# Why There Is No Downside In Going For It: A Practical Guide – James Tayler – MicroConf Starter 2018

Channel: Rob Walling
Video: https://www.youtube.com/watch?v=SdQdAdutx6c
Duration: 11 min
Language: English
Words: 1852
Transcript page: https://viewrankai.com/tools/youtube-transcript/SdQdAdutx6c

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[0:00] [Music]

[0:07] [Music]

[0:15] hello micro calm how're y'all doing good so Las Vegas baby yeah kind of a weirdly appropriate place to get up and give a talk about risk and probability and emotion so my name's James Taylor and over the last two years I've taken a couple of risks so I made $100,000 after-tax profit betting 20k on Bitcoin I've turned down the opportunity to buy a sushi business thus avoiding a $250,000 lawsuit and I've recently quit my job to go indie hacking full-time for one year so during that time I've developed a framework for dealing with risk and I want to share with you guys today so the first thing we're gonna do

[0:55] is get into the emotional foundation of it and we're going to go cover the logical foundation of it so the first thing you notice about taking a risk is that it feels horrible our bodies produce a very strong physiological response to this and this is because our brains grew up in a time that we no longer live in so your fear of failure is actually your fear of getting eaten by a lion we risk resources and reputation for a reward and because we grew up living in limited size social dominance hierarchies of about 150 people weirdly you actually feel really famous and like if you screw up everyone in the

[1:31] tribe which is everyone ever is gonna know about it and you'll never get another girlfriend again because they're all gonna know how much you suck so allow me to share with you my most painful story and in the hope so that kind of sets you free because whatever fail you have it'll never be as epic as this when I was 20 years old 10 years ago I had a friend and he had an idea I had no job no education and frankly no hope but I had a little bit of money and so my friend convinced me to become an investor investors make money I thought

[2:04] my problems were solved hooray so I became a founder in this venture well my only contribution was money my co-founders contribution was the idea and our other co-founders contribution was literally not showing up to meetings because it was better when he wasn't there and so I spent about $30,000 outsourcing to development on which was a third of my net worth at the time on rate my spoon comm which was the only the world's own one and only social photo sharing service dedicated to taking pictures with random strangers in random places whilst spooning yes the idea is that freaking dumb and what did people think of me because I failed of course

[2:52] but you know they didn't think anything they didn't even bat an eyelid you know I didn't die so if in fact my life is 10x better than it was at the time my prospects are better than ever and I got the girl so take it from me if you want to come out of a risk emotionally unscathed it's wise to do the following three things number one assume a hundred percent of the downside risk will go to zero and only make bets that you're comfortable or at least you can still feel like you can walk away from number two reason through the first second and third-order consequences on a

[3:29] 20 to 30 year macro of what you're about to do to get the wider context and number three understand that your ancient psychology is messing with you you're not actually going to die and in reality nothing's really that scary so let's move on to the logical foundation of risk when I started my software career a couple years back the best advice I got online was two words learn business so it did I went out and I got the reality TV MBA I watched Shark Tank Dragon's Den the Prophet you name it all of it and actually it saved me a lot of money so a couple years ago my wife and

[4:07] I were evaluating buying a sushi business so we went with many brokers and we evaluated many businesses and turns out the nightmares from CNBC's the profit are not reality TV they really reflect reality none of these businesses knew the numbers and importantly none of them could show us the books so we had no way to evaluate objectively what we would be buying and every time it I would ask a broker what is food cost for this business they would say well industry average is about the five percent I would say no what is food cost for this business and they could never answer so we didn't buy a sushi

[4:44] business and I was telling this story to a friend of mine recently and he said you know I know a guy that did and he's currently suing the guy for about 250 grand because the business performed nothing like what the broker said hmm so huh hands up how many people agree with this statement 50% of businesses will fail within the first five years who's ever heard that like right but how many of you agree that the figures are the exact same for a serial entrepreneur with successful exits on their fourth or fifth business they're probably not right they probably have better odds why well let's get into it so risk has two

[5:25] dimensions we need to think about upside and downside if you work a nine-to-five job the downside risk is that is nothing you're not losing anything from doing that but your up side is capped at the salary and benefits you and the employer agree on conversely if you go out on a business venture it's the opposite your downside risk is capped at the capital you put in in the opportunity costs of money you could earn by doing other things but your upside is not it it's all the money you could possibly make on that venture which might be significantly more but how do we know this is gonna work we we don't right

[5:57] there's a little bit of uncertainty there so what can we do to address this uncertainty well in information theory information can be defined as a reduction in uncertainty also an information theory there's this concept of mutual information so the mutual information of x and y is the reduction in uncertainty of Y given that you know X and this is stunningly important because in business there are many unknown unknowns things we cannot directly know or study however we can still reduce the risk of these unknown unknowns through the mutual information we can gain by directly studying related things like all of these topics that relate to business and so moving on to

[6:38] probability theory base theorem is basically a tool that allows us to guesstimate probabilities based on very little data and how it works is you take an initial guess and if you don't know call it 50/50 and then as new information comes in you revise the probability based on where it's currently at either upwards or downwards and how far depends on how you weight that information so as we're getting all this information we don't necessarily have to do the math but intuitively this is working in the background to help us revise these probabilities and kind of course correct for what we're doing but it becomes an extremely powerful framework for

[7:13] thinking about risk when we couple it with expected value theory so to do an expected value calculation you take the total upside you stand to gain and times it by the probability minus out what it would cost to pursue that venture and you have to pay that cost regardless of whether you succeed or not right that's your expected value so extremely simple case million-dollar upside 25% chance it works out what's it cost you nothing that would be $250,000 positive expected value brilliant however in a more realistic case it kind of gets a bit complicated it's sort of kind of into counterintuitive so if it's a million-dollar upside with a 25% chance

[7:51] but it costs you $100,000 regardless of whether you succeed or fail then in actuality it's 75% of the time you're gonna walk away - $100,000 so it doesn't feel like the right thing to do however the math says that long-term if you keep taking this bet over and over again you will come out 150,000 dollars ahead mathematically speaking it's the correct move how this all hinges though on the accuracy of that probability so herein lies the rub what we can do is to reduce the unknown unknowns risk is to gain you use this as sort of a feedback loop and that by going wide and deep on any and

[8:36] all topics related to business we can reduce our uncertainty and intuitively deploy Bayes theorem to revise our probabilities up and downwards to continue to get those estimates to be more and more accurate and this has a material impact on our expected value calculations which then in turn inform which course of action we should take to execute on our dreams so to illustrate this point what say on your million dollar opportunity you get a piece of information that comes and you think wait a minute that's not 25% I think this is more like 40% chance that this works out now your expected value calculation winds up at

[9:17] $300,000 evie positive even better we should definitely do this but conversely what's a some new information comes in and we think actually I only think this has about an 9 percent chance that this works out well now you take a million dollars what's nine percent of that it's 90 grand - out the hundred thousand that would cost you to pursue this and now you've got negative expected value from - ten thousand dollars guys you really should never ever take that bet so I have an insane level of confidence that every single one of us in this room with this strategy can win at our dreams and

[10:01] I want to leave you with a thought experiment that inspired this level of confidence in me and hopefully that has an impact on you so what if every single week you read a new nonfiction book or you know watch one of these talks or come to a conference like Micro Kampf on you know so get it this information about these business and you talked to customers and potential customers every day about their needs and their problems you continue to always ship products and you keep meeting credible and connected people and what if you could do that for 300 years what do you think that would do for your future and your chances and

[10:44] that my friends is why there is no downside and going for it [Applause] you

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