The Prof G Pod with Scott Galloway - The Algebra of Wealth

Episode Date: February 18, 2021

Noreena Hertz, an economist, a bestselling author, and an Honorary Professor at the University College London, joins Scott to discuss the learnings from her latest book, “The Loney Century: How to Restore Human Connection in a World That's Pulling Apart.” We find out how loneliness impacts more than just our mental health and the second-order effects of our “contactless” world. Follow Noreena on Twitter, @noreenahertz. (16:10) Scott opens by explaining the algebra of wealth — or in other words, how to get rich.  This Week’s Office Hours (52:40): CEO compensation (53:04), Roblox and deferred revenue (61:05), and deciding whether to get an MBA (65:17).  Additional Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

episode 49 the atomic number of india my favorite 49ers steve bono who backed up troy ekman at ucla and then went on to back up joe montana and steve young but still managed to get to the pro bowl i'm backing your ass up today let's go to the proth episode of The Prop G Show. In today's episode, we speak with Norena Hertz, an economist, bestselling author, and honorary professor at the Institute for Global Prosperity at the University College London. We discuss insights from her latest book, The Lonely Century, How to Restore Human Connection in a World That's Pulling Apart. Okay, so we're going to go off script a bit here, and we're going to do an extended algebra of happiness for the body of the podcast. I've been thinking a lot about economic security. I've been thinking a lot about the GameStop Reddit movement, and effectively think it comes down to a desire to be more economically secure, a desire to take control of your future. And these are wonderful things. And started thinking a lot about wealth and the fact that

80 to 95% of people who are trading versus investing lose money. And started thinking about the algebra of wealth and want to share my observations around if there is an alchemy or an algorithm for wealth as an entrepreneur and as someone who has made really bad decisions and then I think slowly started to make really good decisions. Anyways, the algebra of wealth, or put another way, how to get rich. I want to preface this by highlighting that while I wasn't born into wealth, I have benefited immensely from the circumstances of my birth. And some, a lot of my success is not my fault. My smartest move was to be born a white male in California in the 60s, an America that at that time loved unremarkable kids and presented me with a world-class education.

At the time, UCLA had a 60% admissions rate and cost us $400 a semester. And that good fortune, the generosity of California taxpayers, and the vision of the University of California Regents thrust me into the financial boom of the 80s, and through sheer luck, positioned me to catch the internet wave. And I point that out just as a giant asterisk here, that the algorithm sits on top of a different plane for different people for different reasons, mostly how wealthy their parents are, when they were born, their levels of education. There's a fantastic book out called Cast that talks about race in

America and how that disadvantages so many people. Since I set foot on the UCLA campus in the 80s, we've told ourselves we remain the land of opportunity and that we're making progress to remedy our historic imbalances. Yet as illustrated by one metric after another, economic security is harder to obtain, not easier, and is becoming less a person's individual thought and more result of circumstance. Or put another way, America is becoming less American. Okay, okay. So the algebra of wealth, and just a quick newsflash to sort of put some myths aside, this notion that you should follow your passion and you shouldn't think about money are mostly bullshit. Achieving economic security requires hard work, talent, and a tremendous amount of focus on, you guessed it, money. Yes, there's some people's genius that will be a tsunami that overwhelms a lack of focus and discipline.

Assume you are not that person. Yes, it's a humble brag to say, I really don't think about money very often because what you're saying is I'm just so fucking talented that it swept over any need to organize or to think about long-term prosperity, that I was just so talented that the money just followed me and I became economically secure. I find that is totally misleading and not true. What is rich? What is the definition of rich? Rich is having passive income greater than your burn. Passive income greater than your burn. People on a path to money focus on their

earnings. However, people on a path to wealth also focus on their burn. It's not your income. It's not your income, but your income to expense ratio that determines if you're rich. So how to increase the odds of reaching economic security? My observation is that there are four factors in the algebra of wealth in order, focus, stoicism, time, and diversification. One more time, focus, stoicism, time, and diversification. Focus, factor one. Intelligence and talent are correlated with success, but the strongest signal of future success is your perseverance and your resilience. Let me be clear. If you have the option, you want your career to have something that gives you some enjoyment, but it doesn't necessarily need to be

your passion. Don't mistake something that you're good at and you enjoy for a passion. Follow, follow your talent, not your passion. The accoutrements that accompany being great at something, starting with talent, investing the perseverance, investing the bullshit that you have to put up with like everybody else to get great at it. Once you are great at that thing, at something, the accoutrements of greatness, relevance, admiration, camaraderie, money will make you passionate about whatever it is. So focus on putting yourself in a position to be financially successful. Specifically, get certified. In a digital world, much of the corporate world decides whether to swipe right or left based on the logos on your LinkedIn page. If that sounds unfair,

trust your instincts. Sector dynamics will trump your talent. I realize how awful that sounds. However, someone of average talent at Google has done better over the last decade than someone great at General Motors. Any opportunity you have when you are young to choose among different paths is a profound blessing that most people are not awarded. So if you have those opportunities, if you have a choice, try to be very thoughtful about those decisions. Finally, focus on relationships.

Family and friends are essential to long-term happiness, and the most important relationship is your spouse. Again, the most important relationship for economic security or for general happiness is the relationship you have with your partner, your spouse, specifically the person you're going to have kids with. Married people grow their net worth 77% more than single people. Try to marry the right person. I know that's easy and there are whole books written about how to find the right partner and then invest in that relationship every day.

If you don't, it costs a great deal. Your market power economically, your market value goes down dramatically once you're divorced. Factor two, stoicism. Determine what you can and can't control. You can control your reactions to temptation. A lack of discipline is the antichrist to economic security. Our society of superabundance makes this difficult. The most powerful forward-looking indicator of your financial freedom is not how much you earn but how much you save.

