Lessons from the Small Bets Cohort (Part 1/6)

I just finished attending Daniel Vassallo’s final live “A Portfolio of Small Bets” cohort. I’m glad I got into this last one because it was fuII of valuable mental models and concrete strategies to apply them.

In order to “lock in” my learnings from it, I’ll write my takeaways on each of the 6 sections of the cohort, starting with the first one:

The Role of Randomness

Right out the gate, Daniel dropped a bomb on me.

The world I thought I knew is actually split into 2 very different worlds: the predictable world, and the stochastic world (stochastic means random, unpredictable)

Everything I’ve learned since childhood has equipped me with strategies for success in the predictable world.

But if I try and use those same strategies in the stochastic world, I’ll be ill-equipped. That world operates so differently that it demands a different approach.

It all makes sense now

The “predictable word vs. stochastic world” mental model fascinated me because it explains a lot.

For years I’ve laughed at how I can reliably make 6 figures working as a full-time developer, but don’t even know if I’ll make 6 dollars on a side project.

I’ve taken it as a sign that building your own thing is just that much harder, and that I simply needed to improve my skills and keep trying.

As far as randomness was concerned, I pretty much dismissed it.

“It would be nice if I get lucky, but it’s out of my control. The best I can do is I try my best for as long as I can, and hope it works out eventually.”

And while that may seem true, according to Daniel’s framing, randomness is so disproportionately important in the stochastic world that dismissing it is the worst thing you can do. You should base your whole strategy around it.

But how can you even make a strategy around randomness?

“Taming” randomness

Daniel always uses this phrase: “taming”. It makes me think of taming nature - a big undertaking, but something humanity has certainly proven is doable.

We don’t have complete control, of course. Tiger-trainers still get eaten by tigers.

But generally, humanity has succeeded in mellowing out nature’s rough edges so much that our relationship with nature is very predictable most of the time.

And that’s what certain operators in the stochastic world have done. For example, book publishers, venture capitalists, and movie studios can operate with consistent success in the stochastic world.

Daniel showed a line chart of a major book publisher’s yearly profits. Bearing in mind that book publishing is very unpredictable and random, you’d expect that chart to reflect the randomness of the industry.

But it was as stable as any other business that operates successfully in the predictable world.

They’d managed to tame randomness, and if we use some of their strategies, maybe we can too.

More to come in the next post.

I might send a newsletter sometime.