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•Between now and Sunday, track one new opportunity, each day, to which you have been exposed•Describe the various opportunities? –How is it that you became aware of each opportunity? –Consider the potential downsides of pursing each opportunity –Consider the potential upsides of pursuing each opportunity •By Sunday evening, select one of these opportunities to pursue –I encourage you to select the one with the most undefinable upsideThose are the assessment, you can base on the ppt to figure out.
mindset_9___black_swan_logic__1_.pptx

mindset_9___black_swan_logic.pptx

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Women in Entrepreneurship
Mindset 9: Black Swan Logic
ECON-181G
Prof. Kenneth McLeod
Entrepreneur in Residence
April 25, 2019
Overview
• Announcements
• What we can know – continued
– Unknown-Unknowns
• Black Swan events
– Rules for living in a world of Black Swans
• Homework assignment
Announcements
• Next Guest Speaker (April 30) – Emily Jablon
– Mosaic Artist
What will you earn?
• What will your annual income be five years
after college graduation?
– $50,000 – $100,000
– $100,000 – $200,000
– $200,000 – $500,000
– $500,000 – $1,000,000
– $1,000,000 – $5,000,000
– $5,000,000 – $50,000,000
– Over $50,000,000
Last year, James Simons (Renaissance Technologies)
earned $1,700,000,000
Simple Systems
The sum of their parts
• The 2-body problem / Deterministic solutions
Newton first
solved
circa 1690
Note that modern economics began in 1776 with the publication
of Adam Smith’s “The Wealth of Nations”
Complexity
• There are many things which we cannot know due to
the extensive interactions which exist in the real world
– Interactions give rise to emergent behaviors
• The whole is more than the sum of its parts
• This is the essence of complex system theory
• Ignoring this fact leads to biased perspectives
• For example, the commonly used rational man model of
economics is fatally flawed
– RMM assumes overall economic activity is simply the sum of all
individual activities
» That is, there are no interactions beyond a buyer and seller
– We assume economics is a “two body problem”
» A simple system – Simple systems give rise to normal
distributions
Complex Systems
– More than the sum of their parts
e.g. The “3-body problem”
• Three key concepts
– Interdependence
• “Rules” of interaction are typically quite simple
– Development
• Systems evolve over time – history matters
– Adaptation
• The rules of interaction (environments) change
Sand Piles & Emergence
Outcome not evident in the individual components of a system
This is characteristic of “emergent behaviors”
Emergent behaviors represent Unknown-Unknowns
Body Height Distributions in U.S.
Women
Men
Average height of American
Woman = 5’ 3”
1 Standard Deviation = 3”
Probability of an American
woman being 6’ = 0.1%
What is the probability of finding a 7’ 2”
woman in the U.S. (8 S.D. above average)?
Approximately 10-15 (1 in 100 trillion)
Margo Dydek, WNBA Center – 7’ 2”
The Black Swan (2007)
• Nassim Taleb
– Mathematician/Wall Street Trader
• Got out of the market just before the great crash in 2008
• Strong interest in the role of randomness and complexity
• Concept of long-tailed distribution
– Outliers are not outliers at all, but in fact very common –
they are the unknown-unknowns
We tend to assume normal distributions
(simple systems)
But all natural distributions have longtailed distributions (complex systems)
“Outlier events” commonly occur in
natural systems
Black Swan Events
• Taleb is famous for coining the phrase “Black
Swans” to describe “outlier” events
– Characteristics of “Black Swans”
• They have disproportionately large impact on your life
• They are unexpected (rare, impossible to predict)
• They can be “Rationalized” after the fact
– Our cognitive biases blind us from recognizing the role of
randomness
• Black Swan events (often thought of as luck)
play a dominant role in life
– The most important things that will happen to you
in life will, most likely, be Black Swan events
Class Activity
• Form into groups of 2 or 3
• One of you describe one of the most amazing,
impactful thing that has ever happened to you
• Did you expect this thing to happen at the time?
– Can you explain why this thing happened?
• Repeat for each person in the group
• How many of you could describe such an event?
• How many of you could explain why it happened?
– These were Black Swan events
– They are big, important, and always explainable “after
the fact”
Negative and Positive Contingencies
• Positive Contingency
– Behavior or action which makes something happen
• Negative Contingency
– Behavior or action which eliminates opportunity
• Non-scalable opportunities are typical negative
contingencies
– E.g. Salaried employee
• Downside is capped – you receive a steady paycheck
• Upside is also capped – there will be no 10,000% raises
– Services are non-scalable
• Doctors, lawyers, consultants, freelancer
– You can charge more per hour, but hours/day are limited
Positive Contingencies are Scalable
• Scalable opportunities exist when there is no
linear relationship between time and success
– “You only have to do a few things right in your life so
long as you don’t do too many things wrong.
