John Arnold on Trading, Energy, and Evidence-Based Philanthropy

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. For a full transcript of every conversation enhanced with helpful links, visit conversationswithtyler.com. Hello everyone and welcome back to Conversations with Tyler. Today I'm here with John Arnold. John is arguably the greatest energy trader in all of world history. In 2007, he became known as America's youngest billionaire. These days, working with his wife Laura, he does Arnold Ventures, where we're sitting right now. And Arnold Ventures is one of the most important and influential voices and actors in philanthropy. John has done much more. That's just a brief outline. John, welcome.

Oh, thank you for that intro and great to be here.

Your days as an energy trader, do you think you were especially good at trading at the close or you didn't like doing that?

Yeah, there was always an imbalance on the close. And so if you could sense what it was, whether it was imbalance for buyers or imbalance for sellers, it definitely offered an opportunity. And the close kind of set the index for the day as to, you know, the starting point for the next day. So it was particularly important, but I don't think there was anything necessarily profitable about it besides a little bit around the edges.

But sensing that imbalance, what do you feel is the skill you had that your other traders didn't have to the same degree?

Yeah, I've always had a difficult time answering this question. I think, you know, part of it is trading is a team sport for sure. And I always took the view, and my personality is kind of either be around or get around, you know, smarter people and listen more than talk. And that's certainly my personality. But in terms of traits, you know, here's what I would offer as my traits.

Yeah.

Number one is this detachment from emotion.

Mm-hmm.

So there's a lot of talk about fear and greed drive markets. And to the extent that fear and greed change your process, the more you can you remove those emotions, I think the better. I think there is a component of first principles trading or first principles of how you look at information. So don't accept the information as is, but you really test all assumptions that go into it. I think there is a component of being on the perfect point of the confidence spectrum. So you have to be confident in order to say the market is wrong and I'm right, that other people are wrong because I think the efficient market hypothesis is fairly true. But if you're overconfident, you know, you'll blow up quickly. There's, you know, this notion of being quantitative enough to build the long-term models, but being quick with numbers in order to jump on the trades as they happen. There's this aspect of, I think, a chip on my shoulder.

Yeah.

Kind of goes back to—

Feeling you can do it better.

Actually, it goes back to kind of my life before my professional life. And, you know, I always had this chip on my shoulder and then really having this passion for it. Like you have to have the love of it that this is the most important thing. And I ate, breathed, and slept it. You know, I would be thinking about it first thing in the shower in the morning. I would be dreaming about it after work. I'd go out with people in the industry and talking about it. It was that real devotion to the markets. I think there was a timing component that I always had great timing in my career. And then certainly luck's a part of it.

But an interesting feature of your career is you walked away from all of this more or less at the top of your performance, right? And if you're so wrapped up in it, what's your own model of yourself?

Yeah.

For how you could both walk away from it and be so wrapped up in it.

So, but part of it was I started to become less wrapped up in it. So I started in, in energy trading at age 21 and did it for 17 years. And first 14 years of that, yeah, it was just, that was the eating, sleeping, breathing it. And then kind of years 15 and 16, I started to feel myself like that the end is coming at some point. And by year 17, I didn't enjoy the game anymore. And I could feel like if your drive, if your passion isn't there, that you weren't going to be successful. And so that was part of the reason of stepping away. It coincided with kind of a time when, you know, I'd gotten married, I had kids, so started to get more love over for family. Yeah. And with the spouse, the markets had changed. So the shale revolution had come in and you had a market that was by its nature extremely volatile, that go-to-one that was bouncing around marginal cost to produce as the natural gas became oversupplied. And so the opportunity was very different. And then I think I was, you know, starting to spend an hour or two in the afternoons with our foundation work and that started to suck some of my energy out. Mm-hmm. And I started to become more interested in those questions rather than of energy trading. And part of my career and part of the success I think was the business plan I developed was be an inch wide and a mile deep in this. It was find this niche and try to be best in the world at it and don't expand the focus.

Yeah.

And so it was North American gas and power. At some point, you know, LNG started to become relevant and put a small team in Europe, but mostly for information flow for the North American gas and power group. There were numerous opportunities to get into oil, to get into metals or agriculture, or start trading energy equities, for instance. And every time considered it, thought, stick with the niche and just focus here. And I think the upside was, yeah, if we were successful with that, if that plan worked and we were best in the world, it was gonna be enormously profitable. The downside is that the intellectual curiosity starts to sag, right?

You just going in— After 17 years.

Going in—

Not in year 13.

Yeah, it was, you know, again, it was like part of it was like the market opportunity. Part of it was my financial situation had changed so much, the personal situation. So like this whole combination of things, the regulatory situation had changed.

And in your niche, do you think the skills needed to be a commodities trader in particular are different from other kinds of trading or it's just the same?

I think it's pretty similar. You know, one of the great things about the natural gas industry for a long time, and it's still largely true now, is it was a closed system, right? And you could kind of figure it out. And it also had this forcing mechanism twice a year that the fundamentals had to align with price. More or less twice a year, kind of at the end of the injection season and end of the withdrawal season of gas. And so where price could deviate away from fundamentals for a time period, it had to come back at a certain time. And so it was a system that was conducive to being modeled, apply smart trading on top of that, and it created a lot of opportunity.

Why did you go to Vanderbilt?

I was always smart but not motivated in school. Okay. I was interested in other things. And so my—

Like sports.

