours a week, you're going to lose money almost for sure. A lot of what the casinos do is figure out ways to manipulate you so you have enough rewards in the medium term that you keep playing and the games are fun and things like that. But no, they are often people who are struggling. Slot machine gamblers and slot machines offer a safe space but an expensive safe space.
Ricky Mulvey: You talked about also how the take rate on these slot machines has gone up. No one really notices because of the variants involved. What do you think the limit is for that? At what point would people notice and get annoyed and not be willing to enter that trance?
Nate Silver: I hope my book brings out a little bit more. If there's one gambling tip, if you're at a convention, you're at the Aria or something, don't play slots. Slots are the worst deal in the casino. That's the one gambling tip I've had. If you want to lose a little bit of money, then that's OK. I don't know if we're going to find this out. With sports put in now, you have one of the sites, Draft Kings proposing an additional tax where it takes back some of the money that states are taxing them and charges a surcharge for winning bets. We'll see how much market share that cost them. In general, because slot machine gambling is negative expected value in general, customers are not as price sensitive whereas in more skilled forms of gambling, sports betting and poker, people are quite a bit more price sensitive. One thing the casinos are smart at is that they have whatever your psychological profile because there's not just one profile of a problem gambler. There are some people who are very responsible when they're playing live casino gambling but they have a tilt problem when they play online, for example, or vice versa. You're out with your buddies, you're playing craps, you're trying to look cool, so they'll go and do things that would not be advisable otherwise. They figured it out, that's why there's 15 different ways to gamble in any given casino is that it'll tickle some part of your degenerate funny bone.
Ricky Mulvey: Let's talk about Draft Kings for a second, because you talked to these casino execs or experts who were not surprised that these online sports books were struggling, basically calling these sports books an amenity. Do these sports books basically need eye gaming to survive, do you think? By eye gaming, I'm talking about online slots, craps, that kind of thing.
Nate Silver: Yeah. If you look at Las Vegas, where you've had legalized sports betting for years, it makes up about 2% of casino revenues and 1% of overall Las Vegas Trip casino plus non-gambling revenues. The problem is that it's actually a hard business because you don't have to be that good. Let me qualify this very carefully. Las Vegas is very good at what it does and Draft Kings and FanDuel, the online Sports books are very good at what they do. But they're offering a menu of literally thousands of bets on any given day. There are 100 different ways to bet the Checkers, Chiefs game or whatever and there are 15 NFL games a week and 50 college football games and 100 soccer matches and whatever else and 20 NBA games in a three-day period and things like that. You only have to find one winning bet that's winning by more than four and a half percent which is the average house rake or cut. It's not that hard. What they do instead is limit who's allowed to bet and how much they're allowed to bet as a semi-skilled sports bettor. I've been limited by Draft Kings and MGM and literally a half dozen sites in New York just for having the profile of someone who's trying to win. I remember shopping for a Halloween costume a couple of years ago and the NBA season started and I'm like, the line just went up for the Charlotte Hornets, Washington Wizards game, I'm going to hit that line really hard. If you're betting 1,000 bucks on the Hornets-Wizards game when it first comes out, then you're clearly trying to win. It's not a recreational bettor's profile but they'll shut you down. I should say Caesars still looks to be the better; they're the one exception in BetRivers, I think. But people don't know how much they're trying to move away from the traditional model of bookmaking. The traditional model is that you knowingly take some smaller bets from sharp winning gamblers because it helps you set your lines for the recreational players later on. Draft Kings, MGM, trying to cut that first part out of the process, where they don't want you to bet with them at all if they think you're a winner. Which you wonder by the way, if you've been on Draft Kings or something for a long period of time, why haven't you been banned? If they say we don't want winners and you're still allowed to bet, then that says and they think that they're making money from you.
Ricky Mulvey: I can feel my producer saying, please move on from gambling. Promise, I will. This industry does relate to stock market stuff but you talk about the efficient markets. I think this has to do with stock investing and gambling. One would normally think that the more money that goes into a pot, the more efficient a market is because everybody guesses the weight of the cow and then the average is probably right. But that turns out not to be true. When there's more public money in the mix, there's more emotion. One example might be a Connor McGregor fight, who's a huge fan favorite in the UFC. A lot of people like him and they might be betting on him. I think this is something that stock investors can also apply. What are the signs of a big market that's inefficient, you think?