Stoicism is not just about being stoic in the face of temptation, it means also having good character. Succeeding in life is much easier if other people want you to succeed. Success is in the agency of others. There's a cartoon. There's a cartoon that rich people are Monty Burns and greedy and grabby. They are not. The majority of very wealthy people I know are hardworking, smart, take risks, and are kind. People want kind people to win. I spent the first 40 years of my life chasing some form of Western relevance so I could register more dopamine surges.

It was never enough. I always wanted more, more, more, more. All of my relevance attempts to get economic security were such that I could chase more dopa and never sated that appetite. This stage of my life was characterized by fits of progress, getting close, but never really achieving anything resembling the potential my opportunities warranted. In one moment, that all changed for me. When my first son had the poor judgment

to come rotating out of my girlfriend 13 years ago, everything changed. I was young enough to be selfish, but old enough to recognize it and acknowledge that I needed to change. I decided at that moment, no joke, to bring more focus and discipline into my life, specifically, specifically around investing in key relationships and also busting a move to economic security. Factor three, time. This is our most inflexible and valuable commodity, the one thing with which you should not be generous.

When it comes to investing, the long-term is our ally, the short-term is our nemesis. The gangster authority on time, Albert Einstein, supposedly remarked that compound interest is the eighth wonder of the world. Yet our brains are not wired to understand this. Small investments I made a decade plus ago have grown into the base of my economic security. I would have had economic security sooner had I realized at 26 that our flaws of species is thinking that time takes much longer to pass than it does. Compounding is not just a financial thing. The most important returns in life come from

compounded effects of our investments over time, whether in our finances, careers, hobbies, or relationships. Change the timescale of your life and you change your life. Start investing financially and in your relationships early and often. Factor four, diversification. In your life, focus is key. Plan A for financial security is being great at doing something that the market values highly and leveraging that into income and or equity in a business. But plan A squared is investments. And with investments, focus is to be avoided. What do we mean by that? Diversify. And unless your plan is to be in the finance industry, be sure that your time spent

tracking and trading your investments does not distract you from what is, should be your source of income and savings. If you want to be in finance, fine. It's a great industry. It has great scale. It's well-paying. The markets are fascinating. But be clear, are you actually trading to learn and get the skills such that you can be in that industry? If you don't plan to be in this industry, fine. If you enjoy it, dopa hits are fine, but be clear as to why you are doing it and what is the net result. If the net result is you are spending a lot of time on something and it's taking away from your ability to make money and then invest, then get the balance back in order. Investing over the long term pays out, but there are always dips along the way. Diversification is the Kevlar that protects you. With it, bad decisions will still hurt, but they won't prove fatal. Diversification, in other words,

is your bulletproof vest. We're not all perfect when it comes to investing. As a matter of fact, all of us are imperfect. Of my many egregious investing errors, I want to highlight two. I was so emotionally involved in Red Envelope, a firm I co-founded in 1997, an e-commerce company, that I kept putting more and more money into the business and ended up losing 70% of my net worth when the firm declared Chapter 11 in 2008. It just felt like it happened overnight. There was a long shoreman strike and all our merchandise ended up on a tanker 10 miles off the California shore. We had a software problem and then some analysts at Wells Fargo pulled our credit line

and we went from a stock trading at about 10 bucks a share to zero in what felt like just almost overnight. I had no Kevlar as I was terribly concentrated in one asset. Second big mistake I wanna talk about is Netflix. Yes, Netflix. I believed in the company, thought it had great management, absolutely recognized the potential, and bought a lot, for a professor anyways,

at 12 bucks a share. That's the good news. The bad news is that I sold it six months later at $10 a share to capture a tax loss and never re-bought. Today, it's at $560 a share. Not that it doesn't haunt me. Not that I don't think every day about the Gulfstream I would have bought with that money. No, definitely don't think about it.

Not at all. However, however, this mistake, this mistake, I could survive. Most of my major mistakes in investing can be distilled down to two things, not diversifying and trading. As my colleague Aswath Damodaran said in the pod a few weeks ago, there is no better teacher than the markets or mistakes. The best regulation, quite frankly, are personal life lessons and mistakes. In the end, my Kevlar has been not allocating more than 10% of my net worth to any one investment. That doesn't mean I don't look for opportunities that offer asymmetric upside. I do. I just don't ever take off my Kevlar. You don't need to be a hero to get to

economic security. Yes, I sold Netflix at 10. However, I also owned Amazon and Apple. It was my diversification getting in front of the e-commerce wave, if you will, that pushed me forward. I had several stocks, several stocks. And even though I wiped out on Netflix, the wave was able to get me to the beach. In sum, focus on what matters. Be a stoic in the face of temptation. Use time to your advantage. Diversify your investments. So in any economic

climate, we ask ourselves, how do we build economic security? We ask ourselves, how do we foster love? We ask ourselves, how do we find joy? How do we get rich? The answer is slowly. Stay with us. We'll be right back for our conversation with Norena Hertz. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact.

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Get all the automation, integration, and reporting tools that get your marketing running seamlessly, all backed by Constant Contact's expert live customer support. Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. Constantcontact.ca. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should

you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the tools are right for you, and what privacy issues should you ultimately watch out for. And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So, tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. Welcome back. Here's our conversation with Norena Hertz, an economist and author of The Lonely Century, How to Restore Human Connection in a World That's Pulling Apart. Professor Hertz, let's bust right into it. Let's discuss your book, The Economics of Loneliness. How have we ended up in a situation where loneliness is costing us billions?

So when we think about loneliness, we think about it typically as being something that affects our mental health, and it definitely does that. But loneliness is also not only damaging to our mental health and our mental health. And it definitely does that. But loneliness is also not only damaging to our mental health and our physical health. Loneliness is as bad for us as smoking 15 cigarettes a day. It's also damaging our economy. It's doing that two ways. First, because of the healthcare costs that are associated with loneliness. If loneliness is making people sicker, well, there's obviously a higher healthcare cost associated to that. But also, loneliness is affecting productivity in a very serious way. We know from extensive research that lonely workers

are less productive, less efficient, less motivated, more likely to quit a company. We know that the single biggest determinant for whether someone's productive at work is whether they have a friend at work. And yet, even before the pandemic struck, 40% of office workers were lonely. One in five people said that they didn't have a single friend at work at all. So break down the actual mechanics of loneliness. Is it a function of the fact that your behaviors degrade when you don't have the guardrails or checks and balances or motivation of being around other people? Or is it that you physically and biologically get less healthy because we're pack animals and not in the proximity of others? Break down the actual biomechanics of loneliness.