Like sports, like business. Yeah. And so yeah, I had this baseball card business from an early age that was pretty successful and was just interested in different things and wasn't interested in academics. And so I always did enough work to get the A- in school, but I thought I was really smart. And so, you know, I was winning in math competitions, but my grade in math class wasn't the best, right? And So schools don't like that. Yes. And when I applied to a number of Ivy League schools and thinking that that was the right fit for me and got rejected from all of 'em and you know, then it was like, uh-oh, what do I do? I really wanted to go to the Northeast. This kind of had its origins in my interest in business, my interest in really making money. I remember telling my parents that. When they would ask, what do you want to be? And I'd say, I want to be a millionaire. And they, that's not a job, right? You gotta go learn a business, learn a skillset to become a millionaire. Like, no, I want to be a millionaire. And you know, in 1989, the book Liar's Poker comes out.

Yes.

And, and you read the book and you love it, or, and I read the book and I love it. And you know, the famous phrase, and there was equities in Dallas, right? That's Siberia in the finance industry, right? And here I am, I'm growing up in Dallas. So like, Two things were like, I gotta get in this game. This is where the most competitive, the most fun game is. And it's New York, it's not in Dallas, right? So I gotta head up to the Northeast and I, I wanted to do that going into college and didn't have that opportunity. And Vanderbilt ended up being the best place I got into. And at the time it was, you know, a very different school. It was much more of a regional college at the time. I remember when I applied, I think the acceptance rate was 44%.

Incredible. Now, Ken Rogoff, who's now an economist, he still misses playing chess, though that was decades ago for him. Do you still miss trading? And sometimes you'll wake up and you'll be thinking, what's my trade? Or it's just over?

So my big fear when I stepped away was, will I find something else? Or will I, you know, want to go back? And I have. And so, so that was the, the very pleasant surprise because I had seen a number of people who stepped away because they were burnt out because they, you know, wanted to go do something else and not find something of passion, you know, outside of trading and go back to it. And so that was my big fear almost, was that I would get pulled back into it. I still trade a little bit from my own account, but I've never for one moment since I stepped away thought that that was the wrong decision and that I wanted to go back to managing other people's money and doing it as a full-time job.

If you think about the culture of a successful trading organization, and you've been in several, What is unique or striking about those cultures?

You know, the irony is the trading floors are known, especially in the '90s and 2000s, kind of known for this very boisterous atmosphere and boys' club kind of, you know, with bordering on sexual harassment for females and people throwing phones, whatever. And that came from these New York trading floors. With the Ivy League educated people in probably a more conservative workplace type environment in the Northeast than one would think of Texas being.

Yeah.

And what I found was that the trading floors in Texas in the energy business that was largely a male dominated industry were all very calm and it was much more cerebral. Than what this image had been.

So like chess in a way.

Yeah, it was. And especially as trading went from open outcry on the exchanges in New York to electronic, then trading floors just became silent. Like everybody's sitting there just working on their computer. It's as if you're going into a tech company. Yeah. And just seeing everybody coding. Everybody's just sitting there staring at your computer all day long and all interactions ended up being, you know, over the computer and virtual rather than oral.

Yeah. And one of the places where you traded was Enron. What was Enron like as a talent culture? Obviously it later became much more controversial, but how did it feel being there? The, the traders that attracted or—

Yeah, I think it realized that it wasn't gonna be able to recruit the, the good graduates from the top 10 schools. All right. So it went for that next tier and tried to find, you know, the, the best people out of that next tier of schools from Dallas, say, right? So like schools like the Vanderbilt and Rice and Emory, University of Texas, et cetera. And you kind of would bring them in. And I think everybody kind of had a bit of chip on their shoulder when they came in, but it kind of brought in this collection of people and really put 'em through the traditional Wall Street training and analyst program. But I think what was different about Enron versus, you know, the more mature investment banks was Enron was growing so quickly and the industry was growing so quickly that if you showed any modicum of talent or ability to take responsibility, that you would either get promoted or you would get hired away by another firm that was trying to copy the Enron business model. And so as a 21-year-old going in there, my career escalated much quicker than it would've somewhere else. Now I think there was, you know, a lot of benefits for the employee. I think this ended up, you know, maybe, you know, being part of the downfall of Enron was that, you know, responsibility was given to people too early in their career without the necessary controls being in there. And so I think there was this balance of it was the fantastic place to work as a, a young person, especially if you, you showed that you could handle the responsibility because, you know, I went from, you know, age 21, kind of the most junior guy on the trading desk to age 25, and I was the head trader at the biggest trading firm in the industry.

Questions about energy markets. How much conventional capacity in the US has solar really replaced?

So it's replaced a significant part of coal-fired generation. So, you know, The transition, to the extent you think that, you know, we need to transition away from carbon fuels, has two components. Number one, it's the component of replacing the existing stock, and second is fueling the growth in energy demand, which is expected to double between 2020 and 2050 globally. And so those are two enormous challenges on their own, and combined they become very significant. So the growth in solar, as has happened in the US, has very much replaced the decline in coal, which is close to down 75% from its peak. Now, it hasn't met the growth in electricity demand. And so you see at the same time where coal's going down and wind and solar, and primarily solar at this point, are going up, you see natural gas still going up. And so the replacement of the existing energy stock is happening. It's happening at a slow pace, but the ability to meet the future demand growth isn't been proven yet.

And how green do you think natural gas is?

You know, from a carbon standpoint, it's relatively clean. I think the problem with, with natural gas is the methane leaks, and it's a problem that the industry has really kind of avoided to date. I think that a lot of the focus in the environmental movement for a long time was just on carbon and kind of either didn't recognize or didn't address the methane leaks that are happening in the industry. And so there's a lot of debate about, you know, what is the true footprint, environmental footprint of natural gas. I think it's bigger than certainly what the industry is willing to admit, bigger than what was commonly held. And it's a tricky problem. You know, there are some components of it that are easy to address. There are some components of it that require an enormous amount of resources in order to plug old wells. And the question is, how do we go about, you know, dealing with this legacy problem of old wells that are leaking? And then, and that's the expensive part. The easier part is, you know, making sure that the new supplies are as clean as possible. And I think industry's broadly done a good job with that.

