I’ve been thinking a lot about success recently, more precisely, why do some people seem to be more systematically successful than others. Systematically successful as opposed to incidentally successful. I’m not interested in thinking too deeply about the one hit wonders of the world, the people who manage to luck into a particular outcome by the graces of Fortuna. Instead, I am interested in people who have shown the ability to generate successful outcomes repeatedly.
In this vein I’ve been inspired by three schools of thought, the first is inspired by Aristotle and has to do with habits; “We are what we repeatedly do. Excellence then, is not an act, but a habit”. Aristotle is implying that we can be excellent but that we will need to cultivate and deliberately practice this over time.
The second vein has been inspired by serial entrepreneurs, the kind of person who has not just started once successful company but instead multiple. Some people amongst us seem to have the ability to bounce with whatever life throws at them. You chuck them on a deserted island and come back two years later and there is running water.
The third and final vein relates to the optionality based approach of Nicholas Nassem Taleb who has repeatedly explored the role of positive (and negative) “Black Swan Events” in modern life.
My aim in this post is to explore two concepts which I believe make the difference in whether someone will be able to achieve success over the longer term. The two are not independent of one another, you need both in order to succeed and should not be thought of as independent. For systematic success you will need:
- Opportunity Flow - Defined as the number of qualified opportunities which come into your life over a period of time
- Exploratory Risk Taking - Defined as how willing you are to explore the opportunities and assess whether they will work
First, let’s begin with Leonardo Dicaprio.
There’s quite a famous chart floating around the internet which depicts Leonardo Dicaprio’s dating over the years. To say the least, it’s a who’s who of some of the most beautiful women in the world and no matter what age Leo reaches there always appears to be another one waiting around the corner. So, the question is, what makes Leonardo Dicaprio different?
The thing that separates Leo’s dating from anybody else’s is the sheer number of dating opportunities that Leo is swimming in relative to the average male. He’s a good looking, wealthy, world famous actor who has his face plasted in some of the most obscure locations around the world. You can guarantee that he’ll be invited to the best parties, he’ll be on the short list for awards, his phone will always be blowing up with somebody who wants to offer him something.
In short, Leo has amazing opportunity flow, beautiful women will compete for him and not the other way around as is the case for most men. One of the main reasons that Leo is successful with women is his status affords him great opportunity flow.
Let’s think about a very different kind of individual now, Warren Buffet. The Oracle of Omaha is renowned for being one of the most consistent and impressive investors of all time. His track record at building wealth is, to say the least, unequalled. Most people claim that building wealth is all about luck but Warren Buffet has so consistently generated returns for his investors that there is something else that has come into play. Not only is Buffet intelligent and diligent, he also gets offered opportunities that most investors will never get to see (and has positioned himself to take advantage of those opportunities).
Take the Great Financial Crisis of 08/09. It was Warren Buffet who was being presented with opportunities by the likes of Goldman Sachs to invest at incredibly favourable rates. No other investor in the world was being presented with these opportunities. Buffet bought $5 billion worth of preferred Goldman shares during the crisis and just three years later in 2011 he was able to offload a number of them to net himself a multi billion dollar profit (sources put it at $3.7 billion). By cultivating and refining his reputation over the years Buffet now receives investment opportunities that are, in many senses, too good to be true.
Now, what’s interesting about this investment is that Buffet would have probably just been better off dumping it all into the S&P500 at that point in time, the market boomed following the recovery and Buffet could have made even more. Instead, he chose to invest it with Goldman. Looking into the deal more it’s interesting, not what the overall return was, but instead the terms that he was able to achieve on the deal and how much they added to the overall return of the investment. In essence, he barely had to throw down any cash due to the complicated financing arrangement. Buffet managed to make billions predominately by applying his name to the deal.
When the next financial crisis comes calling (Coronavirus?) who do you think investors will be reaching out to again to showcase their stability? You can guarantee that on that short list will be Warren Buffet. Buffet has great opportunity flow beyond the likes of most other investors.
It is also possible to have too many opportunities. Opportunities take time, energy and skill to correctly evaluate. The best opportunities are often, to some degree, hidden. If they were easy to spot and identify then others would quickly capitalise on them.
Psychologically, having too many opportunities can also lead to apathy, why bother trying for this particular opportunity when another will be just around the corner. There needs to be a sweet spot between the two.
We want to have enough opportunities that missing out on one, while it will sting, is not the end of the world. Simultaneously, we don’t want to have so many opportunities that we cannot evaluate them all, or worse, stop caring about whether we succeed. I think about this using a diminishing returns curve like the one shown here.