So because we are designed in evolutionary terms to be creatures of togetherness, because we are hardwired to connect, what happens is that when we are lonely, we've almost got a kind of clever systemic alert system goes off, telling us don't be alone. So our blood pressure goes up, our pulse rate goes up, our levels of cortisol go up. Essentially, we're put into a state of fight or flight when we feel lonely. And the trouble is, of course, that in contemporary life, what happens

is we don't act on that alarm signal, or many people don't act on that alarm signal. And so remain lonely for days or weeks or months or even longer. And it's this state of remaining lonely for protracted periods of times that is clearly associated with premature death, with increased rates of stroke, of heart attack, even a 64% increased rate of dementia. And what is it, let's put COVID aside for the time being, because obviously it's pretty easy to understand how COVID has created, for lack of a better term, an epidemic of loneliness. But what about our society more broadly or the era we live in has led to... I mean, people have been talking about loneliness as the new cancer for a while now. What is it about our society that increases the problem? So there are a number of reasons why even before the pandemic struck,

we had built a lonely world and one in five Americans were lonely, often or always. One in five millennials said that they didn't have a single friend. So a number of factors from the way we build. Let's just stop right there. One in five millennials say they don't have a single friend. Yes. A single friend. It's a shocking statistic. And it was actually my students that first alerted me to how big a crisis loneliness was, especially, interestingly, amongst the young.

We think about loneliness as being something that affects the elderly the most, but it's actually the young who are the loneliest. I read, I apologize, I keep interrupting you, but I read people under the age of 18, 50, the number of sub 18 year olds who see their friends every day has been cut in half in the last 10 years. And I mean, there's an obvious reason for it. The migration to smartphones and amongst the young in particular, this really has become their form of communication with a whole host of deleterious side effects. I mean, I started my research very agnostic on the role that smartphones and social media played in today's loneliness epidemic. But having researched the subject at length for a number of years, I feel confident that it's playing a significant role, especially amongst the young. At first, it was hard to know. We had seen a correlation for some time with rising levels of loneliness amongst young people and smartphone usage amongst this same generation. But it was hard until about a year and a half ago to know categorically that using social media was making young people lonelier. But technology isn't the only driver. It is clearly a driver and a real driver and helps account for why the young

are the loneliest generation amongst us. And yet there are other factors at play too, for sure. So how do you diagnose loneliness? If someone's listening to this podcast and they think, well, I'm not entirely sure if I'm suffering from loneliness and if it's having a negative effect on my mental what am i actually what do i mean by that term and for me loneliness is not only feeling that you're craving intimacy and the company of friends and family but it means also feeling disconnected disconnected from your friends and family for sure but also disconnected from your employer from your work colleagues from your friends and family, for sure, but also disconnected from your employer, from your work colleagues, from your fellow citizens, from the government. It's about feeling invisible and uncared for by those closest to you, but also by these bigger institutions, by the state, by your workplace. So for me, loneliness is personal, but it's also political, it's drivers, technological and often also economic.

So some of the things that you that if you answer in the affirmative might suggest to you that you're lonely might range from. friends, a more obvious definition to I feel invisible, to I feel uncared for by my government. Those are all, as I define it, ways of thinking about loneliness. So I think about loneliness as an existential state as well as a personal one. But if you're feeling lonely in even the most kind of traditional sense yourself, there are definitely things you can do. One of the things that there's a lot of research to show really helps if it's you who might be feeling lonely is actually reach out to someone else. And that is something which we know not only makes you feel better and actually also has a health dividend. Helping others has a health dividend. But it also, of course, makes whoever you're reaching out to feel better too.

So it's a kind of win-win. You touched on something that's in your book that was revelatory for me, and that is loneliness is not only a function of feeling invisible or uncared for amongst your family, friends, and community, but feeling detached from your government, or I would say the wider community, that you can feel lonely on different levels. Yes. And so the first aha moment that we were in the midst of a serious loneliness crisis, even before the pandemic, was my students coming into my office in office hours and confiding in me how lonely they felt. But the second was my research, which at the time was looking at the rise of right-wing populism across the globe. And as I interviewed and heard from Trump voters, railroad workers in East Tennessee, Parisian voters for Le Pen, voters in Italy for Salvini, I heard time and time again from their stories how lonely they felt.

Lonely both in the sense of feeling that they lacked a support system and friends, but also lonely in the sense of feeling forgotten and forsaken, which of course is what right-wing populists have played very effectively to, speaking to that sense of forsakenness that clearly so many people do feel, often with legitimate grievances on that front, for sure. Yeah. The other thing that, or one of the many things that you brought up that was sort of eye-opening was, you're right, when you think of the cartoon, if you will, or the image or the stereotype of loneliness, you think of an old man or an old woman who's lost their spouse and is lonely. And something that I've noticed, I coach a lot of young men and women,

college age or whether they're in college or not. And especially I find among young men that we don't want to use the word because it's somewhat shameful and it somehow implies that they're not successful socially or that they're not cool. So there's more shame involved than just saying, OK, you're 21. You were supposed to be you thought you were going to college. You're not for whatever reason. You thought you were going to have a job. You don't or you don't have a job you like. But it's clear you're lonely. It's clear you don't have, you know, a network or you're just, you know, the lack of

better term, you're lonely. And my sense is, and I don't, I ask this generally to learn, not to make a point. My sense is both older and younger men are worse at this, that they have more trouble acknowledging that they're lonely and making that step to reach out worse at this, that they have more trouble acknowledging that they're lonely and making that step to reach out to other people, that women are generally speaking better at remedying this than men. Is that true or false? Well, the data actually doesn't show, it's pretty equally split, actually, loneliness amongst men and women. But I think you're right in terms of, I think there's probably a disproportionate, and this is more anecdotal than based on empirical evidence, that it's harder for men to admit to being lonely in the same way that we know that it's harder for men in general to talk

about emotional problems they might be having. So I think that that makes sense. But we know that there are just a lot of lonely people out there. I mean, when I was in Manhattan, as part of the research of my book, I actually had heard that you could rent a friend. And I rented a friend, a woman called Brittany, for a few hours. And it was a very odd experience because it kind of felt like she was my friend. We drank coffee together. We walked around a bookshop. We went into a clothes shop.