– Warren Buffett
• When the value you deliver is not linearly tied to
the time you are required to put in, you put
yourself in a position with potential for massive
good luck
– You increase the possibility of experiencing a Black
Swan event
Black Swan Opportunity Practice







Joining the military
Authoring a book
Movie making
Insurance business
Joining a large established firm
Becoming an entrepreneur
Going on a picnic
– Be human – don’t sweat the small stuff !
Rules For Life
• Two very simple rules for increasing your odds
of benefiting from Black Swans
1. Don’t pursue opportunities where the potential
downside far outweighs the potential upside
“Do not pick up nickels in front of steamrollers”
2. If you can afford the potential loss, and the upside is
undefinable, then go all in!
– Acceptable losses will vary as a function of your age,
employment, etc
• Losses include time, money, relationships
Take Home Message
• The goal in life is to work to set yourself up to
cross paths with many positive Black Swans
– Work hard to put positive contingencies into your life
• Strategy
– Learn to distinguish positive Black Swans from
negative Black Swans
• What is the downside? Is it limited and manageable?
• What is the upside? Is it immense?
– Don’t try to determine probabilities of Black Swans
• We don’t know them, and they can’t be figured out
• Recall that these are rare (unimaginable) events
– Focus strictly on the possibilities
How to Get Hurt by Black Swans
• The Don’ts are primarily cognitive biases
1. Don’t pretend that Black Swans don’t exist
– Don’t assume events are normally distributed
2. Don’t create Narrative Fallacies
– Expecting historical patterns to continue
3. Don’t ignore silent evidence
– Ignoring what hasn’t happened
• “The reasonable person adapts to the world; the
unreasonable person persists in trying to adapt the world to
themselves. Therefore, all progress depends on
unreasonable people.” – J.B. Shaw
Don’ts II
4. Don’t develop tunnel vision
– Cognitive tunneling causes people to become
overly focused on whatever is directly in front of
their eyes
– We start to assume we understand the sources of
randomness/variation in events
5. Don’t make errors of confirmation
– Focusing on selective evidence
– Knowing too much about the consensus opinion
• Conventional Wisdom
Conventional Wisdom
• Conventional wisdom is a term used to describe
ideas or explanations that are generally accepted
as true by the public or by experts in a field.
– Such ideas or explanations, though widely held, are
generally unexamined.
• Unqualified societal discourse preserves the
status quo.
– It codifies existing social norms.
• Conventional wisdom prevents an empirical
outlook which is needed for progress.
Influence on Young Entrepreneurs
• Young people hesitate to contradict conventional
wisdom (expert opinion)
– How dare you? On what basis? Respect your elders!
– This attitude is a dominant inhibitor of innovation
• Expertise does play important roles in society
– But, you can only be an expert in systems where the
situation does not change (i.e. rules are fixed)
• Expertise is not translatable
– Expertise in one field provides no basis to assume any
level expertise in any other field
• Testimonial marketing, expert panels, etc
Experts on Wall Street
• In July, 2000, Fortune Magazine published an
article on “buy and forget” portfolios.
– They asked experts to pick 10 stocks, which would perform so
well that a person could safely purchase these stocks and
ignore them as these stocks represented a safe, secure, and
high performing investment.
• Because of the 2008 crash, the market
performed only reasonably well over this decade
– S&P 500 rose 36% from 2000 to 2010.
• How well did the experts who were selected by
Fortune Magazine do in their stock selections?
Expert Performance
Company
Percent Change
Broadcom
-78.1%
Charles Schwab
-44.9%
Enron
-100%
Genentech
-34.0%*
Morgan Stanley
-17.2%
Nokia
-36.1%
Nortel
-97.8%
Oracle
-45.3%
Univision
-36.0%
Viacom
-49.2%
Average
*Bought by Roche in March 2009
-53.9%
Expert Political Judgment
• Phil Tetlock – UC Berkeley – 2005
• 27,451 predictions surveyed over 20 years, with
follow-up on outcome.
• Predictions largely in the fields of politics and
national security.