Nate Silver: In sports betting, I guess we are talking about sports betting still but I'll bring it back to the stock market. You have what's like a U-shaped curve. If you imagine the volume of the market is like the X-axis and the amount of EV you have, how beatable it is is the Y-axis. Really small markets if you're betting on Mongolian Ping Pong, then you might be able to have an edge there just by having spent more time modeling the sport out. But really big public events like the Super Bowl or elections, frankly, where people who aren't sharp bettors are betting, then you can also actually make money. The in-between is what you want to avoid. I don't know where the stock market falls on that spectrum, may be big. Obviously, you have meme stocks and stocks that become big public positions and maybe you want to fade that a little bit. All I know is that when I try to invest in individual stocks, I'm not a pro and I make less money than my boring old index funds, which do great. I'm not really trying to beat the market. But when you have huge volumes of unprofessional or non-professional, I should say bettors, then there's more chance of having a good bet that you can have.
Ricky Mulvey: You looked at a lot of different ways that people invest and speculate within your book. I will include crypto and NFTs. In the speculation side, you also have VCs and hedge fund folks. I know you just said you like the ETFs but did studying how people treat risk handling, did that affect the way you think about investing at all?
Nate Silver: Maybe it should have more. But look, understanding just the importance of compounding returns and compounding interest, I would love to be a VC. The top decile VC firms do really well. They're not just bragging or exaggerating that. It's a really nice idea to be able to make a portfolio of high-upside bets because any one high-risk high upside bets probably won't pay off but the portfolio does very well. I use data provided to me by Marc Andreessen to run some simulations. Actually, it's very hard to have a losing decade or something. If you're Andreessen Horowitz or Founders Fund or Sequoia and you get the top founders from all around the world begging to get money from you, that's a pretty good business, it turns out. Those firms do very well making money. Kind of a self-fulfilling prophecy by their own admission but even though I talk a lot about the character flaws of Silicon Valley, these are people that are very flawed in some ways.
Nate Silver: I didn't realize how profoundly profitable their businesses actually are.
Ricky Mulvey: Many of these people, especially VC land hedge fund land, even sports betting land, if you want to go there, they have to be contrarians in order to find an edge. You said, "If you're going to be a contrarian, that means looking for information that's hard to quantify." What does that actually look like in practice from the people you spoke with?
Nate Silver: A lot of time it's being willing to work with incomplete information. Because the funny thing about VC is that you're making a bet on a newly founded company that's claiming to revolutionize some market or do something differently that has a very long time horizon. On the one hand, you want to be contrarian. On other hand, you want to trigger a cascade of different seeds of investment, and you want to attract employee talent, and you want to attract further capital, and you want to attract other investors. You don't want to be too contrarian. It's like trying to find the night club in your town that's like just emerging as the hot spot. If you get there too soon, and nobody else is there, then you aren't actually cool. You're just a an empty nightclub looking like an idiot, and paying too much for vodka sodas or whatever. It's a very weird dynamic. It's people who have, I think, actually fairly good social skills more than maybe the hedge fund people do. They like to talk if you're a reporter, like I am, they make for good interviews because they're very engaging people, but they're like tastemakers in a way. It's like buying an apartment in a neighborhood you think will be much more valuable in five years. That's a much better analogy than people might realize.
Ricky Mulvey: This may sound esoteric, but I hope it's not. I've heard you, not rail against, but disagree with people who go on vibes based strategies, whether it's specifically for sports gambling. I'm going to put it into the investing category, though. I guess, in your mind, what's the difference between hard to quantify information in vibes? Because it sounds like those could be very similar.
Nate Silver: I think vibes can be fine if you have a lifetime of experience reading the vibes and translating that into something resembling an empirical strategy. Certainly poker players. If you watch like Maria Ho, for example, or Phil Hellmuth, very different players from one another, but they both have this uncanny way to tap in and just know from somebody's vibes or their tolls or their betting patterns, whether they are bluffing or have a strong hand. I know because having played so much more life poker for this period of three or four years, you every now and then, on a good day, I develop a little bit of that skill. The 10% of what Maria Ho is capable of, on her worst day, I get on my best day, but you do experience a little bit of a sixth sense, where if you spent years and years watching how people put chips in the pot, watching people's pulse. Watching when people get erect when they have a good hand, awkward pauses and things like that. You develop a database in your head that actually does become empirical. If you're Marc Andreessen or somebody, and you've heard tens of thousands of pitches, then you probably do have actually some good vibes based sense. On the other hand, if you're in like we were in the pandemic, we were all in the pandemic three or four years ago, we never experienced anything like that. Going by vibes was probably quite dumb, and we should have stepped back and said, let's actually plot this out more carefully. Maybe we'll open up a spreadsheet or something and understand how exponential curves work and things like that. Vibes are great when you have experience reading the vibes and otherwise overrated.
Ricky Mulvey: Earned vibes.
Nate Silver: Earned vibe, for sure.
Ricky Mulvey: You mentioned Marc Andreessen. I want to stay on the VC stuff because Marc Andreessen gave a lot of money to Adam Neumann for his new start up flow. That was easily dunked on, because here's this guy who had work and he blew it up. Why is he still getting money from these big VC firms? But you actually found the answer to that.