But when I asked her who else her clients were, I thought it was quite eye-opening. She said to me, most of my clients, they're men and women, aged 30 to 40 professionals who've moved to the city um working all out yeah people working all hours mainly in tech finance consulting um new to the city don't have a network here and they're just lonely and want a friend want someone to have a coffee with or go to see a movie with. Yeah, I found that was quite eye-opening. So loneliness clearly affects everyone amongst us, but certain groups are lonelier than others.

And we know that there's a link between income levels and loneliness. The lower your income, the more likely you are to be lonely. We know that there's an association between age and loneliness. The young people are lonelier on average. And women actually through the pandemic have been disproportionately lonelier, women rather than men actually, from the research that has been coming out over the last few months. Is that because, so it strikes me that loneliness is not only a function of physically not having contact or bumping off people as much, but that you feel forgotten or you feel that you are enduring something and no one empathizes with you. of responsibility for educating children has moved from schools to mostly mothers at home and that they feel, does anyone really feel my pain? Does anyone really know how incredibly hard this is for me? And that leads to loneliness. Like I am alone here. No one really gets what I am going through. Is it not only a function of proximity to people, but just how goddamn hard your life

has become? It feels to me like moms have just, if there's a cohort, people talk about cram parents not being able to see their kids. I would say that moms are the ones that have really gotten crushed in this thing. Is it a function of your situation, not just proximity to other people? Absolutely. I mean, you're absolutely spot on there. Loneliness, you can be on your own and not be lonely. And you can be very lonely amongst other people. And part of the reason, and that can be even lonelier. And part of the reason for that is when you feel that you're not

seen, heard amongst them, that's a very lonely feeling. And when you feel that you're not seen, heard amongst them. That's a very lonely feeling. And when you feel that you don't have agency or are powerless. And you're right, a lot of women unfortunately feel like that at the moment as they've been landed with disproportionate amounts of housework and dealing with children, even when they're holding down jobs alongside their husbands, we know that childcare and housework is not being disproportionately shared. And also, the other reason why women are disproportionately lonely, unfortunately, probably stems from the fact that we've also seen a rise in domestic abuse during the pandemic. And there's nothing lonelier than being, of course,

in an abusive relationship. What role does government play? I go by the soccer field and I think, okay, it's impossible to get a higher ROI than community-sponsored sports, where we just reach into... When I grew up with a single mother, I had a guy come, I was a box boy in junior high school. And I had a guy come up to me and say, "'Hey, do you play baseball?' And he said, "'I'm a coach at this league.'" He literally, he knew I didn't have any money. He paid for my gear and I played baseball

and it was wonderful for me. And then I look at seniors communities. I remember living in South Beach and walking by and seeing these very you know, very, very senior citizens sitting out in front, watching the wonderful freak show that is South Beach and thinking, you know, I don't know, it was like a senior community center. I'm like, it's impossible to overfund this. What role does government have in facilitating connection and helping to diminish loneliness?

Well, these things that you're talking about, community daycare centers for elderly people, youth clubs for young people, sports centers for young people, public libraries, they're all elements of what I call the infrastructure of community. And I believe it's absolutely crucial that these are funded adequately, because if people don't have physical spaces to be together, to do things together, not only are they going to feel lonely, but how will we as a society come together again, if there are no physical spaces we share? And yet, since 2008, we've seen, since the financial crisis, we've seen a steady defunding. This is not only in the United States,

but globally of the infrastructure of community. In the United States, federal funding for public libraries has fallen by 40% since 2008, for example. And this is clearly having a really significant impact and needs to be a priority moving forward, for sure. It feels as if the pandemic, when you start dispersing, we call it the dispersion that has everyone retreating to their homes or remote work, but the ugly cousin of that really is segregation, right? And isn't segregation kind of another just huge driver of loneliness when we're only surrounded by people who look, smell, and feel like us? We lose empathy.

Do we come back from this? Or is this a, you know, isn't a danger that we're taking a step change down in what makes us lonely? That we no longer feel the empathy. We no longer reach out because we become, I don't know what the term is, our society permanently becomes trained to be introverts and not trust the person next to us. So I talk about the rise of contactless in general. And this is something that we saw beginning before the pandemic. So people choosing to eat at home and order on DoorDash rather than go to a cafe or do a Peloton class on their bike. And that was a trend before the pandemic,

but obviously the pandemic has massively accelerated this. And this poses a real danger because to us as society that we are trading off convenience for community and not only creating a society in which we're more lonely, but also more importantly, losing out on being able to practice the skills that in many ways underpin what we might think of as inclusive democracy. Because even going to a yoga class and having to think about where you put your mat and, you know, being mindful of the person next to you, even walking around a grocery store and navigating your trolley and making sure you don't bump into someone, even in a line waiting for a coffee. Those are moments,

those are moments in our day when we practice thinking about others, looking at others, noticing others, being mindful of others, and doing things with people who are not necessarily like us. And there is a real danger that we are going to increasingly lose out on such interactions, especially as local stores, which of course, and studios and cafes, which are, of course, all places where we can come together with people are facing the triple whammy of the economic downturn, COVID and the shift to e-commerce that we're witnessing. And yet at the same time, we are creatures of togetherness. We are hardwired to connect. And so I think there is a counter

veiling force, which ultimately I hope and do believe will prevail, which is that we do actually want to be around other people and that after this pandemic is over, we'll actually want to connect more in person. And historically, we see that to be the case. We saw this after the 1918 Spanish flu, where by the 1920s, bars and nightclubs were packed. We saw this in Taiwan this fall, where as soon as people were allowed to, 5,000 people a night were going to see Phantom of the Opera in the theater. We see this right now in New Zealand, in 5,000 people a night were going to see Phantom of the Opera in the theater. We see this right now in New Zealand, in Australia, where people are hanging out at music festivals and in nightclubs. So my hope is that that will prevail. And yet at the same time,

