Why a little chaos is a good thing

Jul 15, 2023

Chaos can be good for your health. When paired with leverage and small bets, it is a three-course tasting menu for a certain kind of entrepreneur. Namely, one willing to keep losing until he wins.

I am fascinated by behavioral economics. I have written often about the insanity of riding the rocket right into the ground based on misunderstanding, miscommunication, and faulty bomb doors (refer to Dr. Strangelove).

A new book, “Chaos Kings,” by Scott Patterson, is ostensibly about Wall Street, but the big themes apply equally to entrepreneurship. It is a must-read for understanding this time in history. The A.I. revolution and the rare Black Swan (extreme events that no one could have predicted) are swimming in the same pool, they just haven’t run into each other yet — but they will. Think 9-11, 2008 crash, COVID, etc.

It is always the suddenness. I never saw it coming is a cheap excuse. You just weren’t looking.

Allow me to introduce you to Nassim Nicholas Taleb, chief swan watcher. Taleb has written several books, all of which explore the big ideas of risk, randomness, probability and uncertainty. Herewith some of his punditry.

“Don’t Lose Money.” Well, that is not exactly what he means. What he is saying is don’t lose A LOT of money. He likes small bets, and when they turn against you, get out, sell, stop the madness. This is a classic for the startup. You are seeking product-market fit, but continuing to pound a square peg — you get my drift.

“Frailty, thy name is woman.” That’s OK for Hamlet to say, but real frailty is leverage. Too much of a good thing. Need I remind you of Silicon Valley Bank. When you make long bets at low-interest rates, and the world turns on a dime, and people want their money back, well no way out. Just ask Ophelia.

Taleb worked on Wall Street where he saw “masters of the universe” blow up by taking on too much risk. Turning to a young acolyte on the trading floor, he pointsout an older man in a cubicle, “He made a million every year for seven years. He lost it all in seven minutes.”

But let’s not give risk a totally bad name. In my younger days, I was a gunslinger, and I made lots of bets. I didn’t have much money so I needed leverage, and I needed to look for chaos, for mispricing, for lack of vision. Places where I could compete.

I chased downtown real estate when it was still unclear how it would play out, and in particular how long it would take for the flotsam and jetsam to drift into the bay, leaving high-rise condos as far as the eye can see. Maybe I had vision, but I was also lucky. And I know it.

Beware “Helpers.” Warren Buffett warns investors to stay away from these people, aka wealth managers (consultants), with complex strategies, who charge fees to keep you safe — until they don’t. The brokers have the yachts, the clients have canoes.

OK, maybe you can’t see it until it arrives, but you can at least consider and anticipate the possibility of crisis. Taleb is not advocating for massive paranoia and frozen-to-your-couch, your-money-under-the-mattress behavior.

What he is saying is, “Be humble.” One of Taleb’s most famous books,” Fooled by Randomness,” draws the distinction between chance and thinking you have magic dice.

And finally, for the angel investor, the dilemma is two-fold. Make lots of small bets, play it safe, you might get a long single or a double over time. Go big on only a couple of ideas, and if you are right, you own the ball club.

The problem on the second one is you need a steel gut and patience. You know the Padres on paper should win the World Series, and you also know they are playing poorly and underperforming. Stay or fold.

No crystal ball, but I have always liked the idea of managing for chance. To allow for the possibility of the swan showing up in your favor. To look into the darkness with night vision glasses.

Taleb says “The three most harmful addictions are heroin, carbohydrates and a monthly salary.”

Rule No. 772: Pessimism, meet Pollyanna.

Senturia is a serial entrepreneur who invests in early stage technology companies. Please email ideas to Neil at [email protected].