Typically, having too many opportunities is one of the consequences of success. Success does, after all, tend to breed further success and this usually occurs from others wanting to be associated with you. In this scenario the correct approach is to go deeper into the areas that you’re truly interested in. At the surface level there are always a large number of generic opportunities. It is only by going deep into a domain that the quality of the opportunities will improve. Ultimately, it is the overall quality of the opportunities which will dictate our outcomes.
Exploratory Risk Taking
But great opportunity flow is not the only measure for success. Even if you see great opportunities each and every day of your life if you just sit there and let them pass you by you’ll never achieve any success at all.
To be systematically successful (as opposed to fortuitously successful) you need to have the type of mindset to capitalise on the opportunities that arise for you. I have termed this mindset exploratory risk taking because it captures the key components of what I’m interested in.
I distinguish exploratory risk taking from it’s more prevalent and unfortunately less performant cousin, binary risk taking. An exploratory risk taker will, no matter what the odds look like, always have a crack at something. They’ll test the waters out on the off chance that they might be successful. A binary risk taker will only make an attempt if they think their is a guaranteed payoff.
Psychologically speaking, we don’t like to explore the opportunities that arise, instead, we want to overcommit to the “sure thing” due to a combination of Loss Aversion at the bottom end and Fear of Missing Out (FOMO) at the top end. This leads to areas of overinvestment or underinvestment.
The challenge is that most of us only explore a small number of options in our lives. We have very few jobs, we date and marry the girl from our home town, we take very few risks and end up falling into nice, safe, comfortable patterns. I mean, it’s not a bad life, but it is a very safe life.
We typically find a niche and then set down to exploit that, for better or for worse. In all fairness, most of society tries to push us this way, a bank won’t lend you money for a home unless you have a stable income. Many of us explicitly look for stability when we’re looking at romantic partners. Our parents push us to settle down and find a good job. We’re always told, be safe, be conservative, don’t run with scissors.
Most of the time this is incredibly good advice, it’s a safe and consistent strategy. But, we should still recognise that it is a strategy and that it is not the only possible strategies. Additionally, this strategy has a large number of consequences that flow from it:
- We will miss a large number of opportunities and don’t gain the advantage of discovering our preferences
- We can be manipulated by the fear of missing out into overinvesting in bad opportunities
- The consequences of failure are much larger as we make very few attempts
The binary strategy also fails if we want to go outside of our current niche and re-invent ourselves. If we have to wait for conditions to be absolutely perfect before we make the attempt then it will need to exceed the FOMO threshold before we’ll entertain it. This leads to the world of “what might have beens” and “if only if” style of regret.
Where exploratory risk taking differs from straight risk taking is in the level of investment we put into each opportunity. For the avoidance of doubt. I am not suggesting that you bet your life savings on every single marginal opportunity that comes your way. This is not the same as heading down to the casino and putting it all on black.
To explore a risk does not imply that you will go full throttle and embrace it fully, instead, to begin with you just need to dip your toe in the waters and get a feel for the risk itself, is it profitable? Is it lucrative? Is it fun? Is it something that you want to continue doing in the future?
There are a number of professions where exploratory risk taking is systematically encouraged by design, I want to explore the following:
The Scientist is in the business of creating new knowledge. To do this accurately they need to generate hypothesis and then assess whether they’re likely to be true. From a more methodological toolkit perspective the theory of falsification and the scientific methods are about identifying which areas are promising and which are not.
Scientists must take risks but they cannot overcommit to them without any evidence. The potential gain that comes from a scientific advance must always be weighed against the cost involved in doing the work. There are some lines of thought, like Flat Earthers or Anti Vaxers which are essentially scientific dead ends as they have been proven false (see Popper).
An Entrepreneur is similar to a Scientist except their domain is within the messy commercial marketplace as opposed to the scientific domain. Entrepreneurs are in the business of bringing new products to market as quickly as possible. If they fail, that’s okay, they don’t expect to be successful with every deal that they make or every product that they develop. But, they have a belief that by continuously exploring the problem domain and iterating upon their products that one of them may be successful.
The Entrepreneurial challenge in this case is not in so much of developing a new product, most good entrepreneurs have product ideas exploding out of their bodies. Instead, the challenge is to know when to kill your own ideas, or in writing terms, killing your babies.
