Motley Fool Hidden Gems Investing - Nate Silver on Gambling, VCs, and AI

Episode Date: August 10, 2024

What can we learn from the people who put everything on the line? Nate Silver talked to just about every type of gambler – poker players, venture capitalists, crypto traders – to find out.  Silver joins 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. Companies mentioned: DKNG, MSFT  Host: Ricky Mulvey Guest: Nate Silver Producer: Mary Long Engineer: Dez Jones, Chace Pryzlepa Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. in the military standing still in the middle of battle is like a really really bad plan right you either want to attack or retreat those are both better moves than just calling and standing still and so being willing to like get out of a bad situation and then raise the stakes when you have the advantage and press that advantage is i think good advice across a lot of walks of life i'm mary long and that's nate silver he's the founder of the political polling site 538 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 moneyballization 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. I want to do the election stuff up front, and then I want to dive into the book. I think that might be sort of the standard interview procedure for most of this stuff throughout the book tour. You've said that this is a, quote, somewhat challenging time from a forecasting standpoint. And in this time, we've delayed our interview by a couple of weeks. And 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? what's challenging about it yeah it's the first thing you mentioned it is the fact that democrats um only three weeks ago or was it two weeks ago replaced their candidate in midstream there is not a recent precedent for this and so instead of this interminably interminably long election like we usually have we have a compressed election over roughly 100 days um 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 um so far we've seen a lot of momentum in the polls for kamala harris um biden had been way behind trump and now harris is

ahead um in most national polls and more importantly has pulled into like 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 um but yeah but But, you know, usually you'd say that momentum is overrated in elections, that it's a long news cycle and that if you rise, it doesn't guarantee anything about the future. But maybe she could just kind of meme her way into the White House. We'll see. It's been an effective campaign so far. 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 from your sub stack from a subscriber named Tokyo Sex Whale.

which bear 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. So 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. So I think it'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 than the Harris archetype. But you did mention the stock market. And 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. And it's very hard, even though she might try to distance herself from Biden. It's very hard for an incumbent party to win re-election when the economy is in shambles, which it's not now, to be clear. I mean, the day we're recording this, my 401ks had a nice little bounce back versus Tuesday, whatever it was. But that's a risk factor. Absolutely. 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? Is a sports fan i'm a big believer in momentum or someone getting onto a hot streak um if you look at maybe it's 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 are not zero but but very small right 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 smaller than people think intuitively. And in politics, it partly gets at the dynamics of what stories the media covers, where usually Kamala Harris is kind of in this honeymoon period. Typically, you get into a

period of more skepticism because like the storyline becomes dull. People want to turn the page. But again, with a compressed election cycle, maybe it is exciting enough that that you can ride the way further, although obviously the first debate, if she has one with Trump, 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 and momentum swing now, and a debate is an opportune time to potentially take more risk and upend her. 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 uh who wanted biden to win would you take my uh would you take my bet my 50 bet for harris to win at minus 120 right now that's better odds than you're gonna get in a lot of sports books at my i mean that's pretty close to what the markets say i'm not sure there's much edge there necessarily um okay and 50 bucks i mean that's just recreational stakes you know if you're talking more money but no i offered to bet Alan Lichtman is a professor of government at American University and had this model that said Biden's going to win. It's the 13th case of the election and was trash talking me. And I'm like, okay, Alan, I will offer to bet you $250,000 on the election if you really believe what you're

saying. And that shut him up. I mean, I'm a big fan. And so first of all, I should say I advise a prediction market company called Polymarket. So I'm kind of 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 flawed. That's why it's sometimes fun to try to beat the sports books, for example, but, but people are usually a lot more honest and accurate when they're willing to, to wager something, put something on the line. I mean, and 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 a minus one 50? Are you more interested in Trump plus one 50?

