Cognitive Biases, Positive Black Swan Events and Startups
Success and Cognitive Bias
One thing that often strikes me about conversations regarding start-up success is the pervasiveness of the narrative fallacy and hindsight bias.
We can go to Wikipedia's entry on Taleb for a definition:
Narrative fallacy: creating a story post-hoc so that an event will seem to have an identifiable cause.
Allow me to illustrate. What caused YouTube to grow at phenomenal rates in 2005/2006, eventually leading to a $1.65 billion acquisition by Google in 2006?
Was the cause:
a) YouTube had a better UI/UX than their competitors?
b) YouTube, at the time, decided to largely ignore blatant copyright violations (unlike their competitors)?
c) the External Player and the viral widget-ization of their platform? (Obvious, right? We'll come back to this in a moment.)
d) YouTube was simply in the right place at the right time? (Growing popularity of social networking, ubiquity of broadband)
e) YouTube made novel and smart technology choices by adopting Flash 7?
f) Mix and match any of the above.
g) None of the above. Other.
All of those reasons pulled from a case study story appear entirely plausible, even logical, to me.
That noted, I don't how accurate any of them really are. Did/does YouTube have a better UI than the rest of its video-sharing brethren? Were they the first/only to encourage video-embedding? Did they have the best underlying technology?
Even if we assume these to be accurate, we still don't know whether or not they had any sort of causal relationship with YouTube's growth.
Back to the original question: What caused YouTube to grow at phenomenal rates in 2005/2006?
My answer: I don't know (BTW neither does Brant).
Viral Coefficients and Viral Cycle Time
Just recently I came upon an excellent and interesting post about YouTube, Viral Coefficients and Viral Cycle Time. After a persuasive discussion of why one should minimize Viral Cycle Time, the author (@BostonVC) notes:
This [an extremely short Viral Cycle Time] explains why YouTube exploded at a faster rate than ever seen before.
Perhaps I am being overly pedantic, but I think it might be more accurate to state:
This explains how YouTube exploded at a faster rate than ever seen before.
In my eyes, the distinction between 'why' and 'how' is non-trivial and needs to be recognized to avoid distortion by the biases hardwired into my brain. 'Why' implies causation, while 'how' implies manner. And I am of the opinion, that we don't know why YouTube popped, but we may know how it did. Again, I repeat, this is non-trivial. Knowing the difference goes to the heart of the Customer Development methodology.
Please understand me, I am not saying that any of the possible causes I listed above may not have caused YouTube's spectacular growth, I am simply saying we don't know if they did. Not only that we don't know, but pretending to know, while natural, is not cost-less. As start-up founders in efforts to duplicate such astronomical success/growth, all the while pretending to know its true cause, we are prone to draw the wrong lessons, likely to result in wasted money, and more importantly, time. Not to mention the proverbial blood, sweat and tears.
This is why I am of the mind that founding (and investing in) a start-up with the intent of enjoying a future extra-normal financial success is best likened to maximizing one's exposure to positive Black Swan Events.
As defined by Taleb:
What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
Second, it carries an extreme impact.
Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability.
One could argue that startup founders are trying manufacture positive Black Swan Events, but if we accept Taleb's definition, this would be a contradiction in terms. (Nivi at Venture Hacks writes about how raising money for your startup is tantamount to searching for Black Swans.)
For the moment, let's assume Taleb and I are right. We cannot manufacture Black Swan Events, so then how do we, as startup founders, maximize our exposure to positive Black Swan Events?
First and foremost, I posit that we would be better off by thinking about startups through such a lens and accepting the sad fact that we, as humans, are born with cognitive biases (such as the narrative fallacy and confirmation error).
These cognitive biases are evolutionary adaptations that served us well for day-to-day activities prevalent during the Paleolithic, but unfortunately, aren't appropriate for understanding the nature of technology startups.
Second, by rigorously but not dogmatically, employing Customer Development framework and methodologies which are intentionally constructed such that they correct for and recognize the existence of these distorting cognitive biases.
The mistake isn’t having a vision and taking risks. The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.
Not to mention ignoring a lack of facts as well!
If you haven't read The Black Swan yet, I suggest reading it (a thoughtful review can be found here). The implicit philosophical overlap and synergy between The Black Swan and The 4 Steps to the Epiphany are stunning.
In the meantime, I hope you have prosperous 2010 and hope you are exposed to a positive Black Swan Event sometime soon!