Episode 113: Data Decisions with Seth Stephens-Davidowitz 

Description:

The WealthAbility Show 113: Decisions we used to make based on our ‘gut feeling’ have been shaped by a new approach: data analysis. In some cases, we have aggregated tons of data where there was never any before. In this episode, Seth Stephens-Davidowitz joins Tom to discuss how to obtain data that can help you make the best decisions in your business and personal life.


Pre-order Tom’s new book, “The Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make” at: https://winwinwealthstrategy.com/


Looking for more on Seth Stephens-Davidowitz Website: http://sethsd.com Book: “Don’t Trust Your Gut” & “Everybody Lies” Facebook: https://www.facebook.com/SethStephens… Twitter: https://twitter.com/SethS_D LinkedIn: https://www.linkedin.com/in/seth-step…

SHOW NOTES:

00:00 – Intro

04:27 – How Can Anyone Obtain Data?

11:08 – How Can Google Scholar Aid In Obtaining Valuable Data?

17:53 – How Can A Small Business Create A Plan To Use Data?

23:32 – What Is A Data Mindset?

Transcript

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to the WealthAbility Show, where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. So data, big data, little data, all data. Data is that four letter word that we use. The question is, how can we use it? How can we actually use data to our benefit? With our clients, with our customers, with even our vendors, with our employees, how do we actually gather big data? How do we use big data? We have an expert on big data, Seth Stephens-Davidowitz, who wrote the book Don't Trust Your Gut: Using Data To Get What You Really Want In Life. Seth, it is great having you on the show today.

Seth Stephens-Davidowitz:

Thanks so much for having me, Tom.

Tom Wheelwright:

Seth, if you would, just give us a little bit about your background, because I know you go … you've been deep into Google and done some other cool things from a data standpoint.

Seth Stephens-Davidowitz:

Yeah. I did a PhD in economics. Basically, all economists one day decided they were just going to call themselves data scientists, because data scientist sounds cooler than economist. And really, when you're trained as an economist, you learn how to make sense of data, to do regression analysis, sometimes machine learning. So then I got a job at Google as a data scientist. For the last five years or so, I've been a writer. I wrote a book, Everybody Lies, about all the things you could learn about people from Google trends, which is a tool that a lot of people didn't know about. Really, really powerful tool. And then this new book, Don't Trust Your Gut, is about how you can make better decisions in all arenas of life by using data. I kind of call it Moneyball For Your Life. I'm a huge baseball fan, and if you're a baseball fan … What?

Tom Wheelwright:

Yeah. [inaudible 00:02:15]. Moneyball [inaudible 00:02:17].

Seth Stephens-Davidowitz:

Yeah, yeah. If you're a baseball fan, it's pretty obvious that the game's totally different than … When I was a kid growing up, there were no infield shifts. Now there are a ton of infield shifts or they're banning the infield shift. The game was singles and bunts and steals, and now it's home runs and strikeouts. Just a totally different game, all based on these patterns that have been discovered in data. It kind of occurred to me that when we make our big decisions in life, we don't really … I feel like we're in the pre-Moneyball days of big life decisions, so dating or career or happiness. I feel like we're ready to start changing that because, just as there is so much data on the game of baseball that allowed for this sabermetrics revolution, there's now so much data on all the big questions of life. Including the ones you talk about, how to be richer. There's just an explosion of data.

                So I kind of went through a lot of the best studies that I could find on these big topics, that I think a lot of people would say aren't really decisions you make with data, they're decisions you would trust your gut. I'm like, “Well, actually, now we can start move towards … we're starting to move towards a world where you actually could approach these decisions using data.”

Tom Wheelwright:

Interesting. I was listening to Gary Keller, Keller Williams recently, and he said, “You should always be able to predict what your outcomes are.” It should never be a surprise what your sales are, what's going to happen in the future. You should always be able to predict that. A lot of that comes from data. What's interesting to me is you've actually been able to use a lot of tax data that you've gathered. My question is, first of all, how'd you get the data? What kind of data are you talking about? And really, are you talking about … because you talk about trends, I presume you're not talking about personal data, like Facebook was accused of using.