• Predictions based on 1-10 point scale from
“Impossible” to “Certain to Happen”
• Used the students in his undergraduate course as
the control group (dilettantes)
• Scores based on both accuracy and certainty
Decision Strategies
• Forecasters were divided into two groups
– (ala Berlin, 1953 – The Hedgehog and the Fox)
– Those who have a central vision, an ideology
• The classical “hedgehog” who knows one big thing
– Those with no ideology, but know many little things
• Think flexibly, look at many sources, the classical “fox”
– Also defined two intermediate groups
• Fox-hogs and Hedge-foxes: those that did not fall in the
two extremes of thinking processes.
– Tetlock then evaluated success in both short term
and long term forecasts.
Difficulty adjusted scores
foxes
foxhogs
hedgefox
hedgehog
0.1
0.0
-0.1
experts
dilettantes
Short-term forecasts
experts
dillettantes
Long-term forecasts
Forecast Group
Observations from Tetlock’s Study
• Expertise does not add much to effective
decision making about what will happen in the
future.
• The decision process (staying open-minded and
correcting mistakes) is far more important than
expertise.
Course Summary
• Entrepreneurs have a somewhat unique
perspective on the world
– They have a vision, a mental model of an alternative
future (stretch goal)
– The tell (pitch) their story to everyone they meet
• Because you never know who might be able to help you, but
you always know that you will need a team
– They constantly undertake small side projects/hustles
to learn new things
• They know that you learn best by doing
• But they read voraciously and network voraciously as well to
learn about what other people know
– They work hard to prevent their cognitive biases from
unduly restricting their options
– They work hard to benefit from positive contingency
(Black Swans)
Homework #10
Choosing Black Swans
• Between now and Sunday, track one new opportunity, each
day, to which you have been exposed
• Describe the various opportunities?
– How is it that you became aware of each opportunity?
– Consider the potential downsides of pursing each opportunity
– Consider the potential upsides of pursuing each opportunity
• By Sunday evening, select one of these opportunities to
pursue
– I encourage you to select the one with the most undefinable upside
• On pitch day, you will tell us what has been the outcome, so
far, of exploiting this opportunity?
Women in Entrepreneurship
Mindset 9: Black Swan Logic
Overview
• Announcements
• What we can know – continued
– Unknown-Unknowns
• Black Swan events
– Rules for living in a world of Black Swans
• Homework assignment
Announcements
• Next Guest Speaker (April 30) – Emily Jablon
– Mosaic Artist
What will you earn?
• What will your annual income be five years
after college graduation?
– $50,000 – $100,000
– $100,000 – $200,000
– $200,000 – $500,000
– $500,000 – $1,000,000
– $1,000,000 – $5,000,000
– $5,000,000 – $50,000,000
– Over $50,000,000
Last year, James Simons (Renaissance Technologies)
earned $1,700,000,000
Simple Systems
The sum of their parts
• The 2-body problem / Deterministic solutions
Newton first
solved
circa 1690
Note that modern economics began in 1776 with the publication
of Adam Smith’s “The Wealth of Nations”
Complexity
• There are many things which we cannot know due to
the extensive interactions which exist in the real world
– Interactions give rise to emergent behaviors
• The whole is more than the sum of its parts
• This is the essence of complex system theory
• Ignoring this fact leads to biased perspectives
• For example, the commonly used rational man model of
economics is fatally flawed
– RMM assumes overall economic activity is simply the sum of all
individual activities
» That is, there are no interactions beyond a buyer and seller
– We assume economics is a “two body problem”
» A simple system – Simple systems give rise to normal
distributions
Complex Systems
– More than the sum of their parts
e.g. The “3-body problem”
• Three key concepts
– Interdependence
• “Rules” of interaction are typically quite simple
– Development
• Systems evolve over time – history matters
– Adaptation
• The rules of interaction (environments) change
Sand Piles & Emergence
Outcome not evident in the individual components of a system
This is characteristic of “emergent behaviors”
Emergent behaviors represent Unknown-Unknowns
Body Height Distributions in U.S.
Women
Men
Average height of American
Woman = 5’ 3”
1 Standard Deviation = 3”
Probability of an American
woman being 6’ = 0.1%
What is the probability of finding a 7’ 2”
woman in the U.S. (8 S.D. above average)?