I think there is this countervailing force, contactless, which is encouraging us to do less and less in person with each other. Well, you highlighted that in a capitalist society, voids get filled with for-profit businesses. I've read about in Japan, you can rent a family. You not only can rent a friend, you can rent a wife and a kid and then go to your friends who are already married with a kid and feel normal. When you think about, as a parent, other than getting them off screens and just forcing them, which I find I no longer ask, I'm like, we're doing this, then giving them options. Are there any, as a parent, how do you foster a decrease in loneliness among your kids such that they build good habits? in particular, was the extent to which their exclusion is often not witnessed or even

realized by the adults in their lives, whether it's their parents or their teachers, because so much of their social lives is happening on their devices or their screens. So it's not like in the old days where you'd see a kid not being asked to sit with others and somebody could do something about it or your kid not being invited to something with others and somebody could do something about it or your kid not being invited to something you may not even know that your child is being excluded and is lonely so i think have that conversation in an open way and express your own vulnerability i think when it comes to our devices our phones one of the things teenagers when i was interviewing them would always say to me was hey it's not just us who are on our phones the whole time.

And that's true. I mean, we're all guilty of it, of being in the room with our partner, with our family, not even hearing them because we're so addicted to these devices, which we know have been designed to be addictive. And so, you know, I think model good behavior yourself. So it's really important. But I don't underestimate how hard it is, which is why when it comes to children in particular, I really do believe that we should think of social media companies as being the tobacco companies of the 21st century and that they should be regulated as such by government

when it comes to children, especially. Talk about casual chats. Yes. So we don't, it's not just long and depth, kind of half hour, hour long conversations that make us feel connected to other people. So too, it turns out, to even very short what we might think of as micro exchanges, that it turns out make us feel much more connected to each other and much happier. Again, another reason why it's so important that we nurture and support our local stores, especially our independent stores right now, because these are the places that anchor and nurture our neighborhoods and actually

us. So just to be transparent, Professor, pretty much every question interview I do is mostly an excuse so I can talk about myself. And this is that part of the interview. But there's this Woody Allen movie, Hannah and Her Sisters, and Max von Sydow is dating this much younger woman, Barbara Hershey, and she's breaking up with him. And the thing he's most upset about is that she is his link to the outside world. And I'm naturally an introvert, and I can feel myself, my natural tendencies withdrawing from the world and other people. And I have two hacks such that I try to stay somewhat engaged. And they're very basic. And I want you to tell me if you think these are productive hacks.

The first is I'm in Ubers and taxis a lot. And I always talk to the driver just because I find it interesting. I get reward from it. And I find that exercising those muscles of talking to a stranger results just in a lot of good things. It's interesting. You get really interesting color and it just kind of keeps those, I don't know, those muscles working of talking to strangers. And when you use the term, you identified it as casual chats.

It really summarized or kind of cemented what I'd already sort of felt. And the other thing is what I call impulse texting. And that sounds worse than it is, but so often we think I need to catch up with so-and-so, or I wonder how they're doing. And you think, well, okay, to pick up the phone, to schedule a meeting, to write a note, I'm trying every time I think about somebody, I just immediately pull up their number and say, hey, I was thinking about you. What's going on with you? This is what's going on with me. And it can be two sentences, just like a ping. And I'm trying to do that three, four, six times a day. Someone flies into my mind from 10 years ago. Hey, I was thinking about you. What's going on? And I find it's keeping the, if you will,

the engine warm. So one, always speaking, always talking. And I do it with waiters too, because I had those jobs and I liked it when people spoke to me. It made me feel seen, if you will. And then two, impulse texting. Your thoughts? Love both of them. Both of them, I think are absolutely on the money and and i would endorse and recommend on the um kind of speaking to people

yeah especially now i think it's harder when you're wearing a mask and you're walking down the street 100 but you know really you know kind of nod your head in a in a noticeable way so that people are way um if you can in a socially distanced way do stop and just say hey how are you to somebody who i hope you're doing okay um we all want to be seen and heard especially now it's really hard um on um sending people texts it's actually one of the things i also really recommend people to be doing right now. Think, is this anyone in your own network who might be lonely, who might appreciate being reached out to and just send them a text? If you can go meet with them, fine. But it's interesting that you say that you're doing it

as well as a way not only to help them, but also to feel connected to others yourself. And I think that's absolutely right. Oh, and you also mentioned this idea of speaking to people as being like a kind of muscle that you need to exercise. And again, that's something that I noticed with my students, and maybe you've noticed it too, that increasing numbers of students I was seeing when I was sending them group assignments were finding it challenging to interact in person, face to face. And I actually, I raised it with a colleague who runs one of the US's most prestigious universities.

And he said that at his university, it had gotten so bad that they were having to run remedial, how to read a face in real life classes for their incoming students. Because so many were arriving, really lacking the most basic social skills, because they hadn't been exercising them at all. And even nursery school teachers who I interviewed told me that they're seeing, you know, children aged four or five coming to nursery school lacking social skills, because their parents are spending so much time on their phones, that they're not imparting these skills to their children.

So this idea that we use it or lose it, I think, is actually real when it comes to social interaction, as it is in other areas as well. Also, there's just so many layers to this. I think about I spent a lot of time on Twitter. I'm addicted to it. And I think Twitter and its algorithm has taught us to move in and, you know, oftentimes dunk on people. You either like something or don't. There's no casual chatting. And that the reward is to call someone out. And I think I can imagine that that is helping making us more, you know, laughing or saying something silly or saying something, or God forbid you say something off color.

