How to Be Luckier: The Black Swan Effect

how-to-be-luckier

Ask any billionaire, global leader, or professional athlete, and they’ll admit that luck played a key factor to their success.

Sure they increased their luck by being naturally talented, training obsessively, and burning the midnight oil, but so did thousands of others that never saw the spotlight.

Thousands of actors in Hollywood could’ve played the role of Han Solo. But Harrison Ford did because a young director named George Lucas hired him to install cabinets in his home. Microsoft would not be here today if Bill Gates did not have parents in the financial position to give him early (and nearly exclusive) access to the computers at Lakeside.

Talent and hardwork was the requirement, not the tipping point.

Certain luck we’re fortunate to be born into. Born into a wealthy and connected family, born in a developed nation, or just born healthy and sound. But what if we can strategically position ourselves to be luckier moving forward?

This is where the ‘Black Swan’ comes in.

 

The First Black Swan

In the late 17th century, a Dutch explorer became the first explorer to discover a ‘black’ swan in Western Australia. Today, a three-second Google search will spit out endless photos of black swans, but the presumption in those days was that all swans are white.

black-swan

Similar to when we realized that the Earth was round, and (hopefully) when we can become a multi-planet civilization, it redefined historical records and presumptions forever.

In his book, The Black SwanNassim Nicholas Taleb defines a black swan event as having three attributes:

  1. It’s an outlier
  2. It has an extreme impact
  3. Humans find a way to provide retrospective explanations on the event (hindsight bias)

black-swan

Examples of black swan events in our history (for better or worse) include: WWI, the Internet, 9/11, personal computers, and the 2008 crisis.

 

Introducing Positive Black Swans

Despite negative connotations, black swans can also be incredibly positive (even life-changing) if approached strategically. Making a clear distinction between positive and negative contingencies is vital because both outcomes have an extreme impact on your life.

Scalable vs. Non-scalable Domains

Non-scalable domains are opportunities that offer very little or no chances of uncapped upside.

Take for example a salaried employee. The downside is capped (and fairly safe), since they’re receiving a steady paycheck. But so is their upside. Your boss is unlikely to come to you and say, “Hey! You’re getting a 10,000%+ raise this week!”

The same logic applies to freelancers, consultants, doctors, lawyers, accountants, etc.. You may be able to charge more per hour, but there’s only so many hours in the day you can work.

Non-scalable domains include:

  • Income (salaried, freelancer)
  • Factory output
  • Offering services

Then there’s scalable domains, where there’s no linear relationship between time and success. You could put a ton of time in and fail (as many do), but you could also reap continued success (ex. money) without increasing labor/time.

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” -Warren Buffett

Samuel L. Jackson acted in (the legendary) Pulp Fiction movie twenty years ago, but he doesn’t have to appear at every screening to earn his royalties. As an author, you only have to write a book once, and your effort remains equal whether you sell 100,000 copies or 10 copies. If Oprah picked up your book tomorrow, your income can increase by 1,000%+ in minutes.

Scalable domains include:

  • Building a product/website (i.e. software, online courses)
  • Investing in high-growth startups (i.e. accelerators, venture capitalists)
  • Authors (in some segments)
  • Musicians
  • Artists
  • Number of followers/Website visitors
  • This blog
  • Company valuations

When the value you deliver is not linearly tied down to the time you’re required to put in, you put yourself in a position with massive good luck. If your success is tied down to the number of hours worked, you’re significantly limiting yourself to positive luck exposure.

A strategic framework to put this into action is…

The Barbell Strategy

The barbell strategy is a practical way to allocate your resources to maximize upside opportunities with minimal downside.

Take investing for example. When it comes to allocating our portfolio, the majority of us are mildly aggressive or fairly conservative. We place our savings into an index fund (i.e. Vanguard), bonds, and/or in cash.

However, if we accept (or are at least open-minded) that most risk measures are flawed and vulnerable, then your strategy is to be hyper conservative and hyper aggressive instead. In this strategy, if you lose, you lose small (5-15%). But when you win, the upside is limitless (life-changing).

barbell-strategy

When J.K Rowling was on welfare in Edinburgh, she had no idea that Harry Potter would put her in the billionaire list. Every statistic was against her succeeding. But it didn’t matter because the downside risks were so minimal for her.

This is what Taleb calls losing small to make it big.

*Fun fact: If you watched the movie, The Big Short, this low probability, high payoff strategy is how these cats turned $100,000 into millions.

big-short

Figure out your own ratio

Your hyper aggressive vehicles and its respective ratio should be something you decide on your own based on your risk-tolerance, skillsets, passion, etc. (read about Warren Buffett’s ‘Circle of Competency’ Theory).

“I’m no genius. I’m smart in spots—but I stay around those spots.”
-Tom Watson Sr., Founder of IBM

If you’re in your early twenties, taking more bets in scalable domains (higher risk) may make sense since you’ve got time, and no dependents (at least most of us). But you may want to expand your conservative portfolio as you grow older. This is why some people suggest starting a business, traveling the world, or living in metropolitan cities when you’re younger.

