Comment by cwal37 | Hacker News Reader

Comment by cwal37 | Hacker News Reader

I don't think black swan is an appropriate title. This investing is more like when a small group of people split a large powerball jackpot; statistically unlikely, but not really fitting the definition of a black swan (at least as proposed by Taleb).

His rules:

1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.

2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).

3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.

http://en.wikipedia.org/wiki/Black_swan_theory

On a related note, Antifragile is a fun read. Taleb is extremely sure of himself, and extremely passionate. His books and ideas (culminating in Antifragile) can be pretty seductive in the moment.

I like this. My favourite rubric in this area is "there are no Black Swans only Xmas Turkeys." I think that is similar to your view - that all the evidence we need to deduce an out come is available in front of us if we have the right model (human farmers are charitable to turkeys is a bad model, 23rd of December will not result in another free meal is a better model)

I am surprised that investing, especially with Mr Altmans connections and experience, is still a 1/8 crap shoot and that's with no IPOs / exits. It indicates that the model we hold for what the world will look like in 5,10,20 years is far far from complete.

I think that 1/8 sounds amazing actually, let's look at some totally theoretical and extremely simple numbers (basically all we can work with in this case without doing some significant legwork to try and sniff out the actual investments).

To keep it simple let's invest $100 in each of those 40 companies. He defines success as companies that have grown at least 100x over. We know 5 companies have hit that mark and know basically nothing about the other 35 that we'll just consider failures (even though they might only be 10x or 50x[a success in other areas for sure]).

Failed$ = ($100x)35 x is the multiplier on that money across all 35 companies. Perhaps he lost it all and it's 0, maybe it's slightly above 1, who knows. Regardless, in this totally mad eup case the total potential loss (ignoring potential to be invested elsewhere) is $3,500 or 87.5% of initial outlay.

The remainder using the simple information and interpretation available to us looks like this:

Success$ = ($100* 100) * 5 = $50,000

That is 12.5x the initial outlay of $4,000. Making 12.5x your outlay in presumably only a handful of years is massive. Obviously growth doesn't mean exactly 100X, but I just wanted to show that a handful of hits (and I think 5/40 is bigger than a handful) can easily pay for everything else and more.

Reread the article, this is only 2-3.5 years of duration. That seems insanely quick for these kinds of results.

Taleb's book is basically anti-science, in the sense that he's making a (good) case about the dubiousness of the epistemology underlying the scientific method. In the colloquial sense though a black swan has just come to mean an event that most people didn't expect.

I've only read Fooled by Randomness and The Black Swan, but those at least aren't anti-science at all. The argument is that in physics as our ability to measure the world goes up, so does our ability to accurately predict it to an extremely high degree of precision, and we've relied on this fact to build an expectation that the same is true of all sciences, and this is simply wrong, especially because it looks like any fault in prediction is just a flaw in measurements. As soon as we humans making our imperfect decisions enter the equation, a treacherous but inherent element of pure unpredictability appears and unless we temper our faith in our ability to predict the world through models, we stay prone to being surprised by black swans.

I think there's a difference from a Powerball jackpot. There, the upper limit is defined. Whereas there's no upper limits on Sam's investments.

They're perhaps not black swans in the sense that Sam is aware they may increase in value, but other than that they seem to match the criteria in a way that Powerball doesn't. Taleb has spoken specifically about how black swans are not lottery tickets because of this calculability.

The limit doesn't matter so much as striking it in the first place. Realistically, all of the mentioned investments are within the realm of reasonable thought. The presumption of a black swan is that it is completely outside the ability for one to rationally assess a system then predict it with decent success. 5/40 would be a phenomenally high success rate.

Lottery is totally not black swan, which is exactly what I was trying to say. Despite having prior knowledge of the company's situation (unlike a completely random lottery), it seems to me that these investments are closer to the lottery than black swan.

You don't place bets on a specific black swan, but you could place a different, outside bet on a disrupting event (kind of the idea of antifragile, benefiting from disorder). I think under Taleb's comments in Antifragile, living life as an artist as opposed to someone who is inherently reliant on the stability of say, an office job, is placing that bet every day.