And which country does that best?

It may be the US. We were part of putting a methane sat as project that EDF led to survey the methane leaks globally. So there's a fair amount of activity today on measuring methane leaks in the US where you have access to, you know, the property near fields and companies themselves are starting to do it and there are some regs about it. You know, trying to figure out what is the methane leaks in Russia, what's the methane leaks in the Middle East, in South America has always been a big question. And I think as that data's coming in, we're seeing more and more there are very significant problems in those countries.

How are the land requirements for solar gonna work out? Like what percent of the country ends up being paved over with panels? Are there only on rooftops or how does this work?

Yeah, it's probably utility scale, so it's probably on the ground in places where the value of land is low. You know, there is—

in rural Arizona will be covered.

Yeah. Well, so there's the issue of, you know, the first megawatt of solar you bring on the system is very easy to bring on. You can do it right outside of Phoenix, right next to an existing transmission line, and you're just displacing a little bit of natural gas gen during the day.

Right.

And as you build more and more, you start to have the duck curve and you start to have hours when solar is producing all of the electricity during a certain hour and the value of power during that time is zero. And so question is, if you're going to build more solar in those areas, you either need to add battery to take that from daytime to nighttime or you need to build transmission so you can move that energy someplace else.

Say there's a major volcanic event, there's a lot of ash in the sky for 2 or 3 years. So solar needs a backup. In the meantime, before the volcanic event happens, and of course that's quite rare, how much do we need to be up and running with the backup energy infrastructure? Like what do we need for reserve capacity in case the solar goes down?

Good question. I, I, it would be difficult, you know, it's doable today. I think as solar continues to grow in market share, both in the US and globally, it will have to be met with some type of battery or significant battery resource. And that's part of the economics of solar now, is that it's not just sticking it right outside of Phoenix, but it's solar plus transmission or solar plus battery. You know, the question of, you know, what happens in that type of event, it would be difficult. Now we have you know, the existing energy infrastructure is still largely around and—

but it will dwindle over time.

It will dwindle over time.

Is there some market issue? So say the volcanic event is only once every 150 years, but sooner or later one happens. And in the meantime, you need economic incentives for the gas or the nuclear to be ready. And does our government just keep on paying for those for 149 years in a row until the catastrophe comes?

No, it's a great question. And I think this is why nuclear, and particularly next-gen nuclear, is considered the holy grail, right? You're not constrained by location, you're not constrained by, is the wind blowing, is the sun shining, and it's a clean resource. The problem today is just economics, that in order to develop the kind of current generation of nuclear, it's extraordinarily expensive. And next generation, either small modular fission or fusion or both have a number of both technological as well as unclear economics in how they compete. And so I, I do think this question of, you know, how do you do this transition in, in a manner that maintains affordability but continues to get cleaner and lower emissions over time is a complex one. And I think it's one that the environmentalists probably oversold 5 years ago and said that this was going to be an easy transition. And it's certainly not just the scale and scope of the energy system is enormous, right? As you're pointing to in your question, and the need for backup, the need for a diversity of fuels and how they complement each other is real. And you can't replace that just with the intermittent resources we have today plus battery.

Did Mexico make a mistake letting itself become so dependent on the United States for gas?

Mexico made a mistake by having their energy system be state-owned and state-controlled, and that is part of the Mexican Constitution. And one of the problems that they've had is that there's this natural tension between do you take some of the cash flow from Pemex and reinvest it in the business, or do you take it and fund your favorite government program? And government as the decider of that question will naturally over time take more and more of that money into the government coffers. And so the Mexican oil and gas industry has just been in steady decline over time because of lack of CapEx. And I think, yeah, this is a fundamental problem of the industry. In 2013, Mexico proposed and passed a law to allow foreign investment into their energy system beyond just services for the first time, but allow actual ownership or pseudo ownership of the resource.

But it may not be credible, right?

And then it wasn't credible and then it gets revoked. And so the US industry, which had for a time was very excited about this opportunity and ran in there, now is like, hands off. And so that's why Mexico is deteriorating. Although they have enormous resource, they're not using it to their ability and they're becoming more and more dependent on places like the US.

And what should Canada do better?

Canada has viewed itself as having a permanent ally in the United States. Yeah.

Yes and no.

And has become dependent upon exports into the United States and access to the United States market for its surplus energy. And that creates a lot of risk as you're seeing today. It created risk during the Obama administration whenever that administration and they rejected the Keystone Pipeline. And so you had trapped resource in Canada and it's hard to get it to the West Coast and kind of go over the Rocky Mountains. And so there—

the problem there is the mountains or it's the governments or the provincial barriers to trade or what stops them from having their own pipelines to their own coasts?

You know, there's, there's been proposals to do so. I think part of it is the mountains. Part of it is, you know, the provinces have very different views of oil and gas.

And BC wants to be more green.

BC wants to be more green and they're the coast, right? And Calgary is very much kind of a mini Houston, right? And has similar values as Texas and Houston. So kind of the energy producers and the energy consumers often end up with different ideologies on this. And so part of it has been government, part of it's been logistics.

And are they going to solve that problem after the Trump shock or are they just going to stay put and suffer?

I would think that they're going to try to solve the problem.