Seth Stephens-Davidowitz:

Yeah. The tax data it's … I didn't actually analyze the data, I analyzed the charts in the appendix. To get data, there's a rigorous process. You have to go through a million hoops, that researchers, professors go through. It's all de-identified, anonymous aggregated data. But there are all these trends that … I've kind of found … You say, “How can you make sense of all this data out there?” A lot of the juicy stuff's in the appendix of papers. Because academics are always trying to make an intellectual point or a theoretical point.

                There's a paper I talk about, Capitalist in the 21st Century. It's an amazing paper where they analyze the complete universe of tax records. Again, yeah, as you were saying, totally anonymous. They analyze who's the member of the top 1%, the top 0.1%. People are earning, in many cases, millions of dollars a year. It was a very subtle paper with a lot of theory about human capital versus other forms of capital. But they have this appendix where they just list all the fields, how many millionaires they're creating, of different business fields. I'm like, “Oh, wow, that's amazing.” It was in an online appendix, the research. I'm friends with one of the researchers. So he kind of alerted me to this. You can compare that to actual data on how many businesses form. You can see certain fields in the United States just create way higher percent of billionaires than other fields.

Tom Wheelwright:

Interesting.

Seth Stephens-Davidowitz:

Some of them are kind of obvious, real estate or investing.

Tom Wheelwright:

Sure.

Seth Stephens-Davidowitz:

We kind of know them. But some of the fields, middle men tends to be a really good field. Auto dealerships, some people knew auto dealerships. I personally hadn't known how good auto dealerships were as a field. Market research seems to be a really good field. It's like, “Oh, wow, there's all these patterns.” I think as in business … One of the big things that you see in the tax data is the value of owning versus being a salaried employee.

Tom Wheelwright:

Right. Right.

Seth Stephens-Davidowitz:

As you get higher and higher up the income distribution, the percent of people who are employees just falls off a cliff. So people making in the top 10%, making the top 5%, a big percent of them are employees. They're given their W2 form and they're paid their salary. But the ones who start going to the 1% let alone the 0.1%, you just start seeing business, business, businesses, owning, owning, owning is dominated. Which I think isn't that shocking, the value of owning, but then I think people … even people who know you want to own a business if you want to get rich, they don't quite think through how much variation there is in the chances by a business, and that a lot of businesses …

                When you study economics, the first law of … When they teach you about business, they teach you something called the zero profit condition, which is basically, businesses can't make profits. Because if you're making a profit, someone else is just going to start a competing business and charge a lower price until your profit is eaten away. When you look at the data, it's kind of true, in that, most businesses aren't creating a lot of rich people because you're just stuck in horrible price competition.

Tom Wheelwright:

Right.

Seth Stephens-Davidowitz:

So you open up an auto repair shop. You're owning your business. You own your time. But there's nothing stopping someone from starting an auto repair shop down the street from you and charging a lower price. You're stuck in ruthless competition. Same with building equipment contractor. There's just all these business, you actually do the math, comparing the appendix chart to the business chart, that fewer than 2% of people are entering the top 1%. So not many people. And pretty much nobody's entering the top 0.1%. Nobody's making millions of dollars from these businesses.

                But then there are these few businesses where they have some way to escape that ruthless price competition, and they can charge a premium for their service, where a lot of people are getting rich. Just kind of that mindset, of one, you need to start a business, and two, you need some sort of moat around your business, and how are you going to get it? If anybody asks those two simple questions, I think their chances of getting rich would go from about … The average person has a 0.1% chance of entering the top 0.1%. I think if you just asked yourself those two questions, you'd have a 10% chance.

Tom Wheelwright:

Give us those two questions again.

Seth Stephens-Davidowitz:

Well, actually, there are three questions, I should say. Actually, three questions. There's one, do you own something? Two, are you going to avoid … How are you going to build a moat around your business that someone's not destroying you on price competition? And there's a third one, actually, which is how are you going to avoid a global behemoth putting you out of business?

                So if you start a sneaker business, you can build a moat around your brands. You can have athletes advertising your sneaker. But I wouldn't recommend someone start a new sneaker business because how are you going to compete against Nike and Adidas and Reebok? The ones who are really been set up for years and have all the relationships with athletes.

