Great decisions can lead to great outcomes. But under conditions of uncertainty, great outcomes can’t be guaranteed. Great decisions can lead to terrible outcomes.
Terrible decisions, on the other hand, can lead to terrible outcomes. But under conditions of uncertainty, they can sometimes lead to great outcomes.
Because of this, I’m always cautious to judge a decision based on its outcome. You need to look on the quality of the decision. The quality of the decision shouldn’t be judged on its outcome so much as the information available at the time.
This extends to a broader point, illustrated very clearly by Phil Rosenzweig in his terrific book, The Halo Effect. In the following excerpt think of the terms “Hedgehogs” and “Foxes” as labels for two types of people using very different betting strategies:
Imagine that a thousand people spend the day betting at the racetrack, and at the end of the day we select the ten betters with the highest winnings – we’ll call them our Great betters.
When we look closely at those most successful betters, we’re likely to find that all of them placed big bets on long shots – that’s how they came out ahead of the other 990. They were Hedgehogs…
Very few Foxes [on the other hand] will be among the top ten, because Foxes tend to diversify their positions.
Yet even if the top ten betters were all Hedgehogs, it does not follow that Hedgehogs, on average, outperformed Foxes, because some Hedgehogs may have done very well but many more may have gone home broke.
In fact, overall Foxes probably did better than Hedgehogs – they took more prudent risks and avoided big losses.
[Formatting and emphasis added.]
This blog is made possible by Fairhaven Wealth, my independent, fixed-fee, advice-only financial advice business.
(Rosenzweig is using the terms “hedgehogs” and “foxes” as part of a broader point originating from Isaiah Berlin’s essay “The Hedgehog and the Fox”, and often discussed in the context of Philip Tetlock’s work relating to expert judgement and forecasting ability. However, for the purpose of this article think of it simply as categorising two sets of people: “hedgehogs”, who take big bets, and “foxes” who take diversified bets. ANYWAY…)
To illustrate really crudely, let’s take a sample of 10 people, 5 of whom are “hedgehogs” (red) and 5 of whom are “foxes” (green).
As you see, the biggest gain is achieved by a hedgehog. But by far, the biggest losses are “achieved” by hedgehogs. I don’t know about you, but I’d rather be someone from the green camp than someone from the red camp. Especially if I didn’t know ahead of time whether luck is going to be on my side or against me.
There’s a really big and profound point here. If we’re going to focus on the “most successful” people in a given domain, there’s a good chance they are likely to be “hedgehogs” rather than “foxes”. There’s a good chance that they got where they are not because they made decisions but because they took big bets and were lucky. We might not want to emulate them.
There’s a degree to which this breaks down, because being super successful is the cumulative result of a lot of decisions, some of which may be big bets, but many of which are well informed. I suspect that Bill Gates and Warren Buffett would have been pretty successful in any case. And as much as I’m not fond of him, Steve Jobs made most of his billions through Pixar, not Apple. (Although of course, Apple made it possible.)
But other entrepreneurs that are widely celebrated? I have my reservations. After reading Richard Branson’s Losing My Virginity, my sense was that more than anything, he’s a very lucky man. Maybe he’s done a good job of consolidating on his original success. But my suspicion is that for every successful Richard Branson, there are thousands of failed people just like him.