And what's the solu— what does the solution look like? You go to the Atlantic coast or you browbeat the British Canadians or Colombians rather, or—

I think the difference between kind of the environmentalists and the energy producers has shrunk over time. I think there's a realization from the energy producers that cleaning the system over time and trying to minimize emissions is a positive, and that there's a business around it. I think the environmentalists have realized that this is a more difficult problem and that natural gas in particular is going to be part of the electricity sector for a long time. It's hard to see how you transition off of that in anything but the very long term, and that oil has a very large component of the broader energy system on as a transport fuel and as an industrial fuel for a very long time.

Is carbon sequestration going to work or it will just always cost too much?

It's probably going to always cost too much.

With advanced market commitment, does that help at all or it doesn't really matter?

I think the question is, does society want to allocate those resources for that? And the problem of who pays for it, given that the benefit is global.

What's your most optimistic scenario for the US energy future from an environmental point of view? Something that could plausibly happen?

I think next-gen nuclear, if we can overcome the technical hurdles, if we can overcome the economic hurdles.

But isn't the NIMBYism the biggest hurdle? The others I could imagine overcoming pretty readily. But I live in Fairfax County. Yeah. Spills a fair amount. People They just don't want nuclear. It's irrational, but I'm not sure they'll change their minds. It could be called fusion. It's still nuclear to them.

Yeah, I've been surprised. That was my prior 5 years ago. I've been surprised at the number of jurisdictions that are inviting these next-gen nuclear companies to come. Texas, for instance, just passed a bill creating new incentives for nuclear companies to come and build their first plants. And pilot projects in Texas. So you see jurisdictions that are choosing to take kind of the economic growth associated with it and that have more of a building culture and say, come here. And then I think as things get proven out, then the question is, will the Fairfax Counties of the world—

Yeah.

You know, see what's going on and become more agreeable to having that? I think, you know, it's very similar to self-driving cars, right? There are some jurisdictions that say, come here, right? We want you to come. Test. And this is what's happening in Texas, right? These, like, these companies, we want you to come pilot your projects here. And some jurisdictions are saying no, like, prove it out and then we'll talk.

My nightmare is that even Texas becomes NIMBY. You see this in Austin already, right? Houston, Dallas will become more like the rest of America over time. Maybe even San Antonio someday, El Paso with more time.

I think you're right. I think you are seeing more NIMBY that's happening today. It is getting harder to build an intrastate natural gas pipeline in Texas than it was 10 years ago. You're having more debates about kind of transportation infrastructure. There's been this line proposed from Houston to Dallas with private money that ended up with this big NIMBY debate and farmers complaining about imminent domain on their property. And so I think on Certainly on linear infrastructure, that's true. We haven't seen it yet on things like housing and the nimbyism on economic plants or industrial plants coming to Texas. Texas has, has the door open and is welcoming of that today.

What do we need to do to fix the grid? And is that just impossible?

It's not impossible. The problem with the grid is that by nature of history, US ended up with 3 grids. All right. First grid was in New York City in 1882, and it kind of followed the population and started to spiderweb out from there. You also had a grid start on the West Coast and, you know, a few years later, but nobody really lived in the plains. The weather's bad, it's hot summers and cold winters and windy, and the soil's not great in parts of it. And so you had these 2 grids that started East Coast, West Coast, and started to come in. And they never really met. And then you had, you know, this third grid that started in Texas, and Texas has always had this, you know, libertarian nature to it and federal government stay away. So in the Federal Power Act in 1935, where the government came in and said, we're gonna start regulating the industry, Texas said, you know what, we're gonna, you know, disconnect our interconnects to Oklahoma and Louisiana and we're gonna stay intrastate and be independent.. And so now you have these 3 grids. Texas is DC, the other 2 are AC. The 2 that are AC are essentially on a different heartbeat. Mm-hmm. And so there's virtually no linkage across those. And I think what's happened is that as the nature both of load and generation has changed over time, you're starting to see more discrepancies in pricing across regions. And so what really needs to happen is that these 3 grids that have been independent have different mix and portfolio of generation and that their load has different profiles, there's a lot of value to be created by linking those. And so in the summer you want to move resource generally north to south, you know, vice versa in the winter. You get the benefits of time as the sun starts setting, as you know, the 5:00 hour, people start getting home from work. It was obviously different in different parts of the US and you can take advantage of that difference. And then the difference in weather patterns as they move from west to east. And so the more linkage you have, the better benefit you get.

And in terms of governance, would you keep them independent or just have them economically more interconnected for better arbitrage?

I think the nature of, you know, nature of history is that these things are going to stay relatively independent. You're going to have the RTOs and ISOs that you have today. Generally, the Northwest is talking about creating a new regional transmission organization. And so there, there is more integration among states, but I think each of the RTOs probably stays independent over the long term.

And the long-term energy and electricity outlook, as you know, the demand for data centers is way up. AI has been arriving. How are we going to accommodate all that? You know, I live near Loudoun County. They're putting restrictions on data centers. How are we going to do 3x, say, on the grid?

Yeah, it's an enormously difficult challenge. I think for a long time, communities welcomed in data centers and they viewed them as not many jobs, but it was tax revenue that was being brought in. And so there was competition amongst jurisdictions about who's going to win the data center and bring that tax revenue. And so jurisdictions would give a rebate of tax revenue back to the developer. I think there was a realization just in the past couple years that wait a minute, these things are— don't bring that many jobs and they use a lot of power. And the marginal cost of new power is greater than the average cost of power. And so as you bring new load in, it's raising the cost of power to everybody. And so you see jurisdictions now starting to fight it and say, we don't want these things. And when they're a bit of an eyesore, not many jobs, and they're raising the cost of power for everybody. Now, there's ways you can do a large load tariff that's starting to happen to try to isolate the effect on, on individuals. That leaves the problem of how do you get 1 gigawatt or 2 or 3 gigawatts, and some people are talking about more, into a particular location on the grid. And that's as much of a challenge as anything today. You can build the resource, but building the infrastructure to get it to one point is very difficult in much of the country.