It does feel like social media, in a strange way, the whole idea was to connect us, but it does feel like it's taking us back to a place where we feel just safer. Because if you extend yourself, you're so vulnerable, and you can be just hit so hard if you say something stupid. It feels like a lot of this is headed in absolutely the wrong direction. You talked about social media firms being regulated. Can you give more specificity to that? Sure. So one of the areas I think that government should be intervening is around the addictive nature of these platforms, especially when it comes to children.

And I would actually go as far as to say that when it comes to children, addictive social media should be banned. And the onus should then be on social media platforms to, one, prove that they're not addictive, which will be impossible, and two, actually redesign their products so that they aren't as addictive as they are. I think another thing that government can do and is actually moving forward in the United Kingdom, where a bill is currently under consideration and is likely to be passed is actually making social media companies responsible for any psychological harm created as a result of posts on their platforms. I think there are really serious moves here from both the right and the left to hold social media companies much more to account when it comes to the kind of language that is allowed on their platforms. And I know in the United States, where freedom of speech is

held up as, say, totemic, it's a harder argument to win. And yet, in the United Kingdom, 65% of students have experienced cyberbullying. When we know that tweets are retweeted 30% more if they have words like hate in the tweet. When we know that the algorithms are actually incentivizing cruelty and toxicity and bullying, at some point we have to say enough is enough in the same way that we said enough is enough with tobacco companies at some point, we have to say enough is enough in the same way that we said enough is enough with tobacco companies at some point. Yeah, I would argue, Professor Hertz, that it's not a freedom of speech, freedom of saying, that it's not credible, that the reality is freedom of speech has just been weaponized by big tech who has overrun our government and that the majority of parents, I think even the majority of teenagers,

the majority of citizens realize that freedom of speech shouldn't be freedom of reach. And if you can reverse engineer content to depression of our teens, freedom of speech takes a backseat, at least among reasonable people. It's used as a smokescreen here. Any closing thoughts on, if you were to try and summarize, what was the most, the single most surprising thing you found in your research for this book? I think it was just how pervasive the problem was. And realizing that it didn't just damage our health, but also our wealth and affected who we voted for, were also really kind of stark realizations. But also realizing that there's so much we can do, because we built a lonely world, but we don't have to continue to live in a world in which we are

so segregated and disconnected and kept apart. And there are so many things we can do, so many things governments can do from refunding the infrastructure of community to really properly regulating social media companies to actually putting significant funds into the loneliness crisis of today, which is particularly acute. Around 50% of people are currently feeling lonely right now. This is recent US data. But also recognizing that this isn't just about what governments can do top down, but it's also about what we can do so we can put our phones down more and be more present with each other. We can think about how to support our local stores who really anchor and nurture us

and enable us to have these micro connections with each other. And we can also think about who in our own network might be feeling lonely and actively reach out to them, meet up with them, or just send them a text. It can make a huge difference. Norena Hertz is an economist, bestselling author, and honorary professor at the Institute for Global Prosperity at the University College London. Her book, The Lonely Century,

How to Restore Human Connection in a World That's Pulling Apart, is out now. She joins us from her home in London. Professor Hertz, stay safe and thanks for your good work. Thank you. We'll be right back. Think about those businesses that grew their sales beyond their forecasts. Companies like Momofuku or Feastables by Mr. Beast or even a legacy business like Mattel. When you think about them, sure, you think about a product with demand, a focused brand and influence-driven marketing. But part of their

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Go to shopify.com slash voxbusiness to upgrade your selling today. Shopify.com slash voxbusiness. Support for this podcast comes from Klaviyo. You know that feeling when your favorite brand really gets you. Deliver that feeling to your customers every time. Klaviyo turns your customer data into real-time connections across AI-powered email, SMS, and more, making every moment count. Over 100,000 brands trust Klaviyo's unified data and marketing platform to build smarter digital relationships with their customers during Black Friday, Cyber Monday, and beyond. Make every moment count with Klaviyo. Learn more at klaviyo.com slash BFCM. Welcome back.

It's time for Office Hours, the part of the show where we answer your questions about the business world, big tech, higher education, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehoursatsection4.com. First question, Rick from St. Louis. Hi, Professor. This is Rick from St. Louis, Missouri, and I'm currently sprinting with Section 4, and it's been a great experience. My question ties together your themes of CEO involvement and income inequality. Do you have a framework for assessing fairness of CEO pay and Rick from St. Louis. First off, St. Louis. So I think St. Louis, I am long St. Louis. And that is if I could buy real estate in St. Louis, I would. And I guess I could. I just think real estate's a local business. So I'm not sure I'm going to because I think you need to be close. There is a positive correlation between return on investment in real estate you buy for rental or

for some sort of commercial purposes and your proximity to it. They always say real estate is a local business. But why am I long on St. Louis? Because of WashU. WashU has increased its status in the world of universities and really done such an outstanding job attracting the best human capital in America because it has an outstanding engineering department. And as a result, I think you're going to see some grads decide to stick in St. Louis and start firms. Those firms will go public. Those people who get wildly wealthy will

start their own venture capital firms. And you're going to see a tech community develop and emerge in St. Louis just as it's emerging or emerged in Austin and Boston and New York and now in Miami. I think it's going to happen in St. Louis. Anyways, that's not what you asked about. So as it relates to CEO compensation, there's sort of two different worlds. There's the compensation of a CEO in a public company and then the compensation of a CEO in what you pay yourself. So I have been on several public company boards, including on the compensation committee, where we are tasked with figuring out the compensation for the CEO. And here's the problem, and here's what happens. We bring in a compensation consultant to say, okay, in the specialty retail industry,

firms making between $3 and $5 billion pay their CEOs between X and Y. And the perfect median at 50% is $4 million a year, $1 million or $ 800,000 a year in current income, and then options that have a value of say, $2 to $3 million a year. And I'm using that as a hypothetical, but it's not probably far off. But here's the problem. On the compensation committee, we go, well, Bob or Susan is a good person trying to do the right thing and the company's done okay to well. So let's not do 50%.

