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I feel like what isn't really properly understood in these situations is the statistical chances that are involved here. 10 people put $50 on the roulette table

I feel like what isn't really properly understood in these situations is the statistical chances that are involved here. 10 people put $50 on the roulette table, and then we celebrate the guy who hit their number. That genius who hit their number still had a negative expected value when placing that bet. Colette Martin would've been right to criticize Reed Hastings if he were making that bet with Netflix's money. But we don't read articles about the CEOs who make bad bets and lose them, and we don't really know if the CEOs who won made good bets or bad bets. It's possible the richest CEOs are actually the worst at picking bets, because they're the ones who picked bets that were the least likely to pay off, and therefore got the biggest pay out when they won. If 50 people were making the same bet as Reed Hastings, then Netflix would've found it far harder to succeed, since they would've been competing for talent, content and customers with 50 other companies. The reason Netflix exploded in growth is partly because they were the only ones serving that market. Maybe that was a genius stroke of insight, or maybe he was one of a thousand people making bad bets, and he's the one that it paid off for.

maest 6y ago
What makes a betting person good or bad? It's hard to score and compare process and intention. The most natural way of determinig the quality of the betting person is by their results. It's not a very informative way of looking at the world, but it's the most straightforward.
082349872349872 6y ago
Investors diversify, so we need CEOs of individual firms to take more risk than we want for our portfolios as a whole. To be worth their wages, a CEO of a publicly-traded company should be making risky slightly-positive expectation value bets; were the firm too risk-averse, it'd be just as inefficient as if it were to keep too much cash on hand.
tomhoward 6y ago
> we don't read articles about the CEOs who make bad bets and lose them Yes we do, all the time: Theranos, WeWork, WebVan, Myspace, Friendster, BlackBerry, Enron, Worldcom, etc, etc, etc. Sure, we don't hear about companies that never get anywhere because they never did anything interesting to start with, because that's unremarkable. But we hear a lot about the companies that attracted a lot of success or hype early but then "bet" wrong. (In fact, these stories arguably get a disproportionate amount of coverage, due to schadenfreude from journalists and their audience.) The roulette spin analogy is not apt, because building a successful company is not a single bet; it's many many bets, every year/month/day over many years, which moves it well out of the realm of random chance and mostly into the realm of skill. And before someone says it: nobody argues good luck is not a factor in a company's success. But that is mostly at the very beginning (e.g., Steve Jobs meeting Woz; Bill Gates' mother knowing the chairman of IBM) and luck alone is not nearly enough. Skilled leadership over the long term makes all the difference between success and wasted opportunity.
- scottlocklin 6y ago
  It's interesting that plenty of people were flinging poo at Reed Hastings when he was making the transition between mailing DVDs and streaming, and pretty much nobody in the media dared fling poo at the obvious "violating laws of physics" shennanegins happening at Theranos before Tyler Shultz took them to the ground. None of the other examples are really comparable to Netflix either; they were all companies which eventually failed, but which business reporters didn't particularly dislike until after they failed. Netflix was nearly universally reviled for making "dumb" decisions which turned out to be correct, and Mcardle deserves credit for noticing that Hastings was probably a better CEO than most business reporters.
- jecel 6y ago
  > Bill Gates' mother knowing the chairman of IBM I find this story annoying. Imagine that Mary Gates did not know John Opel. Who would have IBM done business with instead?
TopHand 6y ago
Maybe he was just standing in the right place at the right time, but he was also prepared with the right tools to do what he did. Doing good business is more than a spin on a roulette wheel.
thisisbrians 6y ago
Sounds like the VC model, or the found-a-startup model. I came here to say basically this. Well put! Survivorship bias is a huge problem in the way of explaining success.
enaaem 6y ago
It is possible that a rich CEO has a negative EV bet picking strategy. Unlike casino games we cannot exactly determine this expected value, and have to estimate it from past observations. CEOs who generated positive past rewards, will most likely have a positive EV betting strategy.

maest 6y ago

What makes a betting person good or bad? It's hard to score and compare process and intention. The most natural way of determinig the quality of the betting person is by their results. It's not a very informative way of looking at the world, but it's the most straightforward.

082349872349872 6y ago

Investors diversify, so we need CEOs of individual firms to take more risk than we want for our portfolios as a whole. To be worth their wages, a CEO of a publicly-traded company should be making risky slightly-positive expectation value bets; were the firm too risk-averse, it'd be just as inefficient as if it were to keep too much cash on hand.

tomhoward 6y ago

> we don't read articles about the CEOs who make bad bets and lose them Yes we do, all the time: Theranos, WeWork, WebVan, Myspace, Friendster, BlackBerry, Enron, Worldcom, etc, etc, etc. Sure, we don't hear about companies that never get anywhere because they never did anything interesting to start with, because that's unremarkable. But we hear a lot about the companies that attracted a lot of success or hype early but then "bet" wrong. (In fact, these stories arguably get a disproportionate amount of coverage, due to schadenfreude from journalists and their audience.) The roulette spin analogy is not apt, because building a successful company is not a single bet; it's many many bets, every year/month/day over many years, which moves it well out of the realm of random chance and mostly into the realm of skill. And before someone says it: nobody argues good luck is not a factor in a company's success. But that is mostly at the very beginning (e.g., Steve Jobs meeting Woz; Bill Gates' mother knowing the chairman of IBM) and luck alone is not nearly enough. Skilled leadership over the long term makes all the difference between success and wasted opportunity.

scottlocklin 6y ago
It's interesting that plenty of people were flinging poo at Reed Hastings when he was making the transition between mailing DVDs and streaming, and pretty much nobody in the media dared fling poo at the obvious "violating laws of physics" shennanegins happening at Theranos before Tyler Shultz took them to the ground. None of the other examples are really comparable to Netflix either; they were all companies which eventually failed, but which business reporters didn't particularly dislike until after they failed. Netflix was nearly universally reviled for making "dumb" decisions which turned out to be correct, and Mcardle deserves credit for noticing that Hastings was probably a better CEO than most business reporters.
jecel 6y ago
> Bill Gates' mother knowing the chairman of IBM I find this story annoying. Imagine that Mary Gates did not know John Opel. Who would have IBM done business with instead?

TopHand 6y ago

Maybe he was just standing in the right place at the right time, but he was also prepared with the right tools to do what he did. Doing good business is more than a spin on a roulette wheel.

thisisbrians 6y ago

Sounds like the VC model, or the found-a-startup model. I came here to say basically this. Well put! Survivorship bias is a huge problem in the way of explaining success.

enaaem 6y ago

It is possible that a rich CEO has a negative EV bet picking strategy. Unlike casino games we cannot exactly determine this expected value, and have to estimate it from past observations. CEOs who generated positive past rewards, will most likely have a positive EV betting strategy.