I also misunderstood this

    It's more like when a small group of people split a large powerball jackpot

as

    [A Black Swan is] more like when a small group of people split a large powerball jackpot

Ahh, I see the confusion now, sorry. Thanks, edited for clarity.

Why is it even unusual for multiple people to split a large powerball? By definition: a large powerball means there's more tickets and thus more possible matches for the random draw.

Another minor point: there's gotta be dozens of people playing the Lost numbers, the Miami heat starting lineup, etc... every time, so there are natural clusters of group splitting jackpots for lotto winners .

I just said group because presumably he wasn't the only investor in those companies, so a group of people stand to profit. If he was the only investor I would have said individual. It's also meant to highlight the fact that multiple people are in on this, whereas an actual black swan event is something that tends to be much more difficult to predict or be a part of.

I would be amazed if someone could go 5/40 in predicting black swan events under their original definition.

I think the "group" here splitting the Powerball implied a group of people collectively owning/splitting a single winning ticket (such as an office, team, or family pooling money to buy a block of tickets) rather than more than one winning ticket splitting the jackpot.

Much like a group of investors investing in early stage companies.

The point is that is that you can precisely calculate the (negative) expectation value of investing in lottery tickets. Or even the expectation value of lottery tickets.

But you can't calculate the expectation value of startup investments. One outlier skews the whole sample, and there is no limit on how high.

Taleb explicitly placed startup investments as those that are antifragile.

> I think there's a difference from a Powerball jackpot. There, the upper limit is defined. Whereas there's no upper limits on Sam's investments.

Statistically, you can still define a finite expectation value for an unbounded probability distribution, just as you can compute a finite value for an infinite sum.

How does that work?

In the general case, you'd take whatever formulas you have for return rate and corresponding probability (e.g. exponentially lower chances of exponentially higher returns), and feed that into a definite integral from -infinity to infinity (0 to infinity in the case of a model like investment return rate where you theoretically can't lose more than you put in). Consider, for instance, that the area under a standard normal curve (like any probability distribution) is 1, yet that curve extends infinitely in both directions, and there's a non-zero chance of it producing an arbitrarily large value.

If you have a continuous analytic model, you can integrate that analytically (or for the various standard models, just look up the answer based on the parameterization). If you have a discrete analytic model (a step function), you can construct an infinite series. If you have a model based on discrete statistical samples and extrapolations thereof, you can use a combination of numeric integration/summing and model-based bounds.

So, even though the total possible return on a business venture is potentially unbounded, you can still establish a finite expectation value for it.

> Whereas there's no upper limits on Sam's investments.

There's no public company with a valuation above $1 trillion, so there's an implied upper limit in practical terms.

I don't follow your logic here. What rules do seed stage startups break when it comes to Black Swan theory?

It simply doesn't apply. A black swan is a rare event that is almost certain to happen (or at least one of them will) that will destroy vast amounts of wealth. Because they are so rare and it's so hard to predict which one will actually happen, people don't prepare for them so they do an incredible amount of damage to the financial system.

The idea is orthogonal to seed round investing.

It simply doesn't apply. A black swan is a rare event that is almost certain to happen (or at least one of them will) that will destroy vast amounts of wealth.

Black swan events are unpredictable and have enormous impact. Whether they're positive or negative is irrelevant. I'm reading the comments on this page and it seems many people are confused about the term. If you're interested in the connection to business and startups, check out this book: http://www.amazon.com/The-Black-Swan-Improbable-Robustness/d...

In the very first sentence of the book description, it defines a black swan event: "A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences."

It's used quite a bit to describe startup success. Paul Graham wrote about this in one of his essays as well. I think the term fits perfectly for this blog post.

It's true. I think so many of us assume black swans are negative because we first heard the term to describe the subprime mortgage mess.

The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).

Success rate is computed and regularly measured by VCs. Otherwise rule of thumbs like 7/2/1 (On average 7 startups will just fail outright, 2 might make your money back, 1 will make you a profit) wouldn't exist.

Almost by definition, if it were a black swan, you couldn't hit 5/40 no matter how good or lucky you were.

I think that would make Sam Altman a really good seed investor. If you're looking at the odds of a startup succeeding big in general, it's way lower than 5/40.

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