|
|
Musings Report 2017-50 12-17-17 Risk, Gambling, and Failure as the Greatest Teacher
You are receiving this email because you are one of the 600+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Risk, Gambling, and Failure as the Greatest Teacher
Last week's From Left Field included this account of Inventor James Dyson’s Big Ideas, the most visible of which is the bagless vacuum that made him a billionaire.
Dyson mentions the necessity of accepting risk in the pursuit of success, however we define it, and the topics of risk and related topics (stasis, gambling, etc.) are especially interesting in the current asymmetry of speculative frenzies in assets such as cryptocurrencies, stocks and housing, and a counterbalancing squeezing of wages and benefits for the bottom 80%, (or even the bottom 95%, depending on how you measure inflation).
In other words, while a handful at the top reap huge rewards for taking on risk, many have gained little from supposedly safe bets on personal assets such as college degrees.
It's easy to confuse gambling with risk, as organized gambling requires a specific kind of risk, i.e. odds that favor the house and games of chance in which skill has only a limited role in the outcome.
Gambling risks money, but we can risk much more than money in life: we can risk time invested in a venture, our health in a dangerous or stressful profession, and so on.
Then there's the risk of doing nothing different, of sticking with our current default settings. This seems to be a low-risk bet compared to making changes that might fail, but doing nothing is a risky bet in its own way when circumstances are changing rapidly and in an unpredictable fashion.
Consider the person who takes a risk and exits an established industry in favor of building another career and income in a new and unfamiliar industry.
If the established industry come apart at the seams due to disruptive technology, trade, regulations, etc., the person who exited at the top looks very smart indeed, even though their income plummeted in the transition and the risk appeared to be needless to those who took "the safe bet" and stuck with their default setting/job.
On the other hand, if the established industry continues thriving and the new industry goes bust, the risk-taker who jumped ship looks like a reckless gambler who played long odds and lost.
Unlike a game of cards, where the odds of drawing various hands can be reckoned in advance, life has no such quantifiable odds. Doing nothing can be riskier than accepting risks upfront, but we only understand the relative risk when looking backward. Looking forward, all is obscure and contingent.
Dyson spent a decade tinkering in his shop, supported by his wife's conventional career. What if he'd been alone, and had to make his own living? Would he have had the time and energy needed to perfect his invention?
There's also the influence of the era and the economic tides. In a deep recession, good ideas are often abandoned, as risk-takers are bankrupted or have to downsize to survive.
The same project might have succeeded had they taken on the risk in a "rising tide raises all boats" period of expansive optimism.
Risk-taking is of course an integral part of the myth of Silicon Valley's entrepreneurial grand slams. While much of this smacks of self-congratulatory PR--how much risk are wealthy kids who start businesses actually taking on?-- I do think the dictum "fail fast, fail often" captures an essential element of risk-taking: failure is the most effective teacher for those willing to learn.
All sorts of things are learned in the abstract, in textbooks, videos and classroom lectures, but actually manifesting what was learned in the abstract in the real world is where learning accelerates most wonderfully.
For example, a film student might go through two or three years of film school and think they know how to make a movie, but if they are fortunate to start their career working for a director who works fast and on a low-budget, they will learn far more about making movies in 3 months than they ever could in 3 years in the classroom.
We think we've mastered all sorts of valuable skills, but the testing ground of our applied knowledge is the real world. Did our knowledge and experience yield good results, or did we fail to achieve what we set out to do?
One last element of risk is scarcity. Everyone making common bets--that college degrees will pay off handsomely, gambling in casinos, buying stock indices, etc.-- is competing against an enormous pool of other risk-takers. The over-abundance of other risk-takers lowers the odds of winning, simply because so many other people have chosen to make the same bets.
It's easier to succeed if competition is scarce or non-existent.
Imagine if Dyson had been competing against 1,000 other firms, all pursuing a bagless vacuum. What are the odds that he would have succeeded in such a crowded field?
Instead, he was essentially alone in the risky project he was pursuing; in effect, he was only competing with himself.
This is the ideal state of risk-taking: being in total control of the risk exposure and the project, and pursuing a project that no one else is pursuing.
How far can you get when you're only competing with yourself? Far indeed, because failure is always hovering over your shoulder, offering harsh but important lessons to your ears alone. What others are doing is of little concern, because nobody else is working on anything remotely similar.
Summary of the Blog This Past Week
Have We Reached Peak NFL? 12/15/17
The Christmas Letter I'd Like To See 12/14/17
Could Central Banks Dump Gold in Favor of Bitcoin? 12/13/17
Three Bubbles/Strikes and You're Out 12/12/17
Bitcoin vs Fiat Currency: Which Fails First? 12/11/17
Best Thing That Happened To Me This Week
My brother and sister-in-law's visit (from Switzerland)--memorable family times together become ever more meaningful as the difficulty of travel becomes greater.
Market Musings: The Cryptocurrency Craziness
Having publicly set a target of $17,000 for bitcoin in 2016 when it was still under $700 has made me look pretty good, but my forecast was for 2020-21, not 2017. The run-up since late 2016 has been spectacular, and many are proclaiming it the greatest bubble in human history.
Many of the charts of BTC you see are log charts, which don't reflect the price run-up as accurately as linear charts like this one, which I've extended to reflect the latest increase toward $20,000:
Phrases like "too far, too fast" come to mind after glancing at this chart, and regardless of the future potential for appreciation, anything with a chart like this (and some other cryptos have made even more extreme run-ups) is basically begging for a retrace or test of previous support/resistance.
Even the most cursory glance tells us 35% to 40% retraces have typified bitcoin's recent run, so a 40% decline from $20,000 to $12,000 should not be too surprising (or a drop from $25,000 to $15,000, if this run extends from $19,000 to $25,000).
Will the big open gaps around $8,000 and $3,000 remain unfilled forever, or will prices come down to fill those open gaps? Maybe, maybe not.
Nobody knows where the ultimate top is in BTC, or even the near-term top, but "nothing goes up in a straight line forever" comes to mind when gazing at a chart like this.
From Left Field
NFL viewership fell in nearly all demographics and all regions in 2016
It doesn’t matter if NFL ratings are dropping — advertisers can’t get enough -- for now; check back in a recession...
A journey through a land of extreme poverty: welcome to America
Thank Goodness for Donald Trump -- not the mainstream view, to be sure...
The body is the missing link for truly intelligent machines -- yes...
Why millennials are facing the scariest financial future of any generation since the Great Depression (via GFB) -- an excellent summary of the US economy and why the status quo has failed the younger generations....
The Silicon Valley paradox: one in four people are at risk of hunger (via John D.)
US Debt Visualized in $100 Bills (via J.F.) - always worth a revisit....
The Human Cost of the Ghost Economy
Some Of Facebook’s Early Friends Now Its Sharpest Critics
The Rude Awakening Of Slumbering Bulls -- good charts describing why the stock market is over-valued....
The Crisis Ahead: The U.S. Is No Country for Older Men and Women
"It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win." John Paul Jones
Thanks for reading--
charles |
|
|
|
|
|
