14 Primary Lessons for Black Swans

Webit, Istanbul, 10 October 2012

14 Primary Lessons for Black Swans(Decision Theory for Startups)

Jochen Wegner . jochen@wegner.io . http://wegner.io . 10/2012

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Jochen Wegner . jochen@wegner.io . http://wegner.io . 10/2012

Karl Popper Nassim Taleb, Rolf Dobelli Daniel Kahneman

14 Primary Lessons for Black Swans

>6 million businessesare created every year in the United States alone*

* Kauffman Foundation, US Census Bureau

1 out of 1.000-10.000 will be big.*

* >500 employees after 10 years, estimate based on Kauffman Index, US Census Bureau

What if big success was random?

What if it would be impossible to predict if you will be the next Black Swan?

What if big success was random?

What if it would be impossible to predict if you will be the next Black Swan?

„The majority of funds — 62 out of 100 —failed to exceed returns available from the public markets, after fees and carry were paid.“ (Kauffman Foundation)

What if big success was random?

Some reliable sources suggest exactly that:suggest exactly that:

Successful startups are „Black Swans“ according to Taleb:

‣rare‣extreme impact‣only retrospective predictability

Big startups successshows many properties of arandom process.

Lesson 1

Startup entrepreneurs showthe typical cognitive biases connected with randomness.

Lesson 2

There are 156 cognitive biases.*Let us pick 12 of them.

* assembled by Wikipedia

Your startup will almost certainly be a White Swan (and no big hit)...

Your startup will almost certainly be a White Swan...

...even if everyone else around you is so successful.*

* Selection Bias / Survivorship Bias / Representativeness / „Law of small numbers“

Lesson 3

Your startup will almost certainly be a White Swan...

...even if you got big funding.*

* smart investors „farm black swans“- © Paul Graham

Lesson 4

Your startup will almost certainly be a White Swan...

...even if you got funded by a very successful investor.*

* Selection Bias, „Swimmer‘s Body Illusion“

Lesson 5

Your startup will almost certainly be a White Swan...

...even if you were successful before.*

* Randomness, Selection Bias, Overconfidence

Lesson 6

(...even if your name is Loic, Niklas or Chad.)

Lesson 6

Your startup will almost certainly be a White Swan...

...even if you find a lot of evidence that your model will work.*

* Confirmation Bias

Lesson 7

Please follow your idea - even if it seems not big enough for big investors.*

Lesson 8

* They are solely in the Black Swan Farming Business - see Paul Graham

Please follow your idea - even if it seems a little insane (but could be really big).*

Lesson 9

* „If a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.“ (Paul Graham)

It may be rational not to take money from big investors.

Lesson 10

It may be rational not to take money from small investors.*

* Reciprocity

Lesson 11

Please follow your idea - but not because you worked so hard on it in the past.* Only because of future prospects.

Lesson 12

* Sunk Cost Fallacy

Don‘t listen to success stories too much.*

* Availability Bias

Lesson 13

(Read „Techcrunch“ like you read „TMZ“ or „People“ Magazine.)

Be very careful if you take advice from successful entrepreneurs.*

* Overconfidence, Hindsight, Illusion of Control

Lesson 14

Resources

BooksJudgement under Uncertainty: Heuristics and BiasesFooled By RandomnessThe Black Swan

Articles / BlogsWhy Angel Investors don‘t make moneyBlack Swan FarmingWe have met the enemy - and he is us (PDF, Kauffman)Cognitive biases, risk perception, and venture formation: How individuals decide to start companies

Resources on EntrepreneurshipUS Census BureauKauffman Foundation

Wikipedia: List of Cognitive Biases