Monthly Archives: April 2012

Confidence, idea generation and failure

New idea generation is riddled with failure. And it has to be this way. Not from our choice, but simply because of how the world works:

Ideas have to be thought of in terms of risk and reward. If an idea has many great attributes and is not risky than it will be very likely that someone has already identified this and tried it. And so that leaves only the risky ideas that also have many great attributes.

This logic leads one to understand that testing in business is of the utmost importance. It means that the only way you will find out if these risky, good ideas will work, is through testing their main components. It therefore increases, exponentially, the importance of testing ideas in the least capital intensive fashion possible.

And if you’re playing in a risky space with high payoffs, it also means many of your ideas will fail. Not because they were bad ideas, but because you could not inherently know that the idea would not work.

And so it also means that you must have to confidence to expect failure, be ready for it and be ready to have the confidence to move immediately forward with your next ideas afterwards.


Note: Inspiration from this post was gleaned from the authors of “Black Swan”, “A Drunkards Walk”, “A Random Walk Down Wall Street” and “Fooled by Randomness”.


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Is control even a good thing?

Thích Quang Duc was a Vietnamese monk who burned himself to death at an intersection in Saigon to protest the government’s control over religion.

The surprising (for lack of a better word) and incredible thing is that he lit his own match and burned in the traditional seated lotus position. While dying, he never moved a muscle.

Most people would say that this sort of thing (or restraining yourself from buying a candy bar or having undesirable emotions) requires fantastic control of your emotions, desires and thoughts. But they misinterpret how this interplay functions.

You are not your thoughts. You have to exist before your thoughts can exist. You are before your thoughts. You can observe your own mind thinking thoughts. The observer is more who you are. You are the sky – your thoughts are just clouds that temporarily occupy that space.

Once this is understood, your thoughts, desires and emotions become increasingly less potent over time. You can distance yourself from them and therefor control them more easily because they are less powerful. It is a very important distinction. Understanding this is the first step in creating an environment in which it is easiest to make yourself into the person you’d like to be. Do you want to be a better business person by letting go of stress and risk associated gun shy-ness? Maybe this path is for you.

Thích Quang Duc’s Wiki –

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All the way to Maccabees

So after the first few books of the Bible, and then all the way to Maccabees which is about half way through the old testament, I’ve found the books to be very similar. The stories are, to me, mostly the same. Someone followed God’s rules, him and his sons were rewarded. His sons don’t follow the rules so well, eventually lose everything, God is mad for a while and then someone comes along who follows the rules again and God is nice.

I honestly did not mark a single page nor really get much out of all of these books. Which though I am disappointed about, I’m really happy I read them.

The new section of books beginning with Job are said to be the books of wisdom and have begun with God and Satan testing Job. I’m really looking forward to these ones.

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Experts beat by very simple algorithms

When it comes to prediction in anything. It is usually the most simple algorithm with the fewest moving parts that can stand the test of time.

But there’s an aspect of this axiom that is even more fun. Experts often tout their ability to predict the future in various fields. Recent research concerning experts versus simple algorithms has shown that this is often not the case.

The best example in my reading is a wine connoisseur who buys and sells wine of a particular region in France each year. Not only does the algorithm (which simply uses rain fall and temperature to achieve a forecast price with 90% accuracy)  beat the expert, even when the expert has the ANSWER from the algorithm and is told the algorithm’s ACCURACY, he still forecasts worse than the algorithm.

It is mostly due to humans natural tendency to overweight minor details. The expert tries to think outside the box and be smarter.

So what’s the big deal? Well if you’re a wine connoiseur, shut up and trust the algorithm and if you’re in business, look for ways to use simple algorithms where your judgement might be clouded by several small confounding factors whose weight you’re likely to overvalue.

More interesting things to come from Kahneman’s new book, I’m sure.

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Certainty and possibility

There are two irrational human tendencies about which I’ll write today. They are the Possibility Effect and the Certainty Effect.
It has been proven that humans will consistently overestimate the importance (or “weight”) of low probability events. We will also overvalue the importance of 100% certainty compared to 95% certainty for example.

This concept is a little hard to grasp, but let’s consider the idea below. If there were a 1% probability or chance of something happening in your life, you might expect that you weight that chance at 1%. In fact, meta analysis shows the that weight people usually give something with a 1% chance of happening as being more like 5.5%. Conversely, if there was a something in your life with a 99% chance of happening, you’d like to think you would weight it’s value at 99%, but you don’t. It’s far from perfectly certain in your mind and so you weight it around 91.2%

As an example, what would you rather?

A) A sure gain of $300, or
B) An 80% to win $450 (20% chance to win $0)

If you’re like most people, you’ve chosen option A, a sure gain. However, if you do the math, an 80% probability of winning $450 carries an expected value of $360 (.8 x 450). So, most people would give up an expected $60 of value just for certainty.

If we were perfectly rational people (or Homo-economicus or Econs as some refer), we would select the risky option. But we are not. This is the certainty effect: the irrational draw we have to the 100% certain.

We do a similar thing with low probability environments. As soon as something is remotely possible, we weight or value that possibility to a greater degree than we should. This Possibility Effect as Kahneman explains in his new book “Thinking, Fast and Slow” is the reason why lotteries are so popular. If we have a ticket; “… you’re sayin’ there’s a chance.” I guess Dumb and Dumber wasn’t so dumb after all.

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