Tom Wheelwright:

Look at Tesla, it took a hundred years from when Chrysler was formed to a second successful automaker in the US, which was Tesla. A hundred years it took. So that's how hard it is to compete against those big guys. This is really interesting to me. Because you talk about the owning versus being an employee, because that's something I talk about. Basically, what I tell people is, “The more money you make, the more taxes you pay, but the more assets you own, the less taxes you pay.” What I'm hearing is, I think the data would prove this out. But let me give you an example, and you can tell me, where would you actually go to get real data on this?

                I just wrote a book and it's just coming out. It's on pre-order right now, the Win-win Wealth Strategy: Seven Investments The Government Will Pay You To Make. What I do is I look at those types of investments that you own that provide both a high rate of return to you and to the government, as well as lowering your taxes. Okay? So when you look at something like that … This is where the top 0.1% come in, because they always do this. This is how the rich don't pay taxes basically, is what this book is, how the rich don't pay taxes. They're doing it legally. They're doing it really the way the government wants them to do, but where would you actually go to say, “Well, okay …” I've used simple examples. Where would you go to say, “Well, here's the data to prove that”?

Seth Stephens-Davidowitz:

Yeah. You have to know your way around Google Scholar, which is … That's one of those things, putting a little energy into understanding Google Scholar probably goes a long way. It's one of those pain in the assistant things to do when you're starting. But once you do it, you can actually … There's usually a paper that's been written on this. Because tax data has been made available, the research, again, totally anonymous, aggregated. There's usually a paper written. Capitalists in the 21st Century is the paper. If you want to know what businesses are creating a lot of millionaires, the appendix of Capitalists in the 21st Century is the paper. There's no other paper that comes close to delivering that type of information. That's not a question that I particularly looked at, but I think you're right that …

                One of the things in writing my book, Don't Trust Your Gut, is I wanted to just encourage people this data-based mindset. This a separate example, get back to wealth and taxes and everything in a bit, but it just shows the mindset, is I talk about this guy, Patrick O'Rourke. he was, I think, a CPA. He was a certified public accountant. And his son was a talented baseball player, but he wasn't a great baseball player. He wasn't going to be necessarily the greatest baseball player. Or, it wasn't clear how good he was going to be. All his friends said, “Your son should play lacrosse, not baseball, because lacrosse, so many fewer people try it, that you just have a much higher chance of getting a college scholarship.”

                What Patrick O'Rourke said is, “We live in the 21st century. Statements such as that can be tested.” He Googled around the internet and started looking into information of how many scholarships there are and how many high school players there were for every sport. I showed the chart that was created based on this. He has a website, scholarshipstats.com, that has all this information. He found out that what his friends were telling him was actually wrong. Yes, there definitely are fewer high school lacrosse players, but there are so many fewer college scholarships, that actually, the ratio of high school players to college scholarships is higher in lacrosse than baseball. The percent of high school players who get a college scholarship is higher in baseball than it is in lacrosse, which is the exact opposite of what his friends were telling him.

                That kind of mindset, I just want people to be in that mindset. The way to do it is being good at Google and being good at Google Scholar. Patrick O'Rourke wasn't a trained data scientist. So there are two things you do. There's either you look it up and somebody has already done this. That's what I did for my book on the best way to get a college scholarship. I just said, “Here's the stats from Patrick O'Rourke that you might not know.” Showed the table and pointed people to that website. So that's one way.

                It's, in some ways, an underrated life strategy, because I think a lot of people want to do everything themselves, reinvent the wheel. You don't need to do a study yourself if it's already been done, you just need to point people to the study or point yourself to that study. That's always the first thing you do, is just Google and see if anyone's done this. The second thing you do is, if someone hasn't done it, is it possible to collect that data? Which sometimes it is. If you're looking for scholarships, think about it. Then go, “Okay, well there's no … Is there information on how many scholarships there are in different sports? And if there isn't, who would I talk to who might have that information?”