So when people say, well, we need all this AI compute, we need it rapidly to beat China, so we need to set up something quite soon in UAE or Saudi Arabia. Does that make sense to you, or do you think they're just barking up the wrong tree?

I think it's true that you can build quicker in some other countries. It's also true that you can get as cheap, if not cheaper, power in some of those same countries. What's not true is that the faith in the political system that I think there's grave concern about as AI is becoming talked about more and more about strategic national interest and national security. Question is, do we want the most important data centers to be located outside of the United States jurisdiction? And I think both at a national level as well as at a company level, that answer's largely been no.

But say if we don't do it, that one, especially UAE, might cut its own deal with China and China just does it. And China's way ahead of us on AI, which has military cyber implications, and we just lose out because we're still fiddling around with lobbying the citizens of Loudoun County or something. I mean, do we need to preempt them even though we don't have full trust in those governments?

Yeah, it's one of the things that the Energy Dominance Council at the White House is considering right now. And there are places in the US where you can build. Again, like trying to bring this into the AI, the historical AI or sorry, historical data center development corridors like Virginia is increasingly hard, right? Bringing it into Texas is still very doable. And so you see many of the announcements of the gigawatt plus data centers are now happening in Texas. But they're also happening some random places across the United States that have, you know, a good point that are at the intersection of, you know, many high-voltage electrical lines and can bring in resource from a number of different areas and get that portfolio approach for resource at— for that particular plant.

Do you have a favorite so-called weird idea for energy supply, like generalized geothermal or solar-powered space stations? Does any of that have a chance or it's just science fiction?

I think it's science fiction. You know, I've heard a lot of these, these proposals. It's hard. It's hard to figure it out.

How good or bad— putting aside the national moves away from nuclear, but how good or bad is EU energy regulation?

Look, it's hard to isolate the shutdown of Russian supplies into the EU. In terms of, you know, what would their, their energy system have looked like absent that. And so, yeah, I think one question is, you know, do you want to have an N-1, that is that your largest supplier goes away and have that risk have that type of effect on the system? And was that a foreseeable possibility that they should have planned for? I think that's a reasonable proposal or hypothesis. I think the question is the more backup and redundancy you build into the system, the higher cost it is. And so there's frequently this trade-off between reliability and cost. Like we have it in Texas. You saw after Storm Uri and the Texas legislature still is debating about, you know, what reliability do we add and what's the cost of it and how do we find kind of the perfect balance of it? And the answer in Texas is different than the answer in Virginia, right? Or the answer in Europe. And so I think it's easy in retrospect to say, you know, Europe regulations failed. I think it's harder to say that, you know, had you gone to Europe 5 years ago and said, do you want to build redundancy in case Russia supply is completely ceased or, you know, or down very significantly? And do you want to pay for that? I'm not sure what the answer would've been. Yeah.

What do you like best about living in Houston?

You know, there's something dynamic about being in a growing area and yeah, I, I have a house in a Colorado mountain town and it's fantastic and it's beautiful and the weather's great and it's a bit stagnant as well. Right. And you have the growth and dynamism in Houston. And Houston doesn't have the natural beauty, it doesn't have great weather, but it's a place that is only gonna succeed if it works. Right. And so government's responsive and people go there because of the opportunity. I think, you know, it's been easy to build. Texas has had this libertarian culture and low tax culture that's encouraged businesses to come, which then encourages people, you know, in their productive years to come. And so many of the first generation professionally, both blue collar and white collar, have chosen to come to Houston for the opportunity. I was at a dinner with friends the other day. I think there were 10 of us around the table. Every one of us was first generation to Houston that had come for the opportunity. And so none of us had our high school friend networks that we were hanging out with.

Yeah.

It's a very welcoming city. I think the, ethnic diversity and the fact that the diversity is intertwined throughout the city. You know, if you look at the ethnic maps of many northern cities and, you know, take Chicago for one, right? You kind of have everything south of downtown as Black and north of downtown as white, and you just have this dividing line and these cities are very separate. The ethnic makeup of Houston is very interspersed. And so you have these little pockets of, Hispanic neighborhoods and Black neighborhoods and white neighborhoods, but it's more of a checkerboard throughout the city, and I think the city's better for it.

At least superficially, I have the impression that there aren't so many externally influential institutions or movements coming out of Houston, Arnold Ventures aside. But do you think that's true, or why is that? It's a large city, it has a lot of wealth, a lot of civic spirit, this thing, you know, great art, two great art museums plus the Rothko Chapel. Yeah, but it seems fairly self-contained in a way.

Yeah, I think Houston is an execution city, right? It is a place that people go to, to do this stuff, to build the things. Its core business has been energy and then kind of all the things associated with energy and chemicals and, and manufacturing. And so it kind of has the blue-collar roots to it., but then also has, you know, become the magnet for corporate headquarters in this space. And so, you know, even a generation ago, 20, 25 years ago, the energy industry was more, much more dispersed than it is today. You know, you had parts of it in Dallas and Tulsa and Oklahoma City and Denver and New Orleans and a little bit in LA and New York. And much of that has congregated to Houston. And so, I agree Houston has not been on the forefront of movements. It hasn't been historically an inventing city. It's been a manufacturing and execution city and more of evolutionary improvements rather than revolutionary improvements.

