Dear Analyst #78: 3 mental models from the show Billions

Following up from episode #77 about mental models, I wanted to take things one step further and tie mental models to one of my favorite shows. If you came here hoping for the latest Excel trick or keyboard shortcut, apologies in advance. If there’s one theme you should take away from these posts, it’s being a good analyst means you’re able to connect differing ideas, trends, and frameworks together.

One show that has informed my thinking over the years is Billions. For those uninitiated, Billions is a show about a hedge fund manager (Bobby Axelrod) who tries to gain wealth and power through unscrupulous means while evading the regulatory arms of Chuck Rhoades, the U.S. Attorney. The show is loosely based on real-life events where then U.S. Attorney for the Southern District of New York Preet Bhara prosecuted hedge fund manager Steve Cohen of S.A.C Capital Advisors in 2013. The show is filled with esoteric references, finance jargon, and yes, some mental models that are worth noting. Here are three mental models from three different episodes.

Source: Showtime

1) Survivorship bias and Axe’s bad trade on BioLance

This is an example of not necessarily a mental model, but one of the many cognitive biases that can cloud our judgement. In addition to survivorship bias, there’s a bit of confirmation bias and the hot hand effect at play here.

Setting up the scene: Axelrod is sitting in his office and waiting to hear the news about a company called BioLance he’s invested in called BioLance. Before the CEO of the company goes on the conference call to discuss the status of their inhibitors for fighting type 2 diabetes, the trader (Mafee) who is executing the trade on behalf of Axelrod tries to talk Axelrod out of the trade. Mafee believes BioLance won’t have approval from the FDA to move forward with manufacturing the inhibitor, and that Axelrod should short BioLance instead given the current competitive market. Axelrod claims he’s done the research and believes BioLance’s inhibitors will get approved, leading to a stock jump. The BioLance CEO gets on the conference call and announces the FDA has not approved their inhibitors. Axelrod is dumbstruck and is trying to figure out how his decision-making led to this $1B mistake.

The reason for Axelrod’s flummoxed decision-making was he felt guilty about a previous misdeed he did and was punishing himself. Notwithstanding the real reason for the bad trade and the need for the plot to make sense, there is some interesting biases to take note of as Axelrod reflected on his trade.

A perfect example of survivorship bias is news about companies and startups who are raising millions in funding or doing an IPO. As an aspiring startup founder, you see this news and believe that it must be easy to create a company and have it be successful. The problem is you are overlooking the status of the majority of other companies who are failing our going bankrupt since there isn’t as much news about these floundering companies.

Source: Google

Most of Axelrod’s employees (including Axelrod himself) believe that Axelrod is never wrong. His hedge fund has billions under management and he wouldn’t get to this position if he didn’t make the right bets. There is survivorship bias here in terms of people focusing on the trades that made the fund millions of dollars, so this trade on BioLance shouldn’t be any different.

Then there is the potential for confirmation bias, or interpreting and seeking information that confirms your current beliefs. Axelrod walks through his decision-making process with his fund’s full-time performance coach, Wendy:

Somehow the idea that all the guys…I asked Mafee. And the moment he said that everyone else agreed that it was the wrong move, I had to stick it out. Had to prove that I was the difference maker. – Axelrod

Knowing that others thought he was making the wrong trade probably led Axelrod further down the path of confirmation bias. Not only did his belief in the trade go higher, but his pride got wrapped up in the trade too.

From a trading perspective, this could also be an example of the hot hand fallacy where a person’s previous positive outcomes leads to them believing the next outcome will be positive as well.

Shooter’s gotta shoot. Unwavering belief in our own capabilities. It’s essential to a point. Keeps us functioning at a high level. – Wendy

Key takeaways

Spend more time trying to find information you don’t see, or isn’t readily available. I think survivorship bias and confirmation bias go hand-in-hand. When I’m researching some new crypto or defi platform to invest in, I’ve started conditioning myself to do Google searches like “is X legit” or “negative reviews about X” to get the full story. A normal Google search for “X” will generally yield the positive news you’re looking for. To bring this back to being a good analyst, what questions are people not asking? What other internal or external input are we overlooking?

Source: Product Placement Blog

2) First principles and the Chicken Man

Would you rather be a chef or a cook? A cook is able to follow a recipe word for word and deliver a consistent meal as long as they have the right ingredients. What if one of the ingredients is missing? This is where the chef shines. To a chef, the raw ingredients are the most important part of the process rather than the recipe. The ingredients are the first principles for the chef and they can create their own recipes and meals no matter what ingredients they have in front of them.

Billions shows some of the darker sides of the hedge fund industry which leads to the drama on the show. Axelrod and his traders frequently get involved with insider trading in order to make profit on their trades. Let’s be clear, insider trading is illegal and wrong. But in the due diligence process for snuffing out a good trade, Billions teaches us about first principles thinking and going beyond conventional wisdom.

“Dollar Bill” Stern is a trader who frequently presents insider trading opportunities to Axelrod. One such opportunity happened to be going long on the Arkansas Chicken Index (no such index actually exists). This is “pitch,” as it were, from Dollar Bill to Axelrod and Wags, Axelrod’s right-hand man:

Dollar Bill: There’s plenty of chickens. And the early chicken action is counting on that. But Chicken Man will say that there’s very few chickens. The price will skyrocket.

Wags: Why will he say that?

Dollar Bill: Because he’s supposed to drag his ass out to multiple farms and productions house to get an accurate count. But the guy’s Otis of Mayberry. So he’ll go to one or two to make an appearance, but that’s it. He’s not counting shit. The guy sits there and calls a few of the major poultry producers and just asks them for their numbers. It’s like a teacher letting a kid grade his own tests.