harris i'll take i'll take i'll take trump at plus 150 for 50 bucks we'll change memo yeah i mean i believe in the model right and so like that's a i think harris is 50 50 or maybe a slight favor but yeah plus 150 i mean come on man i'm not gonna turn down a plus ev wager that would be that would be off brand that i'm willing to take it i know it's minus ev but i think uh you know this is like in poker if someone's playing against like brad owen 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. Okay, perfect. We're creating good content and I know I get a plus AV bet. It's a win all around. 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? I mean, look, if Harris wins or maybe even if she loses narrowly, it's kind of a little bit of a science experiment, this election, where we actually see how much the candidate matters, that when you have a candidate, because people like to say, oh, it's all about the kind of fundamental conditions of the economy and X, Y and Z. But, you know, Biden was four points down in the polls to Trump and she's two points ahead. It's a six point swing, even in as polarized a

country as we are. And so I'm interested to see how much you can maybe overcome the drag that Biden would have represented. And also the fact that like, you know, 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, 81 or 82. And the fact that people thought they could kind of narrate their way out of this and that it wasn't a fundamental problem, I think was proven wrong. So like, in some ways, you know, Biden, people graciously say, oh, Biden withdrew. Now, Biden was was pushed out. Right. 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 care about winning. And he was pushed out and

replaced. And it was kind of a radical risk taking strategy. And so 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. And this is kind of a fundamental question, but you get into how people calculate risk and we use sort of the same percentages for, you know, 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 i mean you're right that on some level ricky it's kind of it's kind of implying false precision but i think

people shouldn't be afraid of numbers right and as a poker player um you know 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. Um, and so maybe it's just a matter of like being an environment where you're, you're paid to make these kinds of precise calculations of risk and trying to reduce any phobia about numbers. I mean, look, I thought for a long time that like, um, you hear it said, Oh, people don't understand probability, quote unquote, where, um, in 2016, we had Trump with the 29% chance round to 30, but 29%, um, 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, right?

The more exposure you have to it, you know, if you play poker and you understand that if you get all in with three of a kind against a flush draw, right, you're going to lose 30% of the time still. And you played the hand well and made the right forecast, so to speak. And so I'm not trying to cater to people's biases as much, I guess I'd say. Are you tired of people saying you got the 2016 election wrong? I think that's what I heard in those other- I mean, I think like a gambler. I think I got it right because you would have a good bet on Trump, right? It was five or six to one in markets. And if the actual odds are two to one or three to one,

then you jump all over that wager. It was mispriced in the market. So yeah, 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. Let's get to the degenerates in the river. I want to specifically turn to to poker in las vegas generally you were around a lot of these high stakes poker players um both i mean you you were 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 um in some ways i think they understand more than most people how fleeting

money can be um it comes and goes and like literally like at the world series of poker last year that you mentioned right doing well and then had a ham where i had the second best possible hand and my opponents had the very best possible hand at it set of sixes versus set of sevens getting a little too far in the poker weeds i know but but you understand that like hundreds of thousands of dollars can turn on something you have no control over and therefore it makes you i mean most poker players know how to have a good time right they're going out to the nicer restaurants we're playing credit card brulette which means we randomly have the waiter waitress, pick one of the cards so someone gets stuck with the entire bill. Because I've chosen

a career that is not a steady paycheck. I mean, the amount of volatility in poker is very high. So there's something a little bit weird and kind of 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 kind of medium good people skills. I mean, people reading does help and things like that. So with that skill set, you could probably work for a hedge fund or work for like a tech company somewhere or something or start a business. But they like the freedom of the poker lifestyle. They like kind of 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. Yeah. The variance is something that's incredible. You asked this to Peter Thiel about basically where he would end up in, in, let's say for the sake of this question, it's we're in a simulation. How many simulations, like 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? Oh, I think we wind up like in a lot more simulations where I'm a maybe successful, maybe struggling professional gambler of some kind than the life I've actually wound up in, right? I mean, that kind of suits my skillset more in some ways than being in the media does. And I feel like I've gotten lucky repeatedly to be in a position where

I am, right? 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'm one of people who pass that law to be voted out of office. Then 2008 comes along. I'm living in Chicago, went to the 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 slash United States senator runs for office. It's kind of this moment where people want analytics and everything, five years post Moneyball and the blog 538 kind of takes off. And then I get lucky that the forecast proved to be

right. In 2012, all 50 states were quote unquote called by the model correctly. I mean, that was very lucky. That's supposed to happen like one out of 20 times or something according to our own internal calculations. So 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. A bit of a sunrun, but for polling, if you will, that's... Yeah. I mean, you had very... And that kind of set me up for no matter what happened, you're going to come down from that peak, right? 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 all off and people had, I think, unrealistic expectations. And as much as I tried to downplay them, it wasn't successful. But also, like, you know, 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 that's just, it's kind of more my speed, I think. Kind of more of a poker player's mindset.

