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Bet on Red AND Black
Black Swans and Innovation
It’s really hard to predict the future. Will the market go up or down? Will we get global warming or a new ice age? Will AI take over the world or fizzle out? Successful product innovation often relies on understanding and predicting future trends. This can feel like gambling everything on nothing more than a guess or a hope. But don’t worry, there IS a method to the madness.
Isn’t gambling bad?
The only constant is change. Nassim Taleb coined the the “black swan” to describe unexpected events that have a profound impact and showed that while each black swan was unpredictable, historically, a steady stream of black swans was reliably predictable. In an increasingly fast moving world fueled by tech, NOT gambling on some change in the future is a losing deal. But is there a way to choose winners? A casino can’t choose winners any better than a monkey, and yet casino’s are one of the most profitable businesses that have ever existed. Why is it that “the house always wins”? They structure the odds, so that in the long run, they will always come out on top, and so can you.
Here are two ways to bet on multiple outcomes and come out on top no matter what happens.
Path 1: Recession proofing
Scenario planning is the process of making assumptions about the future, and then thinking through the impact of that scenario on your product or industry. For instance, if gas prices go up drastically, then demand for Electric Vehicles will rise. Transportation will get more expensive and people overall will travel less as well.
On the other hand, if gas prices drop drastically, then the price of foreign goods will stay cheap. Is there something that can benefit in both cases? Online shopping may rise if gas prices rise as going to the store gets more expensive. But online shopping may also rise if gas prices drop as this makes foreign goods cheaper, and online retailers can entice shoppers with a large variety of cheap goods. In this case, innovations in online shopping would be “recession proof” in that it does well in both scenarios.
Path 2: Bet on Both
It is, however, very difficult to find areas for innovation that will do well in ALL scenarios, especially given the complexity of our current environment. But luckily, the outsized “pot odds” can make betting on multiple horses a good strategy.
In poker, “pot odds” refer to the ratio of the amount of money in the pot compared to the amount of money required to call a bet. Pot odds are used to help players determine whether they should make a call based on the likelihood of winning the hand.
For example, if there is $100 in the pot and your opponent bets $20 (and you would have to match it to play), the pot odds are 5:1 ($100 in the pot divided by the $20 bet). This means that you would need to win the hand at least 1 out of 5 times (20%) to make a profitable call.
In regular life, the concept of pot odds can also be applied to decision-making. For example, let's say you are considering investing in a new business venture. You would need to weigh the potential rewards (the "pot") against the amount of money and resources required to invest (the "bet").
In today’s global economy, “the pot” for something new (like NFT’s) can be billions of dollars, making the pot odds for an investment in innovation (such as an NFT marketplace) rather high. Venture capital generally invests in companies with at least 10:1 pot odds. This allows them to invest in companies that profit in opposing future scenarios. The win from one will easily cover the loss from the other. In your own product planning, it may also make sense to bet on multiple futures as long as those investments have high pot odds. No matter what happens, you win.
So the next time you are struggling to predict the future and aren’t sure if your gamble will pay off, approach the problem through scenario planning. Recession proof your product or calculate the pot odds and place multiple bets. Then rest easy knowing that you can succeed no matter what happens.