Podcast Summary: "A Book with Legs" Episode Featuring Amar Bhide

Podcast Information

• Title: A Book with Legs
• Host: Cole Smead, CEO and Portfolio Manager at Smead Capital Management
• Guest: Amar Bhide, Author of Uncertainty and Enterprise: Venturing Beyond the Known
• Release Date: April 21, 2025

Introduction

In this episode of A Book with Legs, host Cole Smead engages in a profound discussion with Amar Bhide about his latest work, Uncertainty and Enterprise: Venturing Beyond the Known. The conversation delves into the intricate concepts of risk and uncertainty, their implications in the world of investing, and the broader impact on entrepreneurial ventures.

Amar Bhide's Motivation and Background [02:40 – 04:30]

Amar Bhide explains his longstanding interest in the concept of uncertainty, tracing it back to 1990. He emphasizes that uncertainty has been a central theme in his writings, aiming to position it as the "central character" in his new book. Bhide draws inspiration from Frank Knight, a pivotal figure in the Chicago School of Economics, distinguishing between measurable risk and unmeasurable uncertainty inherent in human behavior.

Amar Bhide [04:30]: "True profit is what you get for taking responsibility for genuine uncertainty."

Risk vs. Uncertainty: Frank Knight's Distinction [04:30 – 07:40]

Bhide elaborates on Knight's differentiation between risk (quantifiable and measurable) and uncertainty (unquantifiable and unpredictable). He argues that human behavior introduces a level of unpredictability that cannot be captured by traditional risk models.

Amar Bhide [05:33]: "If you can model something statistically, whatever return you get for it cannot be true profit."

The Role of Judgment and Narrative in Economics [07:40 – 12:14]

The discussion shifts to the importance of human judgment and narrative in navigating uncertainty. Bhide criticizes the over-reliance on quantitative models, emphasizing that storytelling and intuitive judgment are essential for making sense of unpredictable futures.

Amar Bhide [11:09]: "There is where I say that the art of narrative becomes absolutely crucial because we cannot prove... that what I'm saying is correct."

Managing Uncertainty in Investing [12:14 – 17:30]

Cole Smead challenges the investment industry's focus on minimizing volatility, suggesting that this approach often overlooks the higher profits associated with genuine uncertainty. Bhide agrees, advocating for diversification as a prudent method to manage uncertainty, while cautioning against assuming stability in market patterns.

Cole Smead [13:11]: "Is that a good strategy?"

Amar Bhide [13:38]: "It's not unreasonable. It's prudent to get as much information as you can so that you are less likely to be surprised."

Behavioral Economics and Psychological Perspectives [17:30 – 26:21]

The conversation delves into the psychological aspects of uncertainty, referencing Kahneman and Tversky's work on decision-making under uncertainty. Bhide highlights that uncertainty can both hinder and spur enterprise, depending on an individual's willingness to embrace it.

Cole Smead [19:36]: "Uncertainty is that feeling that you get in the back of your head when things are going awry."

Amar Bhide [20:35]: "It can be a spur to enterprise. It is both a hindrance and an encouragement."

The Intersection of Spirituality and Uncertainty [22:39 – 26:21]

Bhide draws parallels between uncertainty in economic decisions and spiritual beliefs, suggesting that both involve a leap of faith. This comparison underscores the intrinsic human element in navigating uncertainty.

Amar Bhide [22:39]: "Whatever we do involves a leap of faith."

Markets, Rationality, and Collective Decision-Making [27:30 – 35:21]

The discussion critiques the notion that markets operate purely on rationality, referencing Vernon Smith's ideas on rationality not being common knowledge. Bhide argues that market metaphors often overlook the complex human interactions that influence decision-making.

Amar Bhide [27:38]: "Meta metaphors of the market often break down because of the underlying human negotiations and dialogues."

Venture Capital vs. Angel Investing [52:01 – 73:43]

Bhide contrasts angel investors with venture capitalists (VCs), highlighting the evolution of VCs from informal, intimate investors to highly institutionalized entities. He points out that modern VCs often have rigid, systematic processes driven by institutional demands, which can stifle the organic growth and mentorship traditionally associated with angel investing.

Amar Bhide [69:37]: "Venture capital has become much more institutionalized, often resembling large corporations in their management processes."

The Impact of AI and Large Language Models [79:09 – 87:16]

The conversation shifts to artificial intelligence, specifically large language models like ChatGPT. Bhide critiques these models for their lack of genuine understanding and meaning-making, emphasizing that human discourse relies on constructing meaning rather than mere statistical prediction.

Amar Bhide [82:03]: "The mind constructs meaning from its past experiences, culture, and empathy, which AI lacks."

Investment Philosophies and Market Examples [31:45 – 50:56]

Cole Smead brings up historical investment examples, such as Warren Buffett's investment in Coca-Cola, to illustrate how overconfidence in uncertain markets can lead to long-term underperformance despite short-term successes. Bhide agrees, stressing the importance of recognizing transient judgments in human affairs.

Amar Bhide [32:10]: "Genuine investing profit can only be realized when you have a bit more confidence than others who are pessimistic."

Final Thoughts and Recommendations [85:43 – 90:32]

As the episode nears its conclusion, Bhide emphasizes the unique value that human judgment and narrative bring to managing uncertainty. He encourages listeners to engage deeply with these concepts to navigate the ever-present uncertainties in investing and enterprise.

Cole Smead [90:04]: "Your book gives investors a paradigm for thinking across the spectrum of investment opportunities... If you enjoyed this podcast, give us a review."

Conclusion

This episode offers a rich exploration of the nuanced differences between risk and uncertainty, the limitations of quantitative models in economics, and the indispensable role of human judgment and narrative in decision-making. Amar Bhide provides valuable insights for investors and entrepreneurs alike, advocating for a balanced approach that acknowledges the unpredictable nature of human behavior and markets.

Key Takeaways:

• Risk vs. Uncertainty: Understanding the distinction is crucial for effective investment strategies.
• Human Judgment: Beyond numbers, narrative and intuition play a vital role in navigating complex markets.
• Investment Philosophies: Balancing diversification with strategic confidence can lead to genuine profits.
• Venture Capital Evolution: Institutionalization of VCs has both benefits and drawbacks for emerging enterprises.
• AI Limitations: While AI can assist, it lacks the depth of human meaning-making essential for meaningful discourse.

For those interested in delving deeper, Amar Bhide's Uncertainty and Enterprise is a recommended read that offers a comprehensive framework for understanding and managing uncertainty in various facets of business and investing.