Now you live in an Alexander Gorlin-designed modernist house, and he once said in an interview, and I quote, "To live in a modern space requires discipline." If one or two things are out of place, it just destroys the whole balance. And then someone said, well, this is why people don't want to live in modernist homes because they're messy. And then he said, quote, not all lives are messy. How do you feel about this living in one of his houses?

You know, it takes a little bit of work for sure. It takes a lot of work. I love it. My wife loves it. Our kids, I think, would prefer the messy house and would prefer things not to and feel like you can't touch them. We have parts of the house that are more formal and parts of the house that are more informal. There is a component to that of if a house looks worn in, if a modernist house looks worn in, it starts to degrade quickly and the aesthetic value of it starts to degrade much quicker than a normal house. And so it just requires a lot of maintenance and upkeep.

And can you do Houston hurricane protection with the modernist house? Is that Contradiction or it just works?

No, it works. It works. I think building materials today are extraordinarily good. And so, you know, any house that was built in the 21st century can withstand, you know, the vast majority of any type of windstorm.

What makes a really good Picasso better than a middling Picasso?

I think the amount of work and effort he put into it. Either, you know, there were some paintings he did where he worked on 'em for 2 years. And there are some that he did in a day and that he would just wake up and pump something out. And this is especially true later in life, I think, as artists get more successful and kind of get lazy and get wealthier and the market starts to take anything that they pump out, the quality of work would tend to decline.

And what's peak Picasso for you?

His Cubist period. Where it was mirroring abstraction with figuration oftentimes, and that's very much a core thread throughout Laura and my collection is that intersection. And I think just the revolutionary components of Cubism is one that I very much appreciate.

A lot of our Silicon Valley friends, they strongly dislike modernism. And they think it's a kind of corruption or even perversion, or it represents decline of the modern or contemporary world. What is it you think they're missing?

I, I've always been drawn to things that are timeless, that were created at a moment in time. And I think that's what great art is, is doing something that's relevant to the moment. And then there's only a very limited subset of those things that become timeless, that are still relevant You know, in a different moment and a different generation or a different century. And I think those are the truly great objects. And I think there are components of modernism that fit that, that mold. And there are components that you look at and like, yeah, that was, that's dated today. And you know, is no longer, you know, appreciated by somebody like me or by many people.

What attracted you to buying 17th century Baroque? 'Cause this seems like an outlier from a lot of the rest of your art collection. And Baroque is sometimes seen as the kind of opposite of modernism.

Again, so we have one painting of 17th century Baroque.

But one's a lot. One's a lot. In a modernist home, most of all.

You know, I think the collection Laura and I have built has really tried to look at, and at the history of art and especially figuration over time. And from the birth of art until maybe 1500, there was this trend of How do we, we the art community, we artists try to create representation of the figure more and more realistically. And this probably peaked with Leonardo, right? Who then masters even musculoskeletal components of the body. And then, you know, once he's mastered it, then there's a big question about where do we go from here, right? And it's now you have to tell a different story. You have to bring emotion into art. You have to start doing abstraction or, or bring a new voice or style into the body. And so I love that arc of art history of trying to perfect the body and then trying to move forward. And so we've built this collection of objects that are largely around the figuration, and as you go from the perfection of it and then to the abstraction of it. And so the 17th century Baroque is again kind of a moment in time that's part of that arc. That then kind of helps tell the story of the collection. And I think the great challenge we have is we need pieces that talk to each other, right? You can very much end up with clutter by putting together pieces from different cultures, different time periods, different media that don't speak to each other.

And how does African sculpture fit into this picture?

So African sculpture, of course, you know, was very inspirational to a number of modernists, you know, Picasso number one, right? Yeah. And so number one, I think it's, you know, I love them as art objects. Many of them were used for, almost all of them were used for some type of ritual.

These would be like Congo pieces or what, what in African sculpture is attracting you?

Exactly. So, you know, there was a lot of it that was developed as kind of pa— for pagan rituals, and it was either celebrating birth or death or the transition to adulthood. Weddings. And it's this isolated culture that still comes up with these objects that are beautiful, right? And had no idea what other people around the world were doing at the time. And the Westerners came there and, and have quickly and have saw these and were fascinated by these objects and started bringing 'em back to Europe. And, you know, Europeans fell in love with them and there started to be even an export market that developed over time. Where Africans were developing pieces, you know, specifically for Europeans. And then as, you know, African cultures went from kind of pagan religions to Christianity, they started kind of discarding many of those objects. There's the flip side of it, which is kind of best represented by, by the Benin Bronzes, where a British expedition in 1897 comes in and conquers the royal palace in Benin and steals all those objects and brings them back. To Europe, and I think there's still this kind of struggle in the West of how to deal with these.

Because you give them back, you're not sure they'll be treated well, right?

Correct. And it's also theft of cultural objects has been happening forever, right? And I think there's the question of how exactly did the theft occur? How important were those objects to the culture? And I think in the case of these Benin bronzes, I've never acquired one because I've never been comfortable with that story. I think there's a spectrum here and there's a lot of gray area in the art markets and art academics and museums have been struggling with many of these questions about where do you draw the line on, you know, cultural appropriation and when do you start giving back objects? Because, you know, that's a slippery slope. For many cultures across many time periods.

The Mona Lisa, you'd have to return, right?

Exactly.

The late period Alzheimer's de Koonings, underrated or overrated?

I think overrated. I think if you didn't have the de Kooning name on it and it was just an object, that people would look at it and would say, yeah, it's somewhat interesting, but we're not going to ascribe the same, certainly valuation and art historical importance to it.