What’s important to remember is to diversify your ‘hyper aggressive’ portfolio with multiple bets (the more the better). The chances of hitting a homerun is so unlikely and unpredictable that you wouldn’t want to put all of your eggs in one basket.

This is typical of a venture capital portfolio where they expect 6 out of 10 businesses to fail, 3 out of 10 to offer average returns, but 1 out of 10 to bring massive returns that makes up for all the losses plus the uncapped upside.

“We’re in a business where we need to pick unpromising-looking outliers, and the huge scale of the successes means we can afford to spread our net very widely.”
-Paul Graham, Founder of YCombinator

One of my mentors, Brian Cohen, the first investor of Pinterest, allocates a small percentage of his portfolio into angel investing — a field he’s well-experienced in — and the rest in safe investments like real estate, bonds, etc. But he makes sure to continue making many small bets to diversify his angel investments.

 

How to maximize exposure to life-changing events

If this post piqued your curiosity, here are some practical steps to become ‘luckier’ in catching positive black swans.

 

1. Practice being an extremist instead of playing in the middle

This part isn’t easy. I grew up in a conservative South Korean family, where taking the safe career path (i.e. doctor, lawyer, accountant) was put on a pedestal. It’s basically re-training your brain to think differently.

“To succeed in a domain that violates your intuitions, you need to be able to turn them off the way a pilot does when flying through clouds. You need to do what you know intellectually to be right, even though it feels wrong.”
-Paul Graham

You can practice applying this extremist framework by extending the barbell strategy in other parts of your life including:

  • Health & Fitness:
    • Maintain a clean, healthy diet during the week, and have one cheat day
    • Lift incredibly heavy weights one day, and take long, relaxing walks
  • Work-life balance:
    • Have periods in your life where you work extremely hard, and periods when you’re resting/reflecting (work hard, rest hard)
      • Example: Entrepreneur life
  • Pricing your products/services:
    • Go free and extremely premium
      • Example: Offer immense value for free (i.e. content marketing/free consultation) and leverage brand equity to charge premium speaking fees, consulting gigs, brand deals, etc. 
  • Business experiments:
    • Continue investing resources into channels that are already working, but spend 10-20% of resources on radical experiments
  • Relationships:
    • Maintain relationships with your core network, but spend time networking at events and reaching out to high profile mentors (even cold-calling)

 

2. Start exposing yourself into scalable domains and opportunities

In summary: put yourself into situations where favorable outcomes are much higher than unfavorable outcomes.

This could mean…

  • Living in metropolitan hubs and going to more networking parties
  • Reaching up to high profile mentors
  • Seizing any opportunity that comes your way
  • Allocating your 5 to 9pm to start a side hustle, write a book, build an audience

 

3. Protect the downside

This may be the most important step.

If you’re an investor, it could mean allocating the majority of your portfolio in safe vehicles like cash or Treasury bonds. If you’re planning a new project or business, plan for the worst case scenario (not the optimal). Or for aspiring entrepreneurs, it could mean keeping your day job and using the cash flow to fund yourself as you build your side hustle.

 

4. Diversify your hyper aggressive bets by making more of them

Black swans — positive or negative — are nearly impossible to predict. This means you never know which opportunity and bet will be your winner. Taleb goes as far to mention that trying to predict swans only makes you more vulnerable to the ones you did not predict.

“You do not look for something particular every morning but work hard to let contingency enter your working life.”

If we acknowledge that a few unexpected bets will outperform others (i.e. 80/20 rule), it should encourage us to keep persistently taking bets (despite previous failures) to maximize our exposure to good luck. For writers, it means to keep putting out work because that next post or script could be your big hit. For entrepreneurs, it means to continuously experimenting because one feature, product or marketing channel can 10-100x your business.

Grit and hard work does correlate to getting ‘luckier’.


 

So is hunting black swans (+) for you?

It depends. You have to know what your risk tolerance is, and what your end goals are.

“A scalable profession is good only if you are successful; they are more competitive, produce monstrous inequalities, and are far more random with huge disparities between efforts and rewards — a few can take a large share of the pie, leaving others out entirely at no fault of their own.” -Nassim Nicholas Taleb

Not everybody is meant to leave their stable jobs, start a high-growth business and raise millions of dollars from Venture Capitalists. Nor should they, because with high luck exposure, comes high risk of failure.

There’s plenty of starving entrepreneurs, comedians, novelists, and even venture capitalists that don’t provide a return. Even the creators of Angry Bird had 51 failed apps before stumbling into their winner.

Although the media loves to talk about the outliers who won big, they fail to talk about the 99% of those that never made it. In the realm of scalable opportunities, you’re playing in a winner-takes-all arena, where most of the benefits are aggregated by a small number of winners.

That said, applying practical frameworks like ‘The Barbell Strategy’ can expose you to massive good luck with minimal downside. At the very least, it will open your mind to a different way of making decisions whenever an opportunity comes your way.

Keep it simple, and remember that creating life-changing luck in your life often takes the same amount of time and effort as creating mediocre ones. It just requires thinking differently.

Hope this was useful, and best of ‘luck’!

 

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