Without knowing when to stop, without killing your own idea the entrepreneur will overinvest on a dead end and will not have the resources to pivot towards the more probable future opportunity that arises.
The final category of person who displays exploratory risk taking characteristics is the Trader. Traders are often scorned by the general public, they’re perceived as sitting there and taking advantage of the little guy, screwing him over and making big profits. This is sometimes true, some traders are particularly unscrupulous and will take any edge that they can find, but this is not really what trading is.
Trading is risk taking and risk management first and foremost. Traders take an exploratory position, for example, they may think that a particular stock is oversold or that world demand for oil will be weaker than forecast next year and then they put their money behind it. This is the opening position or the investment hypothesis.
From this moment the Trader then needs to manage their position to account for the fact that the conditions in the world may change, it may be unseasonably cold for example, or that they may be wrong. Inside every trading position rests a hypothesis about the future state of the world that the trader is testing. If this piece of knowledge proves itself to be incorrect then the trader will lost money, if the trader is wildly incorrect, and if they bet a commensurately large amount on their incorrect bet, then they will be wiped out. Trading has a built in culling mechanism for the incorrect ideas that propagate within the industry. Bankruptcy.
Asymmetric Payoff Profiles
What separates these three areas from most other professions is that they have an asymmetric payoff profile embedded within them. If you’re a scientist, an entrepreneur or a trader then the returns when you’re right can be enormous. For scientists there are prizes, world renown, esteem within your field. Entrepreneurs become fabulously wealthy and their opinions become highly sought after within a large number of domains. Traders, well, they just become quietly wealthy and spend a lot of time playing golf right?
Each of these professions also have developed systematic methods of knowing when to stop exploring the risk. They know when to bail out and avoid the sunk cost mentality. Scientists use the falsification and the scientific method, once an area has been shown to be a dead end they move on. Entrepreneurs use the MVP to determine if an idea has traction in the marketplace and Traders use stop loss functionality.
If we’re exploring am opportunity it’s just as important as knowing when to stop as it is to start. Because you will be exploring a much greater number of individual opportunities you will also be experiencing a much greater number of failures. Failing early, failing fast and failing at minimal cost and degree of investment will ensure that you reserve your ammunition to fight another day. You need to invest enough into an area to generate knowledge about the domain but also to know when to bail out before you’ve gone too deep. Don’t flog a dead horse.
Putting it together: A Success System
Now that we have the two components, opportunity flow and exploratory risk taking we can start to pull them all together to develop our unified theory of success (sarcasm intended). This is not to say that this is the only model for success, mostly that it is the only systemically repeatable model for success across domains that I’ve identified. Once again, I am not interested in one off or fortuitous avenues.
So, how do we do it?
To begin we must first increase the number of opportunities that enter our domain. This has two parts:
- Increasing opportunity exposure - think of this as the baseline rate at which opportunities come into your life
- Improving our opportunity detection - most opportunities are hidden, you need to figure out which ones are real and which ones are not
Let’s use the example of the programming wunderkind who wants to start a new VC funded business. How does she go about this? First, she needs access to the opportunities, she needs to know other people who are interested in these areas. She may need to know VCs, she will need a network of other developers who would be willing to work for her, she may need business relationships and she needs a lot of exposure to different problems that people are facing. In most situations this boils down to two separate things:
- Developing a network of people who can help you in the particular area
- Being exposed to the problems of the area
Once this is in place she then needs to be able to detect what are the genuine opportunities versus what are the gimmicks and the just straight bad ideas. This requires knowledge to do so, if she’s interested in a computer vision problem then to be able to identify opportunities in this space she’ll need in depth knowledge about computer vision to be able to detect what’s bullshit from what’s realistic.
Where entrepreneurs tend to be successful is when they marry their domain knowledge with the risk taking and opportunity flow. For the counterpoint for lacking the knowledge in an area (but having the risk appetite and the opportunity flow) see Bad Blood by John Carreyrou about the failure of Theranos.
To use a slightly more crude, but likely more realistic example for most men. Consider the case of the average guy who’s unsuccessful with women and wants to change that. How would he go about changing that with the view towards finding a long term partner?
To go about this in a systematic fashion he needs to figure out two things, one how to meet more women, it’s almost a tautology that he cannot date anybody that he has never met. Secondly, he must learn how to identify the various social cues that exist which indicate that a women views him as a potential match and is interested in exploring the dynamic further.