Nate Silver: I think it's throwing. On the one hand, you could rationalize it in the sense that you want really high variance when you're a VC. You're not hiring somebody to run like a frozen yogurt shop or something in a mall somewhere, where you have a fixed downside and fixed upside. You are trying to have a company that will earn out 100x, 1,000x, 10,000x investment. That means you want high risk strategies, and I guess the theory is that, the fact that Adam Neumann built up this big company and then saw it lose most of its value, that at least shows higher variance. But I think it was like a little bit of a middle finger to the establishment, I think, too. A lot of these VCs can be trollish. As someone who likes to troll a little bit as a veteran of the Internet Combat Streets. I appreciate it. But it was conspicuous. I went to this conference in Utah where 98% of it was off the record, so I can't talk about it. But the first presenter they had was Adam Neumann in this room of Silicon Valley royalty because they wanted to show off. We are risk on, and we're going to demonstrate that in the most in your face possible way.
Ricky Mulvey: In staying into this, you said, was it a veteran of the Internet Combat Streets. That's a great biography. This plays into that, where you say that, "In memeified world, bubbles will become steeper, longer, and more common." I would think that bubbles would be shorter in memeified world, where new cycles are shorter, attention spans are shorter. But why do you think bubbles grow so much larger in the world we have now?
Nate Silver: In the book, there's a very nerdy explanation of why you can get like bubbles for coins and meme stocks, but it involves on the one hand game theory. Usually, if the price of an asset is inflated, then there's a big incentive for Ricky, either me or you to duck out and take the profit before the asset blows up. Cut your loss, or actually, cash your check. Cash out your highly inflated shares while the price is still high, and that can trigger a sell off that therefore causes a collapse back to some fundamental value. But in a world where we can coordinate and collaborate in a world of like WallStreetBets, where we might have some camaraderie, we might think it's a joke and we're memeifying the world, then those bubbles can persist for longer. Because look, if you and I both own shares in GameStop, and some hedge fund is shortening it, if we both hold on, then we can cause the short position to collapse, and we make money. The hedge fund loses money, but we have to be able to coordinate and trust one another and escape the prisoner's dilemma that you usually face, in the game of chicken that you usually face. In a world of spontaneous coordination on the Internet, I actually can happen more than in the pre-memeified world.
Ricky Mulvey: The ball can stay in the air a little bit more. One of the things I really appreciate about your book, too, is the nuance of it. You get it when you have more than 500 pages. Some of that also comes to how people get super rich. You break it down into, like, are you willing to take these really high risk bets? If you basically have a one in a 1,000 chance of betting a dollar and being paid back $10,000. Most people will not take that if they can also take a one dollar bet to win two dollars at 50/50 and yet it creates these huge outcomes like your Sam Bankman-Fried's and maybe Elon Musk.
Nate Silver: Look, and we should separate out two things. If you have a bet where I can win $10,000, one out of every 10 times, that has like 100% ROI, but I'm going to lose 99.9% of the time. If I can only make that bet once, then it's a crazy bet to take. If I can make that bet 1,000 times or a million times or infinite times, then it's a great bet. That's why the VCs actually are almost guaranteed to make money, but any individual founder isn't. Being a founder, most of the time your company does not live up to the billing, most of the time it fails, that requires a single minded appetite for an idea and a large tolerance for risk, and a lot of founders have a chip on their shoulder. A lot of them have had a difficult childhood, something where they feel like they have to prove to the world, they've going to run in this different direction for 10 years. SpaceX took 13 years, whatever before it turned the first profit and blew up three failed rockets before the fourth one actually worked. Most people don't have that type of risk tolerance, and most people error on the side of being too risk averse, although Elon Musk and Sam Bankman-Fried are people that are very much on the other side of that spectrum, safe to say.
Ricky Mulvey: One of the biggest risks that we're taking right now, it's toward the end of your book is with artificial intelligence, and that's something that intensely worries people that are in the river, your Silicon Valley types, your professional poker players. They think about it in terms of the introduction of nuclear weapons to put it kindly. Or not to put it kindly, to put it mildly. Why is it that, sometimes on this show, we talk about AIs as just like a tool for companies to use to generate more profits or something that companies are just spending too much money on that CFOs are having a problem with. We don't talk about it in terms of existentially. Why is the River so concerned with it there? Sorry, you were ready to answer the question, like, three times. You knew where I was going.