They always pick 60 or 70. Now think about this. Statistically, when everybody is paying their CEO just above the mean, you have an explosion in the growth rate of that CEO as registered each year. And then when the compensation consultant comes back and says, the new 50% is up 16% to 18% a year, whereas inflation's at 2% or wages are up 4% or sometimes flat. And we end up where we are now, and that is CEOs are making 300, 700, 1,100 times what an average employee is making versus what it used to be 30 to 50 times. It has exploded because of compensation committees overpaying CEOs. And it's very difficult because now we have a marketplace where a good CEO can leave and go

somewhere else. So you have to stay competitive. None of us ever pay the 40%. None of us go, yeah, good person doing the right thing, but let's be honest, he or she is underperformed. Let's pay them at the 40% level. You almost never hear that because CEOs tend to be the former rush chairman or have incredibly high EQ and everybody likes them. They're incredibly likable and you want to do the right thing

and you want to be seen as being generous to them. And by the way, being on a board is a good rap, right? You get paid between $100,000 and $250,000 a year to show up four times a year, have free dinner and think big thoughts. That's a bad board member, but it's a lot of them. So we have an explosion in CEO compensation. And I think shareholders have to move in and demand more from their compensation committees and publicly traded boards. Now, as it relates to your own compensation as a CEO of a small company, the way to success, greatness and success, and we talked about this in the algebra of wealth, is in the agency of others. And the only way you do that is by identifying really key people and ensuring that you retain them. Retention is a very strong forward-looking indicator of affirmed success.

And I've always thought a lot about retention. Now, what is retention? Put another way, it's loyalty. Loyalty is a function of appreciation. Appreciation is a function of psychic and economic rewards. If you want people to stick with you, if you want people to stick with you and nothing creates friction and costs like constant turnover, and I'm not saying that some turnover isn't good, you need to signal to the firm that this is a capitalist society. There are winners and losers. I believe a good strategic firing is as important as a good strategic hire.

But the people who are doing a good job, working hard, bringing it, acting like owners. You want them to act like owners? You got to treat them like owners. And I've always taken my current income way down. I've never been the highest paid person in current income in a firm, even when I'm the CEO. Why? Because I want my equity to be worth more. I want to keep my salary low and I want to create economic security for myself using equity. And I find the way you do

that is through loyalty. That's paying people well, giving away a decent amount of the firm. I have never ended up, I've started nine companies. At the beginning, I owned 100% of them. The term founder CEO is thrown around a lot. You know what founders are? Founders are the people who sign the front of checks, not the back of checks. And I've always signed the front of checks. I've always taken money and invested in something that made no sense and started. And at the beginning, I owned 100%. I have never gotten to a liquidity event owning more than 30%. And oftentimes, I own a lot less than that.

Because if I want people to act like owners, which is the key to a successful business, you have to make them owners. You have to give them equity. In addition, in addition, you got to manage expectations around compensation, and then you want to be the CEO that exceeds their expectations and pays them well, even if it means paying yourself less. And that is not virtue signaling, it is capitalism. If you own a private business, the way you get economically secure and the way you all get economically secure is through equity. And you want to keep the best players on that bench,

or on your bench, if you will, or on your jersey. And the way you do that is through compensation that is not market, not market necessarily, but always, if you can, above market. And there's three forms of compensation in a private company. There's salary, there's bonus, and there's equity. And my way or our way, and I'm not saying this is the right way, but it is our way and it's worked out pretty well. The majority of my firms have had excellent retention, is I am below market, below market

on current income or salary. And then I try to be above market on bonuses and equity. And by the way, sometimes you have to adjust that. If someone has four kids, they might say to you, look, I apologize. I just can't do this on this. I need more current compensation. What I like to do is give people advances against their bonuses to say, I know this is going to, I'm so confident this is going to work out. I'm going to give you advance against the bonus. But I try and keep the salaries. Just as recurring revenues are so powerful,

you know what it's like know what is like high blood pressure in a company? Recurring expenses. And when you look at those three things, when you look at those three things, salary, bonus, and equity, the only recurring expense, the only high blood pressure is the salary. So my compensation strategy, and I am clear about this from the get-go, from zero one is, we pay below market on salary. We try to be above market on bonus and above market on equity.

Rick from St. Louis, thank you for the question. Next question. Hey, Scott. This is Mike from Los Angeles. I've noticed recently in some of your conversations, either publicly or on your various podcasts, you're quite bullish on Roblox. My question is about Roblox specifically, but maybe more generally about rundles or subscription-based models and in the revenue recognition policies currently in place in accounting and how that impacts valuation. Specifically, how do you think about the mismatch between, say, for Roblox that has something like $1.2 billion in what they call bookings, but only $500 million in revenue for the given period?

And how does this affect your valuation, your thinking of them, plus your long-term valuation, thinking of all these other companies that are switching over to deferred revenue models? That's a thoughtful question, Mike, from LA. I get the sense that you're either in the finance industry or just know your way around a balance sheet. So benchmarks and metrics for evaluating firms is really important. And I find slowly but surely all the benchmarks and even the language and the nomenclature have all gone one way, and that is to present the company the best possible light

so they can increase the share price and the shareholders and management can get wealthier. It sort of hit its peak with WeWork that vented terms including community-based EBITDA, which was basically EBITDA after all expenses, or let's talk about the profits excluding all other expenses. It was fucking ridiculous, taking out the real estate costs and somehow saying, shielding that from a calculation around EBITDA. I think that the SEC, and I think in general, the market has a key role here. And that's to say, all right, generally speaking, this is the way we like to see gap reported profits. So in the case of Roblox, when they talk about bookings versus revenue, I think that's okay as long as those numbers are matched up against peer firms.

