Implementing Bold Ideas
I recently wrote about thinking differently than the majority through bold ideas that are usually wrong but, when right, generate much value. A friend of mine then commented, paraphrasing: “but how to build an appropriate portfolio of these ideas? How much to invest in each, and how much effort to spend to defend them?”
It’s a great question. Coincidentally, as I listened to Sanjay Bakshi on Reading, Mental Models, and Thinking yesterday, I got it: the secret is to have risk aversion, but not loss aversion. As Prof. Bakshi explains, these are two very different things: risk aversion implies minimizing the possibility of going completely bust due to some stroke of bad luck, while loss aversion implies not liking to lose money under any circumstances, in any bet or scenario.
A loss-averse person will never place bets on bold ideas, and will always be in the same place. While someone without risk or loss aversion will make too many risky bets, and will eventually go completely broke.
Consider a bold idea, a thought contrary to the majority, as a bet. The important thing about being risk averse is to avoid making big bets, or several small bets that are highly correlated, because when/if they go wrong you have a complete failure. And the important thing about NOT being averse to losses is to have several small bets with controlled risk so that when most of them fail you take the loss, with no weight on your conscience, and capture the learning for the next bets; or when some start to work, you have the ability to redirect your efforts (even killing other ongoing bets) to invest enough so that you capture the full earning potential of this bold idea.
And Prof. Bakshi adds that there are two ways to build this portfolio of ideas: the Jeff Bezos method and the Steve Jobs method.
In the Jeff Bezos method, you try to be purely analytical and build your portfolio so that it is a constant learning machine. Without imagining a priori that you can predict or shape the market, you bet on a series of possible ideas, some maybe contrary to others, but make sure you can capture the results quickly to decide quickly when it’s time to give up, to continue or to double the bet. Over time, with proper learning, this should lead to an incredible number of failures — there are lists of all Amazon failures floating around the internet — but it doesn’t matter, as the big successes more than make up for the failures.
In the Steve Jobs method, you have an intuitive sense of where the world is going, so you can disrupt it or “unlock the customer value chains” as Prof. Thales Teixeira says. In this case, the important thing is to break your big bold idea into a sequence of small bets such that, step by step, you prove the potential of the big idea, learning the details along the way, and building the necessary “war chest”. Think of Apple’s journey to the iPhone: the Apple Newton, its predecessor, was a big gamble that went completely wrong. After that, when Steve Jobs returned to the company, instead of going straight to Newton 2.0 he broke the journey into small steps by first showing how design combined with technology in the iMacs G3, then how the user experience and ecosystem could capture even competitive markets like those of MP3 with the iPod and iTunes, and finally how touchscreen could replace keys on the iPhone. And even the iPhone 1.0 was still a fragile piece with a bad screen, which only got better with time.
In conclusion, there are different ways to build a portfolio of bold ideas. But it doesn’t matter if it’s breaking big ideas into small simultaneous or sequential bets, the most critical thing is to invest in your ideas, demonstrate in a practical way when the majority’s thinking is wrong, and capture the success when it happens.