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 talk to military generals, you talk to VCs, you talk to professional poker players, how do you know if you actually have a high risk tolerance? 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 is do you find that terrifying right and it's a it's a careful balance to strike but like i find that i play i mean everyone says this right but 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 um you know if you talk to these people like athletes and like i talked to an astronaut you experience a stress response when you're gambling or or presented with risk whether it's physical risk or um or financial risk that like your heart rate rises and you have more production of different chemicals in your body and you can kind of even go into like a a zone or a flow state or go on tilt as a poker player where why is my heart beating so fast right why am i so nervous and you start to overthink things and then play badly um but i find those moments kind of fun. So that means I'm a degenerate gambler at heart, I think. Do you think that you also talk about how essentially games get just wilder when there's

more money at stake? And that's a little counterintuitive. 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? I mean, 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 bust out for good um so yeah people you know 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 right um so by definition they have high risk tolerance and they have big egos too um you know 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 so they buy in for more chips than they had originally and then and then it kind of escalates from there do you when you're playing and maybe you don't want to give too much away do you find that your your image helps is is a

statistician because you talk about how you don't use you know game theory optimal is the basically it helps you decide at what random points should you bet fold raise that kind of thing do you find and 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 to sort of play against the image that people have of you? I think, you know, I played a lot of poker. I mean, always, I had a background as a professional poker player, but like I played a lot of live poker and working on the book starting in 2021. And at first it was kind of a novelty. It's like, oh, statistician, even though I had this background, people didn't know it. Statisticians playing these poker tournaments. And so for a while,

I was able to like bluff my ass off, right? People were like, this guy must be careful in calculating he's a statistician he wouldn't bluff right when of course like bluffing is what makes poker poker um you know 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 like maybe a little bit tighter recently i think i went through some phases where i overdid my bluffing aggression frequency a little bit um but most of all yeah it is a people game and you're trying to like adapt to the room you You know, 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 know, 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. More generally, you've seen gambling booms and busts in poker. there was one it was the chris moneymaker era yeah of the world series of poker now we're in sort of 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 gambit and yet literal gambling is booming why do you think these risk appetites have shifted so much and moved especially towards gambling um i think part of it not to get too anthropological, but we no longer have the same forms of physical risk, right? 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, right? And so I think there's an excess demand for risk taking among people who have this gene and that Las Vegas is kind of like an output for that, right? Where you go to kind of 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 like 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 yeah, younger people are not drinking or having sex or doing drugs like they once did, which I guess is maybe good if you're like a focus on the family person or something. But also things like free speech, there's kind of less tolerance for free speech

among younger voters, which is kind of been thought of as a risk on strategy, right? Like speech can actually have consequences. But yeah, so it seems like we're in a society where you have a bifurcation of risk-taking tendencies where some people really like to gamble and some people play it really safe. And you probably want some mix of both in society. You want people experimenting and moving things forward. You also want people saying, hey, wait a minute, that's not a good risk to take. But that seems to be getting a little bit out of whack, that balance potentially. Wait, you said restricting speech is a risk on strategy. I would imagine that the people who think they're restricting speech.

No, I think free speech is a risk on strategy, right? I mean, free speech, people blow things up for free speech sometimes. If you say things that offend them, but that's kind of, it's part of the classic strategy of liberalism. I mean, part of the book is about the United States and the kind of traditions of constitutional liberal democracy and free market economics in which the united states was founded that come out of the enlightenment and kind of what that's led to you know 300 years later is is plenty and wealth um but also inequality and uncertainty um and a very dynamic society where if you're not adjusting you risk being left behind yeah um a lot of it is about sort of the the anthropological forces about how people handle money perceive risk that