Nate Silver: Partly is the same expected value mindset. We're like, the base case for AI is that it's an important technology that like most technologies causes some degree of productivity growth, and it doesn't totally change the world. But the large language models that we have, like ChatGPT, Claude, etc., are quite miraculous in some ways. The idea that you could just have a computer, basically read the Internet over and over. Let's have the computer read the Internet, read all texts on the Internet, have a transformer model to process that text, and then just leave the computer on for six months and see what happens. Then you come back and it's like passing the touring test and can answer most questions to some semi reasonable degree of half bullshit half truth, which is how most human beings are. That was considered very unlikely and very miraculous. The fact that there was that great leap forward with large language models makes people extrapolate and say, what if there's another leap forward or continued progress forward, then these things will become smarter than us, and the implications of that are hard to predict. People like Sam Altman, they'll say in the same sentence that yes, this is actually risky, this could go very badly, but also we could solve global poverty with AI because it will increase productivity so much. Again, I think the base case is more boring than that. But if you're thinking in terms of what if there's a 5% chance of severe outcomes or a 10% chance of some singularity where you have incredible productivity growth, in expected value terms, those are things that are very much worth thinking about. With the comparison nuclear weapons, we've only lived with nuclear weapons for 80 years. If there's a one in 100 chance of nuclear war every year, we unfortunately don't have enough data yet to feel safe about that.
Ricky Mulvey: What do you think the base case with AI is then?
Nate Silver: I think the base case there's a scenario that I call hyper-commodified casino capitalism in the book, where, one thing I worry about with AI. Again, I'm more or less a neoliberal capitalist. But I worry that could lead to even more of a winner take all economy. AI is very dependent on having a lot of compute. If you're Google, or if you're OpenAI, or if you're the Government of China or maybe the US Department of Defense or something, and have access to a large computing cluster, then it's not your traditional start-up lab in a Los Altos basement or whatever Steve Jobs was, for example. I worry that it will differentiate people at a very high skill level, where if the baseline of what the machines can do is pretty high, then to add value, you probably have to be very particularly skilled in particular ways, or actually, although ironically, the AIs are not nearly as good at things involving physical movement. If you're a skilled welder or something or a skilled professional athlete, then you're totally safe, whereas the middle brow might be in a lot of trouble. But I worry that AI will contribute to some people getting very wealthy and having a lot more agency and other people being left out.
Ricky Mulvey: I think that makes a lot of sense. One of the things, when you're talking about AI, you talked to a lot of the rationalist, effective altruist types, where they're using very defined frameworks to talk about how what AI could do. I guess in this world ending model, I wonder if you think the same thing that so far has saved us from nuclear weapons can save us from these AI weapons, which is that if Russia throws a nuke at the United States, almost every single person would throw a nuclear weapon back, even though that's a lower expected value calculation?
Nate Silver: So far, the doctrine of mutually assured destruction has proven to be an effective deterrent to the use of nuclear weapons. It doesn't help a country like Ukraine or Vietnam or somewhere that doesn't have nuclear weapons, but you haven't had superpowers step too close to that line since the Cuban Missile Crisis, although you have had a couple of near miss accidental scenarios, which is also quite scary. With AI it's a little bit hard to know the same dynamics in part because unlike the Manhattan Project, which was run by the US government, this is being run by private companies. You have, for example, Meta, aka, Facebook, is pretty open about the fact that it wants to accelerate, it is seen in the marketplace as a little bit behind OpenAI, for example. Therefore, it has no qualms about explicitly encouraging competition, about open sourcing models and different things. If you had, like I don't know what the analogy is, private firms competing to test nuclear weapons or something, then that might lead to more proliferation overall.
Ricky Mulvey: I don't want to end in a totally depressed place. Maybe we'll end with something the listener can take with them. You write about the habits of highly successful risk takers, preparation, raise or fold attitudes, adaptability. You also meet with a lot of smart degenerates, smart degens. What's a habit of a smart degen or a risk taker that a Motley Fool Money listener can take with them?
Nate Silver: I've been to go with that raise or fold mentality one because it's something I want to popularize a lot. Look, sometimes I will deal a backyard, 0.25, 0.50 Poker game to friends, a crew of people that have basically never played poker before, except that twice, someone who play this game. What bad poker players do is that bad poker players are too passive. They'll check and call to see the next card. They won't own and enforce the action for themselves by raising or folding. Sometimes the best action is to quit, is to fold. When I say a raise or fold attitude toward life, making a bolder decision. In the military, too, I talked to HR McMaster, who's a five star general and in the military, standing still in the middle of battle is like a really bad plan. You either want to attack or retreat. Those are both better moves than just calling and standing still. Being willing to get out of a bad situation and then raise the stakes when you have the advantage and press advantage is, I think good advice across a lot of walks of life.
Ricky Mulvey: I'm delighted to recommend on the edge to all listeners of Motley Fool Money. Nate Silver. Appreciate your time, your insight, and thank you for joining us on Motley Fool Money.
Nate Silver: Thank you, Ricky. Appreciate that.
Mary Long: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. Again, we're off tomorrow, but we'll be back on Monday. See you then. Enjoy the weekend.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