                I did a study in my book. I wanted to know what sports were most dominated by genetics. I wanted to see how many twins … The way you know it's something very genetic is there're just a ton of identical twins.

Tom Wheelwright:

Right.

Seth Stephens-Davidowitz:

I just reached out. There's an Olympic historian, Bill Mallon, who's been collecting data on twins in sports, in Olympic sports. I just emailed him and he gave me the data and I could do the analysis. So that kind of mindset is what I want people to get in. Is just, if someone says something, is there data that could potentially test that hypothesis? Sometimes you're going to find, as Patrick O'Rourke did, “Oh, that hypothesis is actually completely wrong. It's the opposite. If my son was a lacrosse player, should try to turn him into a baseball player.”

Tom Wheelwright:

I like that. I have a specific question for you. One of the big FinTech companies is Intuit, right? Intuit owns TurboTax. Intuit owns Rocket Mortgage. Intuit owns QuickBooks. Particularly TurboTax, it would appear that they've used data from TurboTax to drive Rocket Mortgage. So my question is, what are you allowed to do as far as … Let's say you have a lot of ways to gather data. Okay. So let's say you've got access to data. What are you actually allowed to use? I mean, what could Intuit use? Obviously, they couldn't target those specific … I mean, I would hope they couldn't target those specific taxpayers for Rocket Mortgage, but maybe they did. I don't know. But I know that it built Rocket Mortgage was their data from TurboTax.

Seth Stephens-Davidowitz:

Well, I would caution everybody. I am not a lawyer. I recommend people look at where data's available. But as far as the legal questions, if it's your business, you need to talk to a lawyer about that. I don't know. There definitely have been examples of companies … I think Google, at some point, decided … I think Sergey Brin … there's a story that Sergey Brin, at some point said, “We could just be the world's greatest hedge funds because we know what everybody's searching. We could figure out the seconds before some people buy a stock.” I forget where I heard this story. I don't know if it's 100% true, but that Eric Schmidt said, “That's the stupidest idea I've ever heard and that is completely illegal. You're not allowed to use your data to trade as a hedge fund.” Those are separate questions. [inaudible 00:17:12].

Tom Wheelwright:

Basically what I'm hearing is, sometimes it appears that they're using that. They may not at all. It may just be that they're getting data other places, or they're just using more generic data. For example, they would have a customer base, they'd be able to use their customer base data to market those customers. There certainly would be nothing illegal about that. If somebody gets a tax return, then you market to them for a mortgage. I mean, to me, that makes total sense. But there is data. I guess, my question is, besides going and getting data from somebody else and going to Google Scholar, where would a typical business owner get data that would drive business decisions?

Seth Stephens-Davidowitz:

Yeah. A lot of it is their own data. So something like Google Analytics would be really huge, customer lists. Keeping more data. One thing that's very interesting is when I wrote my first book, a bunch of businesses reached out to me to ask me to consult. Every single business told me the same thing, “We are embarrassed to show you how poor our data skills and data collection efforts are.” I'm like, “If every business is telling me that, then they shouldn't all be embarrassed. Because if anything, they should be less embarrassed that they actually reached out to someone and are now trying to correct this problem.” But I think everybody, kind of as you do … People suspect that other businesses are more advanced in data than they probably are. I'd even question whether Rocket Mortgage and Intuit are quite as advanced as you might suspect they are. Sometimes it's the simple things just give you a huge leg up, which is …

                That was kind of the big … I kind of had this insight when I was writing my book. Initially I wanted to … I thought I needed to blow everybody away with new studies that I did, that nobody would believe were even possible. And I'm like, “Wait, I could just tell people about studies they probably don't know about, because the average person just doesn't realize how many amazing studies have been already been done that are useful to you as you're making decisions.” The appendix has these tables and you know the actual businesses that created the most millionaires. Things of that nature.

                But as far as an actual business, the one thing I would recommend is just keep way more data than you actually … Just keep everything. Try to turn everything into more data questions. Then there are tools that … In my first book, I talked a lot about AB testing, which, that's a huge tool of big tech companies. Facebook or Google or Netflix, when they're deciding whether to make a change to their website, they show the current version to a small group of users. And then they show the potential change to a different group of users and they see what effect it has on click-through rates and time spent on the site, whatever they might be interested in, return visits. Then they only make the change if it has a positive effect. AB testing now can be done by smaller companies as well. There are tools you can use, like Optimizely, that allow any organization to do rapid AB testing. That would give you a huge leg up in designing your website.

