Turkeys and Lottery Tickets

Imagine for a minute that you are a turkey, living with a lot of other turkeys. Life is good. Every morning and every evening someone turns up with free food, which you happily eat. The rest of the time you chill; hang out with your turkey mates and generally do the things that turkeys do.

One of your pals is quite bright. He tells you he’s something called a statistician. And he announces that as food has arrived morning and night for the last 100 days, it will continue to do so. Sounds good, and sure enough the next day food does arrive.

Time passes. Food has now arrived every day for 200 days. Awesome! Surely there cannot be a finer life than being a turkey?

Another turkey has heard something. The bloke that brings the food keeps talking about something called ‘Christmas.’ So what? And what’s ‘Christmas’ anyway? Besides, the stats say that food will arrive every day for ever – and so far, it has…

This is the illustration used by Naseem Nicholas Taleb in an article on statistics and financial markets. Here’s the link if you want to read it in full.

His central point is simple: just because something has never happened doesn’t mean it can’t happen.

The real world example that Taleb is referring to is the banking crisis. The banks took risks they couldn’t quantify using financial instruments they didn’t understand. But they were fine, because they were betting against something that had never happened before. The result? In the sub-prime crisis the banks lost more than a trillion dollars – more than had been made in the entire history of banking.

What does all this mean for you, your business and your planning for the next few years? I think there are three lessons that we can learn:

1. Expect the unexpected: the world is more volatile and changing more rapidly than ever before. Over the next five years remarkable things are going to happen, especially on the computer or mobile device you’re currently looking at. (You’ll definitely be using it to pay your bill in a restaurant. For an example, click here.) So over the next five years, nothing is impossible.

2. If someone tells you something is impossible, that ‘it can never happen,’ instinctively disbelieve him. I don’t want to turn the readers of this blog into a clutch of hardened cynics, but don’t base your business strategy on the fact that something has never happened before, or the belief that it ‘simply can’t happen.’ Question things: business experience and the ability to ask uncomfortable questions are going to be more important than ever in the next few years. Fortunately there’s plenty of both among The Alternative Board members.

3. If the world is going to be volatile, so is the banking system. The increasing worries about the liquidity of the European banks could be just the start of a period when loans to expand your business become very difficult to obtain. The old adage ‘cash is king’ may well be more true than ever – especially if it’s retained in your business.

Next week I’ll be looking at a simple business question: what comes first, the marketing or the product? Meanwhile I’m wrestling with another conundrum from Taleb’s stats article…

What’s the point of buying a lottery ticket on Thursday when you have more chance of dying before Saturday night’s draw than you have of winning the jackpot?

Have a great week – and if you’re buying a lottery ticket, take care…


One comment

  1. Steven Partridge · January 13, 2012

    Very thought-provoking, Ed. Quite apart from issues