Approximately 10-15 (1 in 100 trillion)
Margo Dydek, WNBA Center – 7’ 2”
The Black Swan (2007)
• Nassim Taleb
– Mathematician/Wall Street Trader
• Got out of the market just before the great crash in 2008
• Strong interest in the role of randomness and complexity
• Concept of long-tailed distribution
– Outliers are not outliers at all, but in fact very common –
they are the unknown-unknowns
We tend to assume normal distributions
(simple systems)
But all natural distributions have longtailed distributions (complex systems)
“Outlier events” commonly occur in
natural systems
Black Swan Events
• Taleb is famous for coining the phrase “Black
Swans” to describe “outlier” events
– Characteristics of “Black Swans”
• They have disproportionately large impact on your life
• They are unexpected (rare, impossible to predict)
• They can be “Rationalized” after the fact
– Our cognitive biases blind us from recognizing the role of
randomness
• Black Swan events (often thought of as luck)
play a dominant role in life
– The most important things that will happen to you
in life will, most likely, be Black Swan events
Class Activity
• Form into groups of 2 or 3
• One of you describe one of the most amazing,
impactful thing that has ever happened to you
• Did you expect this thing to happen at the time?
– Can you explain why this thing happened?
• Repeat for each person in the group
• How many of you could describe such an event?
• How many of you could explain why it happened?
– These were Black Swan events
– They are big, important, and always explainable “after
the fact”
Negative and Positive Contingencies
• Positive Contingency
– Behavior or action which makes something happen
• Negative Contingency
– Behavior or action which eliminates opportunity
• Non-scalable opportunities are typical negative
contingencies
– E.g. Salaried employee
• Downside is capped – you receive a steady paycheck
• Upside is also capped – there will be no 10,000% raises
– Services are non-scalable
• Doctors, lawyers, consultants, freelancer
– You can charge more per hour, but hours/day are limited
Positive Contingencies are Scalable
• Scalable opportunities exist when there is no
linear relationship between time and success
– “You only have to do a few things right in your life so
long as you don’t do too many things wrong.
– Warren Buffett
• When the value you deliver is not linearly tied to
the time you are required to put in, you put
yourself in a position with potential for massive
good luck
– You increase the possibility of experiencing a Black
Swan event
Black Swan Opportunity Practice







Joining the military
Authoring a book
Movie making
Insurance business
Joining a large established firm
Becoming an entrepreneur
Going on a picnic
– Be human – don’t sweat the small stuff !
Rules For Life
• Two very simple rules for increasing your odds
of benefiting from Black Swans
1. Don’t pursue opportunities where the potential
downside far outweighs the potential upside
“Do not pick up nickels in front of steamrollers”
2. If you can afford the potential loss, and the upside is
undefinable, then go all in!
– Acceptable losses will vary as a function of your age,
employment, etc
• Losses include time, money, relationships
Take Home Message
• The goal in life is to work to set yourself up to
cross paths with many positive Black Swans
– Work hard to put positive contingencies into your life
• Strategy
– Learn to distinguish positive Black Swans from
negative Black Swans
• What is the downside? Is it limited and manageable?
• What is the upside? Is it immense?
– Don’t try to determine probabilities of Black Swans
• We don’t know them, and they can’t be figured out
• Recall that these are rare (unimaginable) events
– Focus strictly on the possibilities
How to Get Hurt by Black Swans
• The Don’ts are primarily cognitive biases
1. Don’t pretend that Black Swans don’t exist
– Don’t assume events are normally distributed
2. Don’t create Narrative Fallacies
– Expecting historical patterns to continue
3. Don’t ignore silent evidence
– Ignoring what hasn’t happened
• “The reasonable person adapts to the world; the
unreasonable person persists in trying to adapt the world to
themselves. Therefore, all progress depends on
unreasonable people.” – J.B. Shaw
Don’ts II
4. Don’t develop tunnel vision
– Cognitive tunneling causes people to become
overly focused on whatever is directly in front of
their eyes
– We start to assume we understand the sources of
randomness/variation in events
5. Don’t make errors of confirmation
– Focusing on selective evidence
– Knowing too much about the consensus opinion
• Conventional Wisdom
Conventional Wisdom
• Conventional wisdom is a term used to describe
ideas or explanations that are generally accepted
as true by the public or by experts in a field.
– Such ideas or explanations, though widely held, are
generally unexamined.
• Unqualified societal discourse preserves the
status quo.
– It codifies existing social norms.
• Conventional wisdom prevents an empirical
outlook which is needed for progress.
Influence on Young Entrepreneurs
• Young people hesitate to contradict conventional
wisdom (expert opinion)
– How dare you? On what basis? Respect your elders!
– This attitude is a dominant inhibitor of innovation
• Expertise does play important roles in society
– But, you can only be an expert in systems where the
situation does not change (i.e. rules are fixed)
• Expertise is not translatable
– Expertise in one field provides no …
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