Now, in energy, you had to make a lot of trades and you hope to win on average. In art, it seems you make a relatively small number of buys, but each one is a very good decision. What's your overall model of yourself that ties together those two facets of decision-making?

Art's hard once your walls are full because then not only is the question, Do I love this piece? But do I love this piece more than the piece I love least in my collection today? And that's a higher hurdle sometimes, all the time. Trading was and is a great industry because of the immediate feedback loops associated with it that are very rare in most industries. And probably I'm on the opposite one today in terms of philanthropy where you have extraordinarily long feedback loops.. And those feedback loops, I think, drive improvement because you can see what's working, what's not. It also creates much higher stress. And so I've appreciated that I had that moment of my career where I had that, you know, strong feedback loop and high stress level. It's not something that I thought was sustainable for my entire life.

And your skill and decision-making at Philanthropy, which is done with your wife Flora, How does that fit into the schema? It's more like trading, more like buying art, something else.

I think there's a lot of similarities to private equity or venture capital, right? This is mostly a money allocation venture. We have some components of being an operating foundation and a lot of internal expertise on areas, and we do a lot of consulting with policymakers internally. But the majority of the effort is in making grants. And so the question on making grants is very similar to the questions of making investments. It's what field do I want to be in? What team do I want to back? What's their theory of change? Do I believe it? What components of their organization do, do they need help in and do we need to supplement or require them to supplement with our resources in order to maximize a chance of success.

What do you think is the key skill behind a good philanthropist?

It's hard. I think, you know, it's—

Trading's easier.

Trading's easier. I think that question is almost like, what's the key skill to be a good businessman? Right? There's so many different types of businesses. There's so many different types of philanthropies and theories of giving and types of giving that one can do that I think you have to find something that suits your own personal passions and your own personal strengths and traits and go from there.

A lot of your philanthropy, it seems quite evidence-based and you, you would say rational. Has your belief in that approach strengthened or weakened over time?

I think it's maintained. I think when we first decided to start giving away very significant sums, we had no vision that it would turn into what is today Arnold Ventures, right? With 150 people and 3 offices and the number of areas that we're working in, we thought it was, let's find 5 or 6 really good social programs that we think can ramp with resources and just go fund those and do this rather passively. And I had enough training to be able to read the academic research. And so, I start pulling up many of those studies and it felt like the more I read, the less I knew about what worked in the world. And that certainly led to this question about what is evidence? What is the integrity of the evidence that's being put out there to try to convince people to give them money, either policymakers or funders. And then it led to— I have this question that philanthropy is going to be a lot harder, especially the way that we wanted to do it and the impact that we wanted to have. And that was going to take this effort around— that the core focus of it was around developing better evidence and trying to increase demand for evidence. From funders have been, again, both public funders as well as private funders. And that's been the core theme of our work ever since.

Do you think other funders now demand more evidence or that's failed?

I think they've, they demand more evidence. I think there's also more poor quality evidence out there, right? The supply has met the demand. And so we started this whole line of work about what we called Scientific Integrity, right? Academic Integrity on the how do you improve the process and the incentive system of academic research? Because there was this realization we had that everybody in the chain was incentivized to find the positive result, right? Whether it was the funder, the academic, the university, the journal, or the popular press. Everybody wanted to find and publicized the positive result. And so there was a lot of positive results that were coming out that were either done with kind of low bars of integrity and quality, or kind of at the extreme end, and this is relatively rare, but, you know, bordering or absolute fraud in the industry.

Let's say I'm a person of great means., and I come to you, I say, John, I think prison is immoral, but I don't want to just release Charles Manson. Where should I put my philanthropic efforts? What do you tell them? What have you learned?

I think there's this fundamental question of if somebody's going to get released from prison, which 95% of the people who are in the prison system today are going to get released back into society, do we want that person to have spent the past 10 years in a gang fighting for their life, doing nothing productively, or do we want that person to have been, you know, working on education, working on skills, have been working on their addiction, et cetera? And I think 100 out of 100 people will choose the latter. We have a system where the political economy of putting money into the prison system for most jurisdictions is very low. And so much of our prison system actually looks like the former where it's become the largest mental health institution, the largest place for people with addiction, the largest place with people who, you know, have a lot of time on their hands and are underskilled and undereducated and don't get any improvement in those things. And so I think the real value add is how do you improve conditions within prisons.

And is there a structural reform that would boost the incentive to do that, or you just think telling people they should improve the conditions is what we should be directing our efforts at?

So, you know, I think there's— and what we're very interested in, haven't gotten all the pieces together yet, is kind of the equivalent of the charter school but in prisons. Like, can you get a nonprofit to run a prison and try these things?, and that nonprofit can supplement the standard money that's coming in from the public sector with private donations and probably kind of a greater focus on volunteers coming into the prison and just try this as a model, as a prototype, and see what the effects are. And then do a long-term evaluation as to what happens to the people when they return to society and what's their, the impact on and the economics as well as recidivism and do the long-term cost-benefit on a financial basis and try to see if you can prove that this is an appropriate model for the public to start funding.

Let's say we put you in charge of everything. How do you fix our tax laws? You can just do it. You're Congress, you're the president, you're the Supreme Court.