Both of these are required. It doesn’t matter if he has fine tuned social skills able to detect the most minute level of attraction if he lives in rural Alaska and meets on the order of two women per year. Likewise, he could be in the world’s most populous dating “markets” but completely clueless because he lacks the ability to identify who is interested in him. He just wanders through life completely oblivious. Worse, if he doesn’t learn how to pick up on the cues of someone not being interested he’ll be branded as creepy, the kiss of death. In later years he’ll probably kick himself for not picking up on some of the signals that were being sent out. In both case the number of opportunities he will have to date is low but for different reasons.
Thus, this gives us two rules
- Place ourselves in high opportunity situations
- Once we’re in these situations work on identifying the opportunities that exist.
Now, the hard part.
Once you’ve improved your exposure to opportunities and can reliably detect them you must go the next stage, making exploratory bets on the opportunities you have identified.
This is where most of us (and I am not excluding myself from this) go wrong. We don’t know how to bet on the opportunities that come up. This leads to failures in four separate ways.
- We bet too much
- We bet too little
- We don’t bet at all
- Once we have bet we don’t know how to back out
Interestingly, my practical experience is that betting too little is rarely a problem. Instead, we tend to systematically bet too much or not bet at all as I explored visually in the section on exploratory risk taking. We follow a step curve rather than an S curve when it comes to our exploratory betting. Inherently, we seem to have a bias for binary risk taking which we need to correct.
My pet theory is that our actions tend to follow the bimodal distribution of zero versus maximum betting because of two separate but linked psychological biases. The first of these is loss aversion. We hate to be wrong and we hate to lose money. This causes the domain at the start of the graph where we systematically underinvest in a particular idea relative to its’ potential payoff.
The second component to this is “Fear Of Missing Out” (FOMO) or alternatively a projected hindsight bias where we whitewash what could have gone wrong and kick ourselves for missing out. This FOMO causes us to systematically overinvest in a particular area. We’re so worried about missing the boat that we stop acting rationally and instead invest all of our resources in getting in on something, anything.
To correctly take risks we need to think more gradually than binary. We must make a much larger number of smaller bets, kill off the ones that aren’t looking promising early and continue to proportionately invest as we understand more about the opportunity.
In the beginning, it’s often better to use a blanket investment rule until your knowledge and sophistication improves. Try to explore at least 1-2 opportunities per day regardless of your internal assessment of their success. If you haven’t been exploring opportunities in the past then it’s highly probable that your judgement regarding whether you’re likely to succeed or not is entirely wrong.
By creating a blanket rule, it should be a small investment that you won’t mind losing too much, you can start trying to improve your understanding of the likelihood of your success. In other words, you’ll improve your decision making judgement and your intuition. Once you’re used to systematically taking risks start to become more selective about what you invest in.
Finally, once you’ve made a bet on something you need to be evaluating whether it’s better to cut your losses and move on to something else or to continue investing. The worst of both worlds is to remain at a continuous, low level, of investment. Instead, either get out or get in. A friend once memorably described this as “shit or get off the pot”, don’t just sit their above your own filth waiting for something to get better.
To do this you should be writing down your risk taking hypothesis before each opportunity that you explore. Are the conditions the same? Does your hypothesis hold more or less weight now that you’ve gained more knowledge about the area in question? Re-evaluate! Don’t blindly throw good money after bad and double down on your past decisions because of the natural bias you have towards your own decisions.
Success is always in the hands of the goddess Fortuna but this is not to say we cannot influence her decisions. There is an attitude pervading modernity that we shouldn’t try, that life isn’t fair, that success is either a factor of birth or one of raw luck and nothing can change that. This attitude needs to change.
Our birth matters, luck matters but what we do matters more. We must never forget this.
Developing a system for your own success is essential to give yourself the best possible chance. You may still fail, but that’s okay, your failures will be less meaningful and they’ll teach you more about what success looks like.
The following is a brief list of some of the books that I’ve found interesting and have influenced my thinking. These are in no particular order and I’m sure there are a number of sources I’ve failed to list.
- Surely You’re Joking, Mr. Feynman! - Richard Feynman
- The Idea Factory - Jon Gertner
- The Black Swan and Antifragile - Nassim Nicholas Taleb
- Zero to One - Peter Thiel
- Letters from a Stoic - Seneca
- The Structure of Scientific Revolutions - Thomas Kuhn
- The Logic of Scientific Discovery - Karl Popper
- Red Blooded Risk - Aaron Brown
- A Man for All Markets - Edward O. Thorpe
- The Art of Learning - Joshua Waitzkin