Black Swans and Business

My very talented artistic brother (if you need artwork, video production, computer graphics contact him) sent me this Fortune interview with Jeff Bezos, founder of Amazon.com.

In it, Bezos expresses something that many business managers and many people do not understand.  It’s about setting your company up to benefit from Nassim Taleb’s idea of black swans, or highly improbable events.

Fortune: In the past, you’ve said that a company learns just as much as by its failures as it does by its successes. Do you still believe that?

Bezos: Well, the key is that the company has to experiment, and what you want to try and do is reduce the cost of experimentation so you can do as many experiments per unit time as possible so you can do as many experiments per week, per month, per year as you can –and they’re not experiments if you know they’re going to work.

So you want to do a lot of these experiments, and many of them will fail, and that’s okay. Because if you’re doing enough of them, there will be some winners. That’s the only mindset you can have if you want to invent. At Amazon, we’re very focused on invention.

Bezos understands that much of business success and failure is luck.

That’s difficult for smart people to believe.  They believe their input causes success.  These people under appreciate how much of their past success and failure was due to luck. Sometimes their input helps improve the chances of success, but luck is still a key factor.

The lesson isn’t to give up and stop trying because luck plays such a big role.  The lesson isn’t even that inputs don’t matter.  They do matter, a lot.

The lesson is to understand that even the best inputs doesn’t guarantee success.  Try as much as possible to improve your odds by trying.

I’m always amazed when I go to talent hubs like L.A., Miami and Nashville to see the quality of talent performing on the street or in the airport.  These people often sound as good and look as good as the celebrities we know and love.  Why haven’t they succeeded?  They haven’t got their big break yet.  Luck.

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2 thoughts on “Black Swans and Business

  1. I like that portion of the interview that you cited above quite a bit and I’ve been thinking about it frequently over the last several days, especially in contrast with the entrepeneurial designs I harbor in the back of my head.

    A stat I’ve heard a lot over the years is some variation of “80% of new business fail within 5 years”. Are that many of the most proactive people in the country (I say proactive because I think of that as a top personality trait for an entrepenuer) that bad at gauging the marketplace? How many of that 80% actually DID build a better mousetrap, but because of poor marketing, contacts, timing, etc. failed as a business owner?

    That one statement from Bezos has become a real perspective changer for me. In retrospect it should have been obvious, if you are trying 20 ideas instead of 1 you’re more likely to have 1 of them hit. If you can keep the average cost of those ideas down then we start seeing significant returns for those that do hit. It’s the same principle we use when diversifying portfolios – minimize risk by spreading it among different assets (or in this case, ideas).

    I always think that people with “sales” type traits do the best as entrepenuers. Reconciling that with Bezos’ statement, it’s probably because those same traits cause them to try things different ways and reach out to a lot of different resources in order to achieve their desired result(s). That approach naturally diversifies their small business.

    • Great insight Brian. Successful people may try more things than those who aren’t, even within their one business. We tend to see all of those trials as one attempt since the one successful business is the outcome we see.

      That also ties into something my brother and I discussed when he showed me this article. We tend to mistake success, be they business or things like celebrity, as overnight successes but many (not all) are really the outcome of many trials. Successful comedians say they had to pay their dues (which means many nights where they bombed). Celebrities had to face rejection after rejection before they got their break, and still have to face bombs after they get their break.

      It seems some people know they’re going to fail and they don’t get worked up about it. They keep trying. They are more likely to eventually hit on something. Others stop trying when they fail.

      To tie back to Bezos I suppose the cost of trial when you’re 23 years old in Hollywood or on the comedy circuit is low.

      My brother said that the successes tend to come from those who keep trying because a) they get better as they keep trying and failing and b) they improve their chances of hitting the black swan the longer they stay at it.

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