AI-assisted Decision-making

Years ago, Federal Express couldn’t deliver packages on time. 

All packages were moved between airplanes at one central airport every night. The only problem was that the night shift wasn’t moving fast enough to get the job done—delays were common and customers were irate.

They’d tried everything they could to improve efficiency to no avail. Until they tried something new: they stopped paying by the hour. Instead, as soon as the night shift workers had completed the task of moving packages, they were allowed to go home with full pay.

Suddenly, packages were going out on time every night.

This story exemplifies one of investor Charlie Munger’s most famous adages: “Never, ever, think about something else when you should be thinking about the power of incentives.”

These sorts of Mungerisms are like catnip for business nerds. If you read through his speech, “The Psychology of Human Misjudgment,” you’ll find all sorts of heuristics and mental models like this. It’s dense with them. Listening to (or reading) it, you get the sense that if you could just imbibe it—really inscribe it in your brain—you’d make such good decisions you could do anything in the world.

Unfortunately, that’s hard.

Over the last 10 years there’s been an explosion in the use of mental models and heuristics by entrepreneurs. Andrew Wilkinson, the CEO of Tiny—a $400 million market cap public holding company of technology businesses—listened to Charlie Munger’s speech over and over again on his way to work for a year.

Everyone wants to learn the latest behavioral economics trick, psychological insight, or lesson from science or philosophy that can help them make decisions.

The problem is: we can’t remember to apply them. We make lists in Notion of our principles and use Anki to note down mental models. But they end up being mostly abandoned.

ChatGPT changes this. It allows you to bring to bear the best of what other people have figured out every time you make a decision. Every heuristic or mental model you could ask for is already in its digital brain. All you have to do is remember to use it when you’re making decisions. 

I know because I’ve been using it. In order to show you how this works, I’m going to use ChatGPT to help the characters in a decisive moment in the movie The Big Short make better decisions. Then I’ll show you how to deploy it in your own life.

Selling shorts to Michael Burry

In The Big Short (which is based on the true story of the traders who profited from the 2008 financial crisis), investor Michael Burry has a meeting at Goldman Sachs. He wants to short the housing market and has decided to bet $100 million. 

This looks like a good trade for the Goldman Sachs bankers. In order for this trade to lose money, millions of Americans would have to fail to pay their mortgages. This has never happened. There is no chance Burry is right. The bankers see dollar signs. 

They take the trade. They laugh as he leaves their office:

We know how this ends: Burry’s right, and the bankers are just blind. 

Homebuyers, enticed by the prospect of cheap loans and the American dream, have been buying homes they can’t afford. Lenders, enticed by short-term profits, have been bending the rules of who is allowed to get a mortgage and originating loans to subprime homebuyers. Banks have been buying these mortgages, bundling them into securities, and selling them to investors. Bank employees are being rewarded with bonuses for the amount of securities they can sell, not their long-term performance. Credit rating agencies that are paid big bucks to sanction these securities look the other way, labeling them safe even though they contain loans that will likely blow up. The government and the media pump home ownership as the most important signal of success, and the cycle continues.

How can you help the Goldman Sachs bankers in this scene make a better decision? Let’s assume they’re smart enough to double-check their mental models before they sign away the keys to the kingdom. 

Creating the psychological context for the players

The first thing you’ll want to do is have ChatGPT break down the psychology of the players in the situation. So all you have to do is ask:

ChatGPT comes back with something pretty great. First it outlines Burry’s biography up to 2006:

Then it summarizes that biography into a set of strengths and weaknesses:

You might be tempted to think, “Isn’t this cheating?” Burry is a public figure, so obviously it’s going to be easier to create a summary for someone like that. In my experience, if you provide ChatGPT with a detailed set of observations about a person in your life, even if they aren’t famous, it will come up with a psychological profile that feels  accurate. For example, I recently met a founder who was in the middle of fundraising for their company and looking for me to angel invest. I fed my observations into ChatGPT to help me clarify my thinking: