One of the concepts that’s been on my mind since I finished reading Nicholas Nassim Taleb’s book Antifragile a few months ago is the Lindy Effect:
For the perishable, every additional day in its life translates into a shorter additional life expectancy. For the nonperishable, every additional day may imply a longer life expectancy. So the longer a technology lives, the longer it can be expected to live.
Taleb gives the example of cookware found in homes in Pompeii. At around 2000 years old – it looks remarkably similar to the cookware you’d see in any house around the world today. The fact that it’s been around so long means it’s very likely to be around for a long time to come. It’s fundamentally valuable. Cookware creates a lot of value in the world because it’s super useful.
This intersects with concept that I’ve thought about lately is about choosing the games your playing and how important that decision is. The example I’ve been rolling over in my head is the one Dan gave me of a mediocre entrepreneur versus a highly-accomplished philosophy professor. Because of the game he chose, the mediocre entrepreneur is in a better position to screw off for four days, read philosophy, and write whatever he wants about it. Ironically, because of the structure of academia, the professor is a lot less free to do that.
It’s basically the businessman-scholar distinction that Taleb presents in Antifragile. Business, by it’s nature, lends more freedom than Academia to the scholar because his livelihood isn’t tied up in what he’s saying. He’s more free to openly express himself. He also has skin in the game so he isn’t talking theoretically. He’s not able to idly spout philosophical BS, he actually has to make decisions and live with the repercussions.
The convergence between the concept of choosing the right game and Taleb’s Lindy effect occurs because my perception of the Lindy effect is that it can be modeled by a reverse exponential curve.
Taleb uses the example of books. On any given reading list – books that are older offer more value since they’ve been around longer and are still being recommended. I’m proposing that books that are well-known from 500 years ago are both exponentially rarer AND more valuable than books that are well known from 5 years ago.
If you were to look at a typical person’s reading list, the vast majority of books would be crammed into the recent, low-value portion of the curve while many fewer books would occupy the much larger high-value, older section of the curve.
So your ROI on reading and understanding a concept from 500 years ago is highly likely to be exponentially greater in the long run than one presented only 5 years ago.
What I’m trying to get at is that the more fundamental or closer to the source that you move, the better the ROI in the long run. In 20 years from now, you’ll be far more accomplished in whatever you’re pursuing if you spend the next 5 years reading the seminal works in the field as opposed to reading blog posts. It guess it’s sort of strategy vs. tactics. Tactics pay off higher short term, but less in the long term.
So the implications in my mind on lifestyle choices are that by choosing a better game – I’ll use the example of a career path – your ROI in the long run can be much higher than if you chose the wrong game even if you tactically execute the wrong game better than the right game.
What’s the Heuristic?
If we accept this, the problem then becomes figuring out the heuristic to make those choices. As systems grow more “fundamental,” they also grow more complex. There are far more possible outcomes and variables involved in choosing a career path versus choosing what to do tomorrow.
I think there are two potentially useful heuristics depending on what type of system you’re looking at.
I saw this on Seth Godin’s blog a few months ago -
“Opportunity exists in the gap between what is perceived as safe (what we’re hardwired to think is safe) and what actually is safe in the real world.”
At the point we’re at in history, it seems like that gap is larger than it’s ever been. There is more opportunity in the world we’re living in than there ever has been in the past. There are more opportunities to generate wealth by creating value because increasing transparency has more closely correlated value and wealth than ever before.
The problem is that our paleolithic brains are are hardwired to avoid areas where there most value stands to be created because they’re perceived as risky. So much opportunity exists precisely because of the massive disparity between the modern world in which we live and the world in which we evolved.
Because the pace at which the world is changing is accelerating, the value of socialization is also decreasing and the value of adaptability is increasing.
The question then becomes how to identify which activities are the highest ROI longterm. Where is the gap between what is perceived as safe and what is actually safe?
It seems to me that the heuristic is The Resistance as described by Steven Pressfield in The War of Art. The Resistance, at least in my experience, seems to be one of the best indicators that you’re moving towards something that is perceived by the vast majority of people as dangerous but in our current world (the imagination economy) is in fact safe and extremely valuable.
The other framework that is useful to me in understanding this concept at a more systematic level is Antifragility.
In many cases pushing towards the resistance ends in failure. However, by systematically pursuing many things that feel dangerous but are relatively safe – that is the reward is high relative to the risk even though both are higher than most people are comforable with. Over time, if you doing a lot of Antifragile things (which you identify via the presence of the Resistance) the long term payoff is potentially huge because of the gap between risk perception and actual risk.
Entrepreneurship is the obvious example. Entrepreneurship is the systematic taking of perceived high risks with relatively larger payouts.
Our caveman brains combined with how we’ve been socialized identify entrepreneurship as a very high risk activity.
However because of technology, both the barrier to entry into entrepreneurship and the risk involved is lower than it’s ever been before. In 18th century England in order to be an entrepreneur, you needed a large amount of capital.
That’s no longer the case. Because of technology – time and energy can be used instead of capital to pursue an entrepreneurial path. So instead of risking capital, you’re able to spend your time and energy to pursue an antifragile path.
This concept doesn’t just apply to more meta level choices (though you gain more leverage by applying it there).
It could be applied on a more micro-level too. Moving jobs or moving cities, even if you’re staying within the same career, can present opportunities to take advantage of the distortion between real and perceived risk.
The Cat Furniture Problem
Within the context of small businesses – the opportunity that exists is in systematically pursuing opportunities with relatively high reward to risk in situations where both are perceived as high by the general populace (or in this case other small business owners or potential small business owners). This comes back to something Rob Hanly made clear to me in a conversation recently.
If you have a business with an established cash flow – it seems like the opportunity is in systematically testing and leveraging the Antifragility of the system and the opportunity created by the real/perceived risk gap.
Though it’s applicable at any level of your business, I think it’s more beneficial in the long run to focus on more macro level concepts (a la the Lindy Effect). So choosing the right industry has better longterm ROI than choosing the right marketing strategy.
An ok marketing strategy in a growing, under-invested industry probably puts you better off than an amazing marketing strategy in a dying, over-crowded industry.
An equally effectively run business in both instances could easily result in a 10x difference returns because of the business model and the industry you’re operating in. So one unit of resources invested into the portable bar business (the better industry) could result in a 10x return compared to the cat furniture business in the more competitive, lower margin industry.
So what I’m getting at here – and it’s what Rob basically told me a month ago – is that starting to by systematically investing in Antifragile strategies at the most meta level possible, you’re long term ROI increases at a larger and larger exponent. That is, any anti fragile investment in any convex system produces exponential return, but if you invest in something more fundamental (ie. the industry or business model as opposed to the marketing strategy or warehouse procedure) then the returns are exponentially larger.
While this all makes sense to me, I still find it really hard to actually implement.
Making it Explicit
For one, it feels really risky. Even though I consciously recognize that I’m falling prey to the risk/reward gap that Seth talks about, my emotional/gut reaction is still to avoid it. This is magnified when you’re making a decision about a more fundamental system – like your career path – since the implications are much greater.
The best way I’ve found to deal with this is to explicitly state the risk/reward on the front-end. I think I stole that from Stoicism, but by explicitly defining the worst possible scenario, it suddenly becomes much less scary.
If this whole entrepreneurship thing doesn’t pan out for me, the worst case scenario is that I spend a couple of years hanging out in cafes in South East Asia, meet some really interesting people and move back into my parents’ basement.
I like cafes in Asia, interesting people, and my parents have a pretty nice basement – so the downside there is pretty limited. The upside however is potentially enormous.
Identifying the Right Systems
The other difficult part is identifying systems in your life and business where the gap between real and perceived risk is large.
Here’s a few heuristics/characteristics that I’ve come up with:
- The presence of The Resistance in all forms.
- Almost always highly influenced/made by man – nature produces robust systems, man produces fragile ones so natural systems have less upside since there are less black swan events.
- They haven’t hit the mainstream. I don’t know jack about bitcoin, but my interest in it is much lower now that it’s been on CNN. There is, I suspect, much less opportunity there since the gap between real and perceived risk has been dramatically lowered since mainstream media legitimized it. The exception this I guess could be if the mainstream media is demonizing something or exalting something then opportunity is created by moving in the opposite direction if the real risk there is much lower.