Yeah. Big question. Big question. We have a system today where I think it's easier to turn dials than to start something new. And so we just have these dials that have existed because they've existed. They were kind of easy to do historically. And so that's what we do. And so things like Pigouvian taxes, which kind of most people agree that you would like to do things that you would like to tax things that are bad rather than tax things that are good are extraordinarily hard to get started in the US and whether that's on carbon or things like sugar. So I think that's one. I think a second is I think you'd rather tax money that has been made in the past than tax money that's to be made in the future. I think there's fewer distortions and I'm not talking about a wealth tax, which I think is not able to be implemented. But I think under the step-up in basis that we have today where if you—

So for capital gains.

Exactly.

Okay.

I think is like the original sin of the tax code. I think there's real questions about how should endowments, including private foundations, you know, which is kind of this legacy of power because money was made in the past or money was contributed to an organization in the past. The tax code then gives favorable treatment to that. And you have organizations that are well-resourced today because they were strong historically or were funded by somebody who was successful historically, but the tax code kind of makes those organizations stronger for no good reason. And I think there should be kind of a public test that those organizations should be required to, if they're to maintain their influence, to convince new resources to go to them rather than just get a tax benefit.

So the 5 to 6 spend-down requirement for foundations, is that the right number? Should be higher?

I think it should be higher.

And the donor advised fund out, that should be eliminated or kept?

That should be eliminated.

So if it's not 5 to 6%, what should it be?

I think the number should be a little bit higher than the expected real —which imposes the test of bringing in new money. That's the key. Exactly. That these organizations, including my foundation, should get weaker over time and not stronger.

Electoral reform, political reform, and I mean the systems by which we choose leaders and policies. Do you have favored ways you would change those?

Yeah, I think a lot of the original sin of elections and the electoral system in the US is the primary system and non-competitive races between the parties. So the vast majority of House seats, the only competition happens in the primary. The person who's more likely to show up in the primary is more extreme than the average or median Republican or Democratic voter. In many jurisdictions, the independents are not allowed to vote in the primary. There's more money that comes in from the extremes. And so you end up with a legislature, Congress, that is more extreme than the people are. And the independents or the moderates are very much underrepresented in today's political system. And it eliminates a lot of the incentive or creates disincentive for internal party debate.

So we should do single transferable vote or something else?

I think nonpartisan primaries is—

But that will end up working like single transferable vote because you have to rate then 4 or 5 people, right?

Exactly. Yes.

Yeah. Ireland does that, as I'm sure you know. While it seems to work fine, is there some big advantage they get from that? Parts of Australia do it. Again, it works fine, but I don't look at those places and envy them.

You're right. And I think there's no silver bullet in this stuff. I don't think there's any electoral reform that's going to solve all the problems. There's a lot of it is built in. A lot of it is things like the media incentives, human nature as to how we like to take information and prefer to criticize the other side than to do real criticism of our own internal beliefs. And so this stuff is marginal, but I think the importance of the electoral system is so great that marginal benefits have significant impact.

There's a common impression both for startups and for philanthropy that doing much with K through 12 education or preschool just hasn't mattered that much or hasn't succeeded that much. Do you agree or disagree?

I agree. I think the ed reform movement has been as a whole a significant disappointment. I think there's been isolated pockets of excellence. It's been very difficult to learn how to scale that. And I think that's largely true of many social programs or many programs that are delivered by people to people that you can find a single site that works extraordinarily well because they have a fantastic leader and that leader might be able to open up a few more sites. But then when you start to scale it to 50 sites and start to go across the nation, it all kind of mean reverts back to, you know, what the whole system is providing. That said, I do think there's a lot of value in changing the incentives of this system and having the rewards and kind of natural kind of growth cycles and evolutionary components that are so strong and have been beneficial in the business world also go to the K-12 world. And what I mean is that the, the service providers that are good and are delivering good results, both for parents and for kids, should grow faster than ones that aren't. And right now it's kind of the same. And I think there's a real question about whether government can be both the regulator and the service provider. Of the same program, which is what essentially independent school districts are today. I think the natural role of government is to be the regulator and that they should be regulating third-party nonprofit providers. And that model is what we support and has been, you know, rolling out across the nation. I think that the evidence is clear that it's a better system, but it's not delivering transformational results.

When it comes to philanthropy, what's something important you've learned from your wife, Laura?

She's great at the organizational components of it, of how do you manage an organization, the communication components. I'm, you know, again, kind of coming from the trading background. That's not my skill set. And I love to dig into the details of specific policies and get into the nitty-gritty of the design of a system. And Laura very much, you know, thinks about the big picture and about how AV can be a more effective organization in the macro level.

Last 2 questions. First, what's something you've learned about markets or society that you didn't believe 10 years ago?

I didn't believe 10 years ago.

You can make it 15 if you, whatever.

Yeah. I think on society, that is very hard to get people off of their baseline for the long term. There's a lot of interventions that can happen that'll change somebody's short-term prospects and whether that's a job training program or an addiction treatment program, an education program. And you can bump them off that baseline for a little bit. And over time, there's reversion to the mean, and it's made it very difficult for, you know, to find social interventions that pass the benefit-cost test over the long term. And I think that's why we were talking earlier about evaluations. We're very focused on the evaluations that we fund of try to do long-term effects of programs and policies because Oftentimes, if you're just looking at what the 6-month effect is, you find an effect and a cost-benefit ratio that's not relevant to what actual policymaking should be. Last question.

What will you learn about next?

Yeah, I think we're really digging into housing policy and housing finance. Housing finance is one of the most complicated issues that I've seen in this space. And trying to understand it at a superficial level has given me no insight. And so I think it's one that I really need to spend some time in, you know, as we start proposing how to fix these systems. You know, part of it is we can't just complain about that the existing system is too expensive and too slow, but have to have real specific and tangible policies about how to change it, how to improve it.

John Arnold, thank you very much.

Thank you.

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