VALUE: After Hours (S07 E21): Buffett’s Cognitive Altitude and the Value of Going Deep

During their recent episode, Taylor, Carlisle, and Chris Waller discussed Buffett’s Cognitive Altitude and the Value of Going Deep. Here’s an excerpt from the episode:

Jake: Yes. All right. So, imagine you’re looking at Earth from space and from that vantage, it’s all these majestic swirls of blue and green and white. The mess of human life, traffic jams and laundry piles and overdue bills vanishes into this abstraction of this beautiful glowing globe that we all live on. If you pull back far enough, of course, everything looks orderly, but if you zoom in, suddenly you’re navigating chaos and signals turning into noise. And so, how we see changes with the distance from what we’re looking at? It’s also true that how we think also changes with distance.

So, there’s this concept that I learned about recently called construal level theory, which we will use CLT for the rest of this segment just to keep because it’s quite a mouthful. So, the further away something is the more abstractly that we process it. The closer it is, the more detailed and emotionally reactive our thinking becomes. So, according to CLT, there are four kinds of psychological distance that shape our perceptions. So, there’s temporal distance. That’s how far away something is in time. The further away it is, the more abstract we tend to think about it.

Spatial distance. So, physical proximity or remoteness. Social distance, like the gap between groups versus individuals. And then, hypothetical distance, which is the likelihood that we assign to an event. So, we didn’t just zoom in and out with our eyes, we also zoom in and out with our minds. And Buffett is, I think maybe the best at this, or he’s so good at it. At that abstract 30,000-foot level, you find most of his quotes, which are almost cliches at this point.

The ideal holding period is forever. That speaks to the time value of compounding over really long term. Buy businesses with a moat. Now, we’re talking about this abstract metaphor of sustainable competitive advantage. Be fearful when others are greedy. Now you have a mental model rooted in behavioral finance and market cycles. All of these are like looking at the earth from outer space.

But then, he’ll pivot on a dime and then he’ll be dissecting a depreciation schedule of a brick plant in Alabama, or loan loss reserves and collection practices at Clayton Homes, or unit economics of See’s Candies and how much they pay for sugar. So, it’s abstract principles one minute and then forensic accounting the next minute. And that construal level theory in action is what’s really happening.

He’s doing it never without really naming it. So, the trick and I think the edge sometimes is knowing which zoom level serves the decision that you’re trying to make. So, of course, Michael Mauboussin urges us to lean on base rates. Statistical realities that emerge only at a distance. Those are that outside view. But it’s hard to think abstractly when the market is screaming these price changes in your face every day.

So, to use it effectively, I think you need to regulate your cognitive altitude. Like, how far away are you from something? And so, here’s a list of some potential things to keep in mind for your cognitive altitude.

Tobias: That’s a banger, by the way. Cognitive altitude. I’m just writing that down right now.

Jake: Yeah, write that down. Okay. Identify the distance. So, is this a decision near term or long term, high stakes or hypothetical? Match your mindset. So, zoom out for vision, you know maybe strategy and thesis and then zoom in for tactics, execution, establishing kill criteria, for instance, something a little more concrete.

Preload your clarity by writing down your thesis and what would change your mind. Use time to test conviction. So, as your reasoning, does it degrade under proximity or maybe it wasn’t all that durable to begin with. And balance that abstract and the concrete by pairing narrative with numbers. So, maybe dream big, but model small.

So, let’s try to just land this plane. Clarity lives at altitude, but action happens down on the ground. If you only zoom out, you risk becoming a philosopher with no skin in the game and you’re just wandering around and it’s just all bromides. But if you zoom in too much, then you’re this like lab rat that’s only reacting to the shocks. So, the real craft and the real like Buffett level mastery is knowing when to fly high and then when to get your hands dirty. So, before your next big decision, ask yourself, “Am I seeing this from the right distance?”

Tobias: Good stuff, JT.

Jake: Thank you.

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