kind of thing and you go you go behind the curtain on on vegas and you also look at the money ballization essentially of of casinos yeah um and what you found one of the things you talk about is that people who are problem gamblers thinking specifically of all generalized slot machine players actually don't want to win yeah so so what do they want they want to keep playing Yeah, I talked to an anthropologist, maybe the world's only gambling anthropologist named Natasha Shull, very smart woman at NYU, who did her kind of PhD thesis on low-end casinos in Las Vegas and found them to be a fascinating anthropological environment. And what she found is that people just want to be in what she calls the machine zone, where you're kind of literally pulling a lever or pushing a button repeatedly, and you can shut out outside distractions. And she would find things that 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. right? And 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 kind of stares at you and you draw attention to yourself. Whereas casinos are designed so that you can kind of at least a slot machine side of it. So you can kind of be anonymous and hide almost, right? I mean, this is different at the higher end resorts where you have more open spaces, but you know a lot of low-end casinos are very dingy and maze-like you can kind of hide off in a corner and and press your button on your slot machine for five hours at a day um and these people for better or worse are people who may actually be kind of risk averse they're very different than like the poker players or the guys playing craps they actually think that you know

one line that natasha has is like uh you know it's the one place where there's certainty because say no 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 and 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 um but no they they are often people who are who are struggling slot machine gamblers and and slot machines offer kind of a safe space but an expensive safe space. You talked about also how sort of the take rate on these slot machines have gone up. No one really notices because of the variance 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, that trance? Yeah. I mean, I hope my book brings out like a little bit more. If there's one gambling tip, if you find yourself, you're at a convention, you're at the Aria or something, don't play slots, right? Slots are the worst deal in the casino. It's a one gambling tip I've had. If you want to lose a little bit of money, then that's okay. Yeah, I don't know. We're going to find this out. I mean, with sports betting now, you have one of the sites, DraftKings, proposing an additional tax where it takes back some of the money that states are taxing them and charges a surcharge for winning bets, right? So we'll see kind of how much

market share that costs them. Yeah, in general, because slot machine gambling is negative of expected value in general. Customers are not as price sensitive. Whereas the more skilled forms of gambling, sports betting and poker, people are quite a bit more price sensitive. So yeah, I mean, one thing the casinos are smart at is that they have whatever your psychological profile, whatever, 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 um 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

and so they figured out that's why there's that's why there's like 15 different ways to gamble in any given casino is that it'll tickle some part of your of your degenerate funny bone yeah let's talk about draft kings for a second because you you talk to the these sort of casino uh 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 iGaming to survive, you think? And by iGaming, I'm talking about online slots, craps, that kind of thing. 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 strip casino plus non-gambling

revenues. And the problem is that like, it's very hard. 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 DraftKings 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 a hundred different ways to bet the Chargers, Chiefs game or whatever. And there are 15 NFL games a week and 50 college football games and a hundred soccer matches and whatever else, and 20 NBA games in a three day period and things like that. And 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. So they do instead is limit who's allowed to bet and how much they're allowed to bet as kind of a semi skilled sports better. I've been limited by graph Kings and MGM and literally a half dozen sites in New York just for kind of having the profile of someone who's trying to win. Right. You know, I remember like shopping for a Halloween costume a couple of years ago and the NBA season started and like, I'm like, oh my gosh, the line just went up for the Charlotte Hornets, Washington Wizards game. I'm going to hit that line really hard. Right. If you're, if you're betting a thousand bucks on the hornets wizards game when it first comes out then you're clearly trying to

win it's not a recreational bettors profile um but they'll shut you down i should say caesar still lets me bet they're the one exception um and bet rivers i think um but people don't know how much they're trying to move away from the traditional model of bookmaking the traditional model is that um you knowingly take some smaller bets from sharp winning gamblers because it helps you set your lines for the recreational players later on. DraftKings, places like that are now trying to MGM, trying to cut that first part out of the process where they don't want you to bet with them at all and they think you're a winner, which leads you to wonder, by the way, if you've been on DraftKings 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 i can i can feel uh my my producer saying please move on from from gambling promise i will um this and this does relate to i think stock market stuff but you talk about sort of the efficient markets and this i think has to do with stock investing and gambling and you talk one would normally think that the more money that goes into a pot the more efficient a market is because it's what is it like everybody guesses the weight of the cow and then the average which is probably right. But that turns out not to be true. When there's more public money in the mix, there's more emotion. So one example might be like a Conor McGregor fight, who's a huge fan

favorite in the UFC. A lot of people like him. They might be betting on him. I think this is something that stock investors can also apply. So what are the signs of a big market that's inefficient, you think? Yeah. So in sports betting, I guess we are talking about sports spinning still, but I'll bring it back to the stock market. You have what's kind of 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, then yeah, really small markets, if you're bidding 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 and the in-between is kind of what you want to avoid. I don't know where the stock market falls on that spectrum. I mean, obviously you have like meme stocks and stocks that become big kind of 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, right? So I'm not really trying to beat the market. But yeah, 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. You looked at a lot of different ways that

people invest and speculate within your book. I'll include crypto and NFTs in the speculation side. You also have VCs and hedge fund folks. And I know you just said you like the ETFs, but did studying how people treat risk handle it? Did that affect the way you think about investing at all? I mean, maybe it should have more, right? But yeah, look, understanding just the importance of compounding returns and compounding interest, right? I would love to be a VC. I mean, the top decile VC firms do really, 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 upside bet probably won't, high risk, high upside bets probably won't pay

off, but the portfolio does very well. I use data provided to me by Mark Andreessen to run some simulations and be like, oh yeah, actually it's very hard to have a losing decade or something if you're Andreessen Horowitz or Founders Fund or somebody or Sequoia and you get like the top founders from all around the world are begging to get money from you, that's a pretty good business, it turns out. And those firms do do very well making money, kind of a self-fulfilling prophecy by their own admission. But I have more, even though I talk a lot about the character flaws of Silicon Valley, I mean, these are people that are very flawed in some ways. I didn't realize how profoundly profitable their businesses actually are.

Yeah. And 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. And you said, quote, if you're going to be a contrarian, that means looking for information that's hard to quantify, end quote. What does that actually look like in practice from the people you spoke with? I mean, a lot of the 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. So on the one hand, you want to be contrarian. On the 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. So you don't want to be too contrarian, right? It's like trying to find like the nightclub in your town that's like just emerging as the hotspot. If you get there too soon and nobody else is there, then you aren't actually cool. You're just kind of at an empty nightclub looking like an idiot, right? And paying too much for vodka sodas or whatever.

So 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. This may sound esoteric, but I hope it's not. I've heard you not rail against, but disagree with people who go on sort of vibes-based strategies, whether it's

sports, uh, specifically for sports gambling. I'm going to put it into the investing category though. So I guess in your mind, what's the difference between hard to quantify information in vibes? Cause it sounds like those could be very similar. Um, 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. Um, certainly poker players. If you watch, uh, like Maria Ho, for example or phil helmuth very different players from one another but they both have this kind of uncanny way to like tap in and just know from somebody's vibes or their tells or their betting patterns whether they are bluffing or have a strong hand right and i know because having

played so much more live poker for this period of three or four years you kind of every now and then on a good day i develop a little bit of of that skill the 10 of what maria ho is capable of you know on her worst day i get on my best day but you do kind of experience like a little bit of a sixth sense where if you spent years and years and years watching how people put chips in the pot watching people's pulse right watching when people get erect when they have a good hand awkward pauses and things like that and you kind of develop a database in your head that actually does become empirical so if you're mark 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, right? We'd never experienced anything like that. And so going by vibes is probably quite dumb and we should have stepped back and said, let's kind of 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. So yeah, vibes are great when you have experience reading the vibes and otherwise overrated. Earned vibes. Earned vibes, for sure. 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 startup Flow. And that was one that was easily dunked on because here's this guy who had WeWork and he

blew it up. Why is he still getting money from these big VC firms? But you actually found the answer to that. Yeah, I think it's throwing. So 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 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 your investment. And 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, right? But I think it was kind of like a little bit of a

middle finger to the establishment, I think too. I mean, a lot of these VCs can be kind of trollish. As someone who likes to troll a little bit, as a veteran of the internet combat streets, I kind of appreciate it. But yeah, I mean, it was conspicuous. I mean, 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, yeah, we are risk on, and we're going to demonstrate that in the most in-your-face possible way. In staying into this, where you said, was it a veteran of the internet combat streets? That's a great biography. This plays into that, where you say that, quote,

in a memefied world, bubbles will become steeper, longer, and more common. I would think that bubbles would be shorter in a memefied world, where news cycles are shorter, attention spans are shorter. But why do you think bubbles grow so much larger in the world we have now? So in the book, there's kind of 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, right? Usually if the price of an asset is inflated, then there's a big asset for a big incentive rather for Ricky, either me or you to duck out and take the profit before the asset blows up, right?