Tom Wheelwright:

No, that makes total sense. Yeah, I learned the AB testing years ago. I was actually speaking to a group on, of course, my topic, tax. But they were actually teaching … This was early in the online internet marketing days and they were talking about AB test. I'm going, “Well, that's pretty cool that you can actually know, okay, what's going to work, what doesn't work, just by doing simple testing like that.”

Seth Stephens-Davidowitz:

Yeah. But I think the thing that's underrated is being entrepreneurial in data as well, so collecting data. That's kind of the Patrick O'Rourke model is let's get data to help answer this question. In my first book, Everybody Lies, I talk about this story, Jeff Seder. He's this guy who predicted what race horses are great. He found that big, left ventricles are massive predictors of horse racing success. That's one of the reasons he was able to predict American Pharaoh would be a great racehorse, because he had a huge left ventricle. You're like, “Well, how did he do that?” He built the world's first EKG to measure the internal organs of hearts. He tried all these things along the way to do that. That mindset, I think, is a great mindset. People don't usually connect data with entrepreneurship, but sometimes you do have to be entrepreneurial to get the data.

                If the first step doesn't work … The first step is you just look, “Has anyone collected a dataset of horse ventricle size?” If somebody's done it, don't redo it. Reach out to them, “Can you give it to me? If you're not going to give it for free, can I pay you?” In business, the same thing. “Is there a list, a customer list that would be useful for me. Before I go about trying to create it myself, let me just see if someone already created it and if they're going to give … they'd be willing to give it to me or sell it to me.” But if that doesn't work, then you got to think, “Can I be entrepreneurial to create that data?”

Tom Wheelwright:

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine. He's a former board certified surgeon, and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he's geared towards. So if you're a high paid professional, you're going look, “I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you joined Buck on this adventure of a lifetime.

                So what I'm hearing is, first thing is, is what question do you want answered?

Seth Stephens-Davidowitz:

Yeah.

Tom Wheelwright:

The next part is, is somebody already collected that data for you, so you don't have to go reinvent the wheel. And then third is, well, if they haven't, how do you go ahead and collect that data so that you can get your question answered? Does that make sense?

Seth Stephens-Davidowitz:

That's totally right. The main thing, again, and that Patrick O'Rourke mindset of, don't just accept what people tell you. Because I think most of us who aren't in the data mindset, if someone says our son should be a lacrosse player because he has a better chance of getting a college scholarship. We'd just say, “Oh, did you hear what my friend said? Have you thought of lacrosse?” We'd get him a lacrosse stick and start practicing.

                We wouldn't say that's actually … The person is basically making a data statement. There are two variables. There's how many college scholarships there are, there are how many high school players there are. There are two sports and there are four data points that would answer that question. He's saying that without any data, just based on what he suspects, and the mindset of, “Well, there are four data points.” So now you know your question. And now it's, “Okay, if someone collected that data, so you don't reinvent the reel. And if someone hasn't collected that data, can I go out … How would I go about collecting that data myself?”

Tom Wheelwright:

I love it. The book is Don't Trust Your Gut: Using Data To Get What You Really Want In Life. Not just money, but also other things like how do you be happy? How do you raise children who can get a better job? All of those things. We do have all this data. It's all out there. Somebody's collected most of this already for us. We don't have to reinvent the wheel. I love that message, Seth. So Seth, besides the book, where could we go for more information about what you're doing with data?

Seth Stephens-Davidowitz:

I'm on Twitter, SethS_D. SethS_D.

Tom Wheelwright:

Awesome. All right. Seth Stephens-Davidowitz and Don't Trust Your Gut, use data. Big fan of using data. When we get more data, when we actually use that data, as Seth suggested, this is how you're going to make way more money and pay way less taxes. We'll see you next time.

Announcer:

You've been listening to the WealthAbility Show, with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.