Risk

For a dying man it is not a difficult decision [to agree to become the world's first heart transplant] ... because he knows he is at the end. If a lion chases you to the bank of a river filled with crocodiles, you will leap into the water convinced you have a chance to swim to the other side. But you would not accept such odds if there were no lion.



— Christiaan Barnard



Scientists suffer from an unfair reputation in America. They are considered to lack instinctual savvy. For this reason, nearly every physicist I know is deeply offended by the stereotypical characters in the CBS sitcom “The Big Bang Theory.” They are socially awkward and tend to quantify even the most banal details of life. What my colleagues miss about “The Big Bang Theory” though, is that hidden underneath all of the silliness these characters possess something that is unique, and apparently rather attractive about scientists. After all, even the Asbergian self-centered Sheldon is likeable , I actually think that there is something about the geekiness of “The Big Bang Theory” that is every bit as attractive as the coolness of the “Sex in The City” ladies. Though this is certainly a project for sociologists and not me, I have a hypothesis regarding television likeability and culture. I think that somehow we know that the common perception of cool is not really all that important, or even interesting. This is a significant, even if unconscious, realization for modern television viewers, because common wisdom takes a long time to become common. It is also interesting because it gives a defense for seeing the Universe and ourselves differently. In essence we think that everything Sheldon does is not intuitive. He is a classic clown in this way. He humiliates himself by creating friendship surveys so that he can create a mathematical model to see who would best qualify as a friend. Our instincts are the opposite of this. We become friends with people because they are attractive in some, sometimes superficial, way. They make us laugh, or they are handsome, or they are somehow dynamic in a way that we wish we were. For anyone who has had friends they ended up hating, or has been married and divorced, human instincts are exceptionally bad.

This is one area where a geeky physicist may have some insight on business that is different than everyone else. Physicists are used to the facts being different than the way they feel. The Copernican revolution is one of the first examples of this: it doesn’t feel right that the earth rotates around the sun. This is even truer of 20th century physics. Our instincts are absolutely insufficient to understand Einstein. General Relativity, with warped space-time, just isn’t in our normal arsenal of instinctual survival skills. Quantum mechanics is even less intuitive, so much so that one of its discoverers, the Danish Nobel Laureate Neils Bohr famously said, “If quantum mechanics hasn't profoundly shocked you, you haven't understood it yet.” So to be a good physicist or scientist in general, it is important to be at least a little “Sheldonesque.” We must not trust our instincts, but instead investigate the truth. In facts and friendships we need to consider quantitative data, not just attraction.

A field of science which is relatively new is called “evolutionary biology”. You would think that this would have started just after Darwin’s “Origin of the Species” was published in 1859, but it wasn’t. That revolutionary book was so well written, that it debunked all of recorded history’s various religious interpretations of biology without being all that difficult to understand. In fact, when you read “Origin of Species” the first thing that comes to mind is “why did it take so long to realize this?” Darwin just observed and recorded nature for many years, and made a leap which was incredibly obvious in retrospect; that there is a relation between species and that certain traits and species survive because of natural selection. This was, of course, controversial for all of the obvious reasons as well. Religion is both very personal and very political. Even though what Darwin was doing was science, it did step on some sacred beliefs. Still, to most people who read the book it made sense. Theodore Roosevelt read it when he was 14 years old and for the rest of his life claimed it was the most important book ever written. It is easy to see that Roosevelt’s love of nature shaped his decisions as president, and much of that can be traced back to his admiration for Darwin. So because of its apparently intuitive qualities, Natural Selection could be taught in biology classes, without there being a separate branch of the discipline devoted to it.

The surprising thing is that as much as Natural Selection made sense, it really wasn’t as intuitive as expected. What made most sense to humans about evolution was not the centuries it takes for species to transform themselves. This is hard to visualize. Instead it was an idea that humans could only prosper through a conscious survival of the fittest. The term Social Darwinism was coined in 1944 by the historian Richard Hofstedter to reference some rather disturbing contemporary human behavior that was carried out with the excuse of Darwinian naturalism. The most obvious during Hofsteder’s time was the eugenics programs of the Nazis. The concept of superior races, and linking human survival to the elimination of the unfit seemed like an extension of Darwin’s work. In fact, Darwin’s own cousin, Francis Galton, was the founder of Eugenics at the end of the 19th Century.

It is only when you let go of this instinctual idea of survival of the fittest that you can really see the true scope of Evolutionary Biology. Genetic mutations are slow to occur, and happen because of natural means, but humans have removed themselves from the natural process. Technology, as wonderful as it is, is only 10,000 years old. Until that time there was not agriculture or architecture. There were no cities or writings. We call everything before this “prehistory,” because until that point history was not created by deliberate societal choices. Darwinism has been in progress since the beginning of life on earth, but social Darwinism exists only during those times we call “history”. Therefore most scientists feel that we as humans are effecting nature, while behaving as if they were outside of the natural process. This is not instinctual, and is not as easy as “Origin of The Species” initially seemed to be.

Social Darwinism is also evident when evaluating risk. The 2008 credit crisis and banking collapse can be seen in this light. The majority of the crisis was caused by misunderstanding risk. Was it riskier to give certain loans or not? Was it riskier to make certain credit swaps or not? There are two prevalent points of view about why this happened, and in such dramatic and drastic ways. Most people not working in finance see it as a case of greed. This viewpoint is an unconscious blaming of social Darwinism. It holds that the wealthy Wall Street Bankers wanted to be the strongest, therefore richest, so they pushed for larger profits at the expense of the weaker greater population. On the other hand, the banking industry blames poor financial modeling for the collapse. The claim has been that the models did not appropriately explain the risks associated with these transactions. Even the most famous economist and Federal Reserve chief of all time, Allen Greenspan, used this explanation saying “the models of finance that I have followed were not accurate in predicting this crisis”. When we look at these two explanations we see a huge contrast, while both ignore something that is probably more accurate. It was neither greed nor modeling alone that caused this. It was merely a deficiency in our ability to instinctually comprehend risk. The numbers were too big, our vision of history too limited, and our confidence too great. It seems that we were not as smart as we thought. Growth seemed inevitable. We thought that credit and finance in general were part of the evolutionary process, but in fact they were removed from it. Derivatives and credit default swaps just happened too fast for Natural Selection to catch up with them.

This applies also to the personal and professional risks associated with starting a technology company. The common wisdom on the risks of entrepreneurship are strangely opposed to the way we approach risk in our daily lives. Most people change their risk threshold based on how much money they have. When we have very little money we tend to risk all we have, because we feel there is not much to lose. This is why lottery lines are longest in poor neighborhoods, and why casinos are filled with people who can’t really afford to lose the money that they are gambling with. These people feel that the upside is much larger than the downside. It just feels right, but is completely wrong. The odds of a poor person winning the lottery are just as bad as the odds of a rich person winning the lottery, but the risks associated with the poor person playing are so much worse. This wrong instinct extends through the middle classes and even to the wealthy, not for lottery tickets but for ideas and the money it takes to pursue them. Someone who is worth 2 Billion Dollars is less likely to risk 1 Billion dollars on a single venture or idea, than someone worth $ 200,000 is to risk $100,000 Even though the billionaire may lose much more money he certainly is in better shape financially than the person who loses half of his $200,000 investment. Our instincts are just that bad.

Instinctively entrepreneurs often work by the motto “never spend your own money”. I have been told this many times, by everyone from the founder of Cirque Du Soleil, to the investor of the leveraged buyout concept in the 1980’s. These people have been undoubtedly following their instincts, and those instincts have made them a lot of money. The question I need to ask myself  is whether that would make me a lot of money too, and more importantly whether that would be the best thing for my company and the happiness. We have tended to answer no to that question. Seeking other people’s money presents a bigger risk for me than risking my own for reasons that seem completely unreasonable.

The main reason why technical entrepreneurs, like me and my family, may want to take relatively large risks compared to the Billionaire, but relatively small risks compared to the lottery addict is because it is a scale that we can relate to. There is an assumption that the risk taken is never so great that it will land us and our children on the street corner, but is none the less a risk that could alter our lifestyle. This is something a scientist can understand. A scientist knows he cannot appreciate in an instinctual way, those things which he cannot feel, and that further comprehension only comes through a deep knowledge of a subject. For a scientist starting a small company it isn’t always the most interesting use of his time to fully understand business, so he shouldn’t have to do it. The risk and reward factors change when this is considered. It becomes more risky to raise large sums of money because large sums of money may be out of the scientist/entrepreneur’s expertise. In order to gain that expertise he would have to sacrifice his true interests, which may very well be the riskiest choice of all.