And you'd have to look at what shrinkage or breakage is from that $1.2 billion in bookings and how it translates to revenue over what time. But in a low-interest rate environment, $ 1.2 billion in bookings is pretty reliable, assuming that it's reliable, but it's pretty close to that 1.2 billion in revenue because you're not losing a lot of time value of money. What I'd want to know there is the breakage, and I'd want to know with other video games how they're accounting for it. And I'd like to think that the market gets more disciplined and applies more scrutiny to how people report their profits and their metrics. You just say like Uber's tried to pull this shit by pulling out certain expenses so they could inflate their numbers. And

unfortunately, the market sort of goes for it. The market is willing to wallpaper a load of what I call kind of yoga babble or very misleading financial metrics when they're looking for reasons to send stocks up and have more cash than there are good companies to buy. By the way, I think Roblox is a juggernaut. I think over 50% of the people under the age of 14 have been on Roblox in the last 30 days. CNBC said that its revenue for the first three quarters of 2020 reached 614 million instead of the 589 that it had reported earlier. Its revised net loss for that period was $195 million. It had previously reported $213. So they misstated their earnings. They got it wrong to the downside, or they underreported, which is unusual for a company that comes back and says,

oops, we were wrong. Typically, when companies say, oops, we were wrong, you're about to be kicked in the head as a shareholder and not get roses. According to CNBC, Roblox said that the financial restatement was related to how and when it books Robux purchases as revenue instead of leaving it as deferred revenue. Robux is their currency. Oh my gosh, is it going to turn into Bitcoin? Who knows? It's the new currency. It's the new asset class. The company's plan to go public via direct listing at a possible $30 billion valuation was delayed until March. A closer analysis of the S1 reveals Roblox generating free cash flow of almost $300 million.

Plus, plus, Roblox has recognized the power of the rundle and offers Robux on a subscription basis. Oh, my God, I love this company. Love it. Love it. Mike from LA, thanks for the question. Next question. Hey, Scott. I love this company. Love it. Love it. Mike from LA, thanks for the question. Next question. Hey, Scott. This is William from Montreal, Canada. I'm a mechanical engineer undergrad and currently working as a project manager for a nag tech company. I was wondering if I'm missing out on anything not pursuing an MBA and just listening to podcasts like yours. Diploma aside, am I getting the same value listening to this

compared to a more traditional MBA class? And lastly, lucky for you to be living down in Delray Beach. I used to live in Boca and it's a very nice place to be living at. Well, first off, William from Montreal, word my brother. I have a friend staying with me from Chicago and he pointed out that it was negative 34 degrees yesterday with a windchill. It is 76 here. So I believe that's about 110 or 109 or 111 degrees swing. Think about that. Think about that. We're clearly not having climate change though. We're a thousand miles from each other if that, and there's 110 degrees swing. Anyways, this podcast is not like getting an MBA, nor does it even like taking a class. You don't get the certification.

You don't have to apply the discipline. You don't have to work in groups. You're not learning a structured material. You're not turning in projects. So there really is no comparison. I'd like to think that there's some learning taking place here. But the reason why graduate schools of business are able, at least the top 20 school, able to get $400,000 to $500,000 in investments, and think about that, it is a $400,000 to

$500,000 investment. If you look, if you're paying full freight for tuition and you're giving up a good job, it's easy to see why it might be two, three, $400,000 economic decision. And why do people continue to do it? By the way, the top 20 business schools, applications are record highs. They're at record highs. And this is for a couple of reasons. One, a weird thing, a weird thing. People are no longer being forced to take the GMAT. So when people bomb the GMAT, they think, okay, I'm not going to apply to Wharton. I'm not going to apply to Chicago. I won't get in. But now that they no longer have to take these tests, a lot of people feel, you know

what? I'll throw in an app to Stanford. I'll throw in an app to Kellogg. I'll throw in an app to Haas. So we've seen an explosion amongst the top 20. The same thing is happening in higher ed that's happening across our entire economy in every sector. And that is there is a concentration and accretion of power to the top players that is very unhealthy for the ecosystem. Now, to the question of whether you get an MBA, it kind of comes down to your opportunity costs, how well are you doing in your current career? Do you have the money? Can you get scholarships? Is someone else paying? Do you want to really pursue it? Do you think you would enjoy it? Are you looking to pivot careers? So there is no one-size-fits fits all answer. Increasingly, increasingly, I'm telling people that they should stay put. If they're doing well at their job, if they're increasing their

compensation, if they like what they're doing, if they're learning, if they have senior level sponsorship, I'm like, boss, just stay put. Oftentimes, oftentimes, the person I'm talking to about going to business school, when they leave that job, they're going to replace them with someone with an MBA. Business school is sort of this great leveler. Now, it is an accelerant, but it accelerates to a similar plane. And that is we can take a Volkswagen and turn you into a Lexus. But we also take a Mercedes and turn you into a Lexus. What do I mean by that?

What do I mean by that? What do I mean by that? A graduate of Columbia Business School is just a graduate of Columbia Business School. Firms don't really look at what they did before. So what's the lesson here? What's the lesson here? You probably want to go back earlier. I'm not saying that if you're 35 or 45 and you want to get a business degree, and there may be great reasons, then more power to you.

But in terms of the bump, it's better to go from being a Volkswagen to a Lexus than from, let's call it a BMW to a Lexus. Thanks for the question. Again, if you'd like to submit one, please email a voice recording to officehours at section4.com. Our producers are Caroline Shagrin and Drew Burrows. If you like what you heard, please follow, download, and subscribe. Thanks for listening. We'll catch you next week with another episode of The Prop G Show from Section 4 in the Westwood One Podcast Network. Support for this podcast comes from Stripe. Thank you. and reach more customers globally. The platform offers a suite of specialized features and tools to fast-track growth,

like Stripe Billing, which makes it easy to handle subscription-based charges, invoicing, and all recurring revenue management needs. You can learn how Stripe helps companies of all sizes make progress at Stripe.com. That's Stripe.com to learn more. Stripe. Make progress.