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 Wall Street bets where we might have some camaraderie, we might think it's kind of a joke and we're kind of meme-ifying 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 shorting it, if we both hold on then we can cause the the short position to collapse and we make money the hedge fund loses money um but we have to be able to coordinate and trust one another and escape the prisoner's

dilemma that you usually face the game of chicken that you usually face um and in a world of spontaneous coordination on the internet that actually kind of can happen more than in the pre in the pre-memified world okay so so the ball can stay in the air a little bit more um 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. And some of that also comes to how people get super rich. And you kind of break it down into like, are you willing to take these really high risk bets? And if you basically have a one in a thousand chance of betting a dollar and being paid back $10,000, most people will not take that if they can also take a $1 bet to win $2 at 50-50. And yet it creates these huge

outcomes like your Sam Bankman Freeds and maybe Elon Musk's. Yeah, 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 a thousand percent ROI, but I'm going to lose 99.9% of the time. So if I can only make that bet once, then it's kind of a crazy bet to take. If I can make that bet a thousand times or a million times or infinite times, then it's a great bet. And so that's why the VCs actually are kind of almost guaranteed to make money, but any individual founder isn't. Being a founder where most of the time your company does not live up to the billing, most of the time it fails, that requires a huge appetite, 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 had a difficult childhood, something where they feel like they have to prove to the world, I'm going to run in this different direction for 10 years. I mean, SpaceX took 13 years, whatever, before it turned the first profit and blew up three failed rockets before the fourth one actually worked. I mean, most people don't have that type of risk tolerance. And most people err on the side of being too risk diverse, although Elon Musk and Sam Beckman Freed are people that are very much on the other side of that spectrum, safe to say. And one of the biggest risks that we're taking right now, it's towards 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 AI as sort of 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. So 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. part of it is the same expected value mindset right we're like yeah i mean the base case for

ai is that it's you know an important technology that like most technologies causes some degree of productivity growth and that doesn't totally change the world right um but the large language models that we have like chat gpt claude etc um 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 a 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 like six months and see what happens and then you come back and it's like passing the turing test it can like answer most questions to some semi-reasonable degree of half bullshit half truth which is how most human beings are um like that was considered

very unlikely and very miraculous and so 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. And 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'll increase productivity so much. And 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, I mean,

in expected value terms, those are things that are very much worth thinking about. And with the comparison of nuclear weapons, I mean, we've only lived with nuclear weapons for 80 years. So 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. So what do you think the base case with AI is then? 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, and again, I'm more or less a neoliberal capitalist, right? But I worry that could lead to even more of a winner-take-all economy. You know, AI is very dependent on having a lot of compute. So 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, right, and have access to a large computing cluster, then it's not your traditional startup lab in a Los Altos basement or whatever Steve Jobs was, for example, right?

And 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, right? So if you're like a skilled welder or something or a skilled professional athlete, then you're totally safe, whereas kind of the middle brow might be in a lot of trouble. But yeah, I worry that AI will contribute to some people getting very wealthy and having a lot more agency and other people being left out. Yeah, I think that makes a lot of sense. One of the things, so when you're talking about AI, you talk to a lot of the rationalist, effective, altruist types where they're using very defined frameworks to talk about what AI could do. And 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. Yeah. 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, I mean, 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, right? So 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. So therefore,

it has no qualms about explicitly encouraging competition, about open sourcing models and different things. And so, yeah, if you had like, I don't know what the analogy is, like private firms competing to test nuclear weapons or something, then that might lead to more proliferation overall. All right. 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, razor 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? I'm going to go with that razor-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 a summer will play this game. And 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 force the action for themselves by raising or folding i mean sometimes the best action is to quit is to fold and so when i say a razor fold attitude toward life i mean making a bolder decision right um in the military too i talked to hr mcmaster who's a five-star general and like in the military standing still in the middle of battle is like a really really bad plan

right you either want to attack or retreat those are both better moves than just calling and standing still. And so being willing to get out of a bad situation and then raise the stakes when you have the advantage and press that advantage is, I think, good advice across a lot of walks of life. 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. Thank you. I appreciate it. 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 so 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 I'll see you next time.