Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi there!
Reading time: About 5 minutes
Quote
"I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across so that the knowledge that might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has difficulty in laying his hands."
— Sherlock Holmes, A Study in Scarlett
Mental Model
Survivorship Bias
Bill Gates dropped out of college and became a billionaire.
Looking at this statement do you think it is fair to justify that you should drop out of college?
I would say you are irrational to think you should drop out of college because Bill Gates dropped out and became a billionaire. Why is that?
It’s simple if you think about it. Look at the base rates.
“The base rate is the probability of a given result we can expect from a sample, expressed as a percentage. If you play roulette, for example, you can be expected to win one out of 38 games, or 2.63%, which is the base rate. The problem arises when we mistake the winners for the rule and not the exception” Farnam Street
What happens regularly in our life is that we only look at the extreme results. So we only see the winners. For instance if you want to justify drinking, people generally give examples of people who have lived a long life and have been drinking alcohol regularly. Same thing for smoking you may find a chain smoker who is a 100 years old and say smoking is safe. But you fail to realise these are all exceptions.
Survivorship bias is when we disregard all the failures and only account for the success or the vice versa.
One of the biggest learnings you should learn from this bias is even if you work hard you can lose.
In Sports
Many times in sports we see people who have succeeded in their particular sport and we associate their career to be something we aspire to achieve. Now this is fine as a sportsperson this is what you want to achieve. It is your ambition. But you have to realise that you are playing a losers game. See this interview from Muhammad Ali the greatest boxer of all time telling people you should not be boxing.
The chances to succeed in these sports are really low. Base rates tell me that. Does that mean I don’t give it a shot and stop playing altogether?
Of course not. If everyone stopped boxing you would not have another Muhammad Ali. You just need to figure out whether you have the capabilities to reach that level if you don’t remember what happens to someone who is average.
In Startups
In India currently there are a lot of startups coming up. It is very ‘cool’ to have a startup which is funded by venture capitalists in todays day and age. All the people we are looking up to nowadays are actually founders/entrepreneurs. Now looking at the successful startups like Zerodha,Ola,Zoho,etc. you would take these examples and you would not see the hundreds of startups that fail.
In No Startup Hipsters: Build Scalable Technology Companies, Samir Rath and Teodora Georgieva write:
Almost every single generic presentation for startups starts with “Ninety Five percent of all startups fail”, but very rarely do we pause for a moment and think “what does this really mean?” We nod our heads in somber acknowledgement and with great enthusiasm turn to the heroes who “made it” — Zuckerberg, Gates, etc. to absorb pearls of wisdom and find the Holy Grail of building successful companies. Learning from the successful is a much deeper problem and can reduce the probability of success more than we might imagine.
We would be better off inverting like Munger and learning about why these startups fail and what we can do to avoid these failures.
In Investing
Same thing applies in investing. We see only the winners. You have to realise the role of randomness and the probability of it happening to you is not very high. There are a million businesses which have failed and many more which have simply provided no returns. As an investor your job is to find the very few which actually do win. It is not an easy game. Base rates tell me most investors cannot beat the index. Investing is also a loser’s game.
One thing Prof. Bakshi taught me and I resonate a lot with is ‘there are many ways to succeed only a few ways to fail.’
As I said before this does not mean you do not try the losers game.You may very well create the next big startup or become a great investor. You have to of course have that belief. But just remember when you enter whether it is a losers game or a winners game. And usually you get signs midway whether you are going to win or lose so as soon as you see there are huge problems my advise would be for you to quit. This advise is contrary to what most people say but it is my opinion.
Interesting find
That’s it for today!
Enjoy your weekend!