On the importance of high upside bets
Decision theory has a hard time distinguishing the aggregate from the specific. In aggregate, starting a restaurant is a bad investment—in the particular, starting a restaurant can be a great investment.
In aggregate, pursuing a career as a writer is a bad career strategy—in the specific, writing Harry Potter was a great career move.
The themes of this carry through with college recommendations. You’ll see many people highlight that college, particularly Ivy League schools, are a bad investment, that it’s not worth the return on investment.
But if your goal were to transform your life outcomes, let’s say becoming a future president of the United States, as opposed to generating the best return on investment—is expected return even the right metric?
The odds are if you attend Ivy League school that you won’t be president, but of the president’s since Kennedy, 63% attended Ivy League schools.
Ivy League schools may not have a highest average return on investment, but they may be the best lottery ticket for extraordinary returns.
About 1.2% of draft-eligible college basketball players are drafted to the NBA. One way to read this is that the odds aren’t in your favor.
The other way to read this is how much would you pay for a 1% chance at an $893K salary (the minimum salary for a rookie). The math says you should spend approximately $10K for that one percent chance.
But is that right?
If you take that same $10K and invest it for 58 short years, you’d have $893K. But if you make the NBA, $893K is your first-year salary, there is some probability that you’ll make the team in year two at a higher minimum salary.
Assuming you’re a Division I basketball player—where else in your life are you going to find 1% odds at fundamentally transforming your life? If you’re playing D1, is it prudent to cap your training and skill development budget at $10K?
This ain’t no practice life
– 2 Chainz, Forgiven
I recently moved to Texas.
After my last role at Nordstrom, I was ready to scale back my next role. Yes, I was proud of my team and the outcomes we accomplished. But to what end was I planning? My family was financially stable, and with a relatively patient investment strategy, it was highly probable I’d achieve my wealth number in 15 years.
In contrast, there is reduced career flexibility that comes with growth in scope. The world needs far more Principal Product Managers and “Product Leads” than VPs of Product and Chief Product Officers.
Having achieved financial flexibility and endured more than a decade of career stress as a minority in rank and yank systems. I decided to take advantage of career freedom and flexibility, moving back to an individual contributor role.
Then—a former boss called about an opportunity, and I had friends wise enough to insist I hear him out before replying, “no way in hell.”
Pursuing a VP of Product role was not a trivial decision, not only because it’s a new market but because I’m trading known outcomes in 15 years—for unknown outcomes. Trading bright career prospects in the event of a downturn, for unknown. I’m almost certain that by the numbers, it was a dumb decision.
So why did we do it?
My partner weighed the pros and cons, but I still needed to reconcile my own reluctance. I called a friend, one of those friends who know you from way back when.
“Yo. That’s a big opportunity.”
In those few words, my friend said it all. Taking advantage of good opportunities is the name of the game, but big opportunities are what we play for.
All these recommendations seem to assume that if your kid wasn’t watching Seasame Street, you would be on the floor super engaged with them.
But some of the time when our kids are watching TV, it’s cause that isn’t the thing you would otherwise be doing with them.
– Emily Oster, A16Z Podcast, A Guide to Making Data Based Deicsions in Health, Parenting… and Life @22:01
Is watching television a bad investment of time? Well, what TV are you watching—and what would you do instead of watching television?
For people looking to save money—a stay at home dinner and Netflix is an absurdly economical form of entertainment.
For people looking to stay active, watching a favorite show while riding a stationary bike, or doing intermittent training during commercial breaks is a pretty effective way of getting exercise.
For busy parents with young kids—Kids Television is far preferred to unsupervised crafts.
While in aggregate, Television viewing is bad. In the specific, Television viewing can be a useful way to save money, stay active, or safely entertain young kids.
That buck that bought a bottle–could’ve struck the lotto
– Nas, Life’s a ….
In our lives, we’re all faced with the equivalent of the lottery problem. Whether to pursue an option where the potential return is life-changing, but the expected return in aggregate—is negative or at best low. It might be the question as to whether we watch TV, move to Texas, start a business, or change careers.
The math says playing the lottery is a horrible investment—for everyone except for the winner. For that person, the investment decision to buy the winning lottery ticket is always an excellent investment.
We often lose sight that by not playing the game, we’re often trading a possibility for great results in exchange for deterministically unsatisfactory results. We spend money on alcohol, fast food, and future landfill waste, and turn our nose up at people who buy a lottery ticket.
We don’t think twice about the $40 restaurant bill. But we scrutinize the $20 stock tip.
When it comes to our time and money—we underappreciate the potential outcomes of habitually investing when the potential payout is large, and the actual cost is near zero. Mainly when replacing a harmful value activity with a high upside activity—instead of Uber Eats today, I’ll buy into the Uber IPO.
No one bet will make you rich. But neither was a night of Uber Eats. However, a habit of these bets on semi-regular intervals—exposes you to the possibility of a high upside.
Our most impactful investment opportunity is our time. We are gifted 168 hours of them each week.
Where would you be if you transferred one hour spent on a negative value activity into a high upside (low probability) positive value activity?
To ground this in a bit more rigor, this thematically borrows from Nassim Taleb’s Incerto series:
Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?):
- You need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet.
- The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital–style portfolios.*
That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your “floor,” the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent.
Instead of having medium risk, you have high risk on one side and no risk on the other. The average will be medium risk but constitutes a positive exposure to the Black Swan. More technically, this can be called a “convex” combination. Let us see how this can be implemented in all aspects of life.
Taleb, Nassim Nicholas. The Black Swan: Second Edition: The Impact of the Highly Improbable (Incerto) . Random House Publishing Group. Kindle Edition.
Taleb says 10%, but in our world, I’m going to assume 5% is all you can safely put at risk. So 95% percent of your money, your career, your time. You look for the sure bet. You weigh the odds, you invest in the index funds, you make the sound career decision.
But you seek out 5% of your time, career, and money to low probability high upside opportunities. This is 5% that you’re prepared to lose; in fact, you assume it’s lost the moment you spend it.
It’s the 5% spent looking for a job in a new field, learning to code, dance, write, think, writing your great novel, or whatever other high upsides low likely of payout opportunity you pursue. So with a 50-year career, 2.5 years are spent pursuing risky but high upside opportunities.
On a 100K hh income–$5K is invested in speculative bets. (A cheap investment thesis is to buy stock in the companies that you would most like to work–it allows you to be exposed to the upside of companies you believe in, without an interview process)
And 8 hrs is spent on your passion project in a given week.
Budget for upside.
Because as we all agree—someone is going to win the lottery, someone is going to change their life from stock investment, and someone is going to get rich off a passion project. The only way to ensure that someone isn’t you—is to never play.
Note: Much of this post is metaphorical. I haven’t bought a lottery ticket, but I understand those who do.
I’ve made a career out of investing in my own low probability high upside outcomes. Including my stock investment strategy (I’ll explain some other time) and business I’ve started only to develop new skills going back to college.
about the author
Mikal is a reformed startup CEO and experienced Product Executive based in Austin, TX. After years leading product teams at Microsoft, Nordstrom and most recently VP of Product at RetailMeNot, he now serves as a product coach helping teams in growing tech markets work their way up The Product Team Ladder.
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