Tuesday, May 21, 2013

Angels Beware: The world of venture-backed innovation only rewards people for taking irrational gambles.

The whole world of venture-backed innovation is structured to reward people who take irrational gambles. In fact, you can argue that technological and economic disruptions of the sort that the tech ecosystem celebrates only come from people who display delusional levels of self-confidence and risk-taking. If every entrepreneur and investor were to read Daniel Kahneman’s book, Thinking, Fast and Slow, and become fully cognizant of the flaws in their thinking and the statistical realities they’re up against, Silicon Valley would have to put out a permanent “Gone Fishing” sign.

By the same token, if the people who donate money to startups on Kickstarter and buy Fitbits and Pebble watches and iPhones were to lose the conviction that each new gadget will make them incrementally happier, there’d be nobody to pave the way for wider adoption—and many genuinely worthy technologies might never see the light of day.

Kahneman himself seems to be aware of the contradictions. “I believe that someone who lacks a delusional sense of significance will wilt in the face of repeated experiences of multiple small failures and rare successes,” he writes. So the answer to the paradox may be that there are sectors of the economy where bias is not just desirable, but indispensable. Entrepreneurs are delusional. They’re looking at examples like Larry Page and Sergey Brin and Mark Zuckerberg and Kevin Systrom (Instagram’s founder) and—like buyers of Powerball tickets—fixating on a hyper-optimistic scenario in which they’re just as lucky.

But you know what? God bless ‘em all for for their obvious overconfidence. If the traitorous eight engineers hadn’t had the pluck to leave good jobs at Shockley Semiconductor Laboratory in 1957 to start Fairchild Semiconductor, hundreds of subsequent Fairchild spinoffs, including Intel and AMD, would never have been formed—and Silicon Valley as we know it would not exist. And if today’s young entrepreneurs weren’t taking equivalent gambles with their careers, we tech journalists wouldn’t have anything to write about.

As T.S. Eliot wrote, “Only those who will risk going too far can possibly find out how far it is possible to go.” Kahneman and the behavioral economists didn’t need to prove that humans are irrational: the tech world did that long ago.

Alas, we wish we had written the six paragraphs above, but we have copied them almost intact (and with permission) from a recent post by Wade Roush in his XconomyBlog.

Roush was reviewing   Thinking, Fast and Slow the career-capping book by Princeton psychologist Daniel Kahneman, one of the founders of behavioral economics.  This book spent months on all the bestseller lists back in 2011, but Roush only picked up a paperback copy a couple of weeks ago.  His full review is timely, excellent reading, and very much related to current Angel investing.

Roush is one of the very few journalists and bloggers in our field who is a pleasure to read, mixing clear and concise prose covering a broad scope, interspersed with historical and classical references, while maintaining an underling playfulness.  Had we the skill, we ourselves would imitate him, but suspect that we can make more money if, eschewing Eliot, we followed  Merle Haggard,  imitating Marty Robbins, Hank Snow, Buck Owens, and Johnny Cash as seen in this classical and historical YouTube video.

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