by • January 30, 2017 • Lean startup metaComments (0)2

Losing while being right, winning while being wrong

The fact that you won at russian roulette doesn’t mean playing it was a good decision. On the flip side, you can lose a hand of poker and still know you made the right call.

In other words, wild success does not justify idiotic behaviour and failure in the end does not invalidate a wise choice.

Entrepreneurs are pretty good about making bold decisions with little information. The bit we get wrong is switching back into bureaucrat mode if it happens to turn out badly and beating ourselves up about it. If the decision was right with the information you had at the time, then it was the right decision, even if it didn’t work out. You don’t need to pay emotional penance for it.

If you’re an engineer building bridges, any failure is a bad failure and is probably a sign of negligence. Bridge-building is a well defined space where the variables are known. But if you’re someone like an artist, failures are okay, because you’re not trying to reliably repeat what’s already known; you’re trying to create one masterpiece. Being a founder is more like being an artist than an engineer. Mistakes are supposed to happen, since you’re doing something new, and they’re also less important, since be wrong a thousand times as long as you’re eventually right once. An artist only needs one masterpiece to be remembered and a founder only needs one profitable product to change their life.

Being wrong on big decisions still hurts, obviously, but you don’t need to add to that with self-flagellation. A couple years ago, I bet big on partnering with another company and they completely screwed me. My decision cost a huge portion of my company’s revenue and I wish it had gone differently, but I don’t regret it in because it was the right decision given what I knew at the time[2].

You can make a counter-argument that you’re still responsible since you could have gathered more information to make a better decision. That only works in practice up to a point since there’s an opportunity cost to obsessing over one choice when an entrepreneur has dozens to deal with. Some friends, after raising their Series B, were taking forever to research and decide about their first big-money decision. The investor eventually said, “I don’t care what you do, but do it faster! You’re business isn’t moving while you’re debating this!” They were so focused on the obvious cost of being wrong that they were blind to the opportunity cost of having their attention taken up.

Hold yourself accountable for making the best choices you can (that’s how you get better), but never demand of yourself that you’re always right. The only folks who are always right are the ones who never made a real decision.

[1] Say we’ve got two poker players. They both face an 80% chance of losing the hand. The first guy stands to double his money, and he plays, and he wins. The second guy stands to 10x his money, and he plays, and he loses. Which one of them was right?

The first guy won, but his bet was dumb, and he should know he made a dumb decision (even though it happened to work out). He had a 20% chance of 200% and an 80% chance of 0%, hence an overall return on his bet of 0.2*2.0=40%, which means if he bet $100 repeatedly, on average he could expect to lose $60 every time.

The second guy (who lost) had a 20% chance of 1000% return and the same 80% odds of losing, so was looking at a 0.2*10.0=200% expected return. The reality of whether they won or lost does nothing in the slightest to chance the rightness or wrongness of their behaviour.

Note that this math only applies if you get multiple chances to play the hand. If you’ve only got one shot then you’re focused on maximising odds of [any] success rather than on maximising expected return.

[2] There was a great moment in High Stakes Poker (the show) where Phil Laak bets $10,000 on whether a coin will land heads or tails. But if he wins, he gets $10,050, so if you do the bet repeatedly, he would expect to earn $25 profit each time. Of course, he loses the flip and hands over his ten grand, and everyone laughs (in a good-natured way). But he’s smiling, and he goes, “I don’t know what you guys are laughing about, I just made $25.” In truth he’d just lost ten thousand, but he was comfortable with his decision because even though it didn’t work out, he still had confidence in the way he’d made it.

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