Axe: And they say the numbers are low because it keeps the prices high.

Wags: If the Chicken Man is wrong, why does he get to stay the Chicken Man?

Axe: Because he’s wrong in the way the producers want him to be. They installed him. And they keep him in place.

In the process of doing research or due diligence on a company for the purposes of investing, first principles thinking comes out. In the case of the Arkansas Chicken Index, an analyst could treat the price of chickens as sacrosanct news and assume it reflects an accurate count of chickens. Why? Because we know (or we think) that other indices reflect the true price of something (e.g. S&P, CPI). Via analogy, the chicken index should behave the same way, until you break down the index into its component parts and build your own conclusions on–forgive me–counting chickens.

Source: UPROXX

The Georgia Dock and the real chicken man

Turns out there is a real chicken man who used to publish a newsletter called Georgia’s Poultry Marketing News. Arty Schronce would also just call some major chicken producers for their numbers. Arty’s numbers would then go into the Georgia Dock, the main wholesale chicken price index created by the Georgia Department of Agriculture.

Source: Gainesville Times

Wall Street analysts did some first principles thinking and decided to investigate Arty’s chicken numbers. A Washington Post article led to the elimination of the Georgia chicken index as well as some chicken producers getting sued for price manipulation.

Did chicken prices go back to normal after the index was abolished? Surprisingly no. One theory is that the buyers of the chickens–big supermarkets–disregarded the chicken index when they found out the index wasn’t reliable. Turns out there was actual price-fixing and the chicken buyers’ lawsuit against the chicken producers held water.

Arty, like the chicken man in Billions, was just a guy caught in the middle of supply and demand.

Key takeaways

Not going with your intuition may be a good thing. Our intuition is influenced by our experiences, history, and other people’s opinions. First principles thinking brings you back to the truths and reality in front of you. When other opinions guide your way of thinking about a problem, you are less likely to come up with a creative solution.

3) Activation energy and catalysts to short the Nigerian Naira

Getting started on a big project is the hardest part. Writing the first word in this post was difficult right up until I removed distractions and had a cup of coffee to wake me up. Activation energy is the initial push to get a chemical reaction started. You can equate this with the “tipping point,” as fans of Malcolm Gladwell may be familiar with.

Setting the scene: Axelrod meets with a talented trader named Everett who works at a different hedge fund. Axelrod is trying to poach Everett to his hedge fund, and Everett tells Axelrod about some news he heard about the Nigerian currency:

The have to devalue. Could be a month for now. And with the right pressure, could be tomorrow, if somebody takes a massive short position against it. – Everett

Everett’s research (and inside information) indicates that the Nigerian currency will be devalued, but it’s a question of when. With a little activation energy in the form of a short position on the currency, Axelrod can control the series of events that leads to the official proclamation by the Nigerian government that the currency is getting devalued.

The entire show is a great example of the activation energy mental model at play. Small actions and nudges here and there lead to the big “reaction” the originator of the action is looking for. An anonymous tip, a rumor, or an unexpected appearance can lead to larger events down the road.

For this play on the Naira to work, Axelrod needs additional capital to take a large enough short position to cause the currency to spiral. He decides to disclose this information to some of his competitor hedge fund enemies in the hopes that they will join him in shorting the currency:

Axelrod: Nigeria is going to devalue its currency.

Malverne: How could you know that?

Axelrod: Because we are going to make it happen. If each of us take a monster position against the Naira, we dictate the timing. This deal only works if we’re all in it together. The threshold is five billion. I’m in it for two. That leaves one each for you three. So, which is the more powerful driver? Boning me, or your own self-interest?

Source: Billions

Frenemies and incentives

Without the help of the other hedge funds, Axelrod doesn’t have the capital and activation energy to catalyze the devaluation of the Naira. Further on in this episode, Axelrod finds out that Birch, one of the hedge funds who originally agreed to participate in the short sale backed out and is backstabbing Axelrod. To make up for this roadblock and officially cause the markets to change, Axelrod get his esteemed friend Lawrence Boyd to appear on public TV saying that he believes the currency should be devalued. It’s like having Janet Yellen come out on CNBC and say Bitcoin is the future.

Another interesting mental model at play here is incentives. People are ultimately driven by incentives and rewards and Axelrod poses the ultimate question to his compadres: do you care about profits above all else? The true nature of the hedge fund managers comes out as they put aside their competition with Axelrod for this opportunity. Axelrod knew the incentives were right to get his competitors on his side for this play.

Outside of finance and politics, I’d love to know other real-life examples of how to “keep your enemies closer.” My hunch is that most people don’t have frenemies, or maybe I just don’t have enough at stake where enemies will line themselves up against me. In this case where millions are at stake, Axelrod’s enemies stand to lose more if they don’t collaborate with Axelrod.

Key takeaways

Figure out what catalyst is needed to move something past its breaking or tipping point. If it’s something you’re trying to change in your life like going to the gym more often in the morning, having your gym bag packed and gym shoes out might be the “activation energy” you need to get out the door. In the case of price-fixing a currency, the first step is don’t do that. The second step is finding others to give you leverage so that the scale tips in your favor.


Some of these mental models are a bit of a stretch in terms of the scenes from the show. The plots and story lines in the show are obviously written to create drama and would not happen in real life. A hedge fund would not agree to short the Naira just to make a profit. I’d hope there’s much more calculus that goes into a decision like this in reality.

Nonetheless, the decisions people make on the show reflect our existing cognitive biases and ways of thinking. The one thing Billions has taught me is to constantly learn about new ideas, markets, and people. Just from this post alone, I learned about a real life chicken price index and forex trading.

Other Podcasts & Blog Posts

In the 2nd half of the episode, I talk about some episodes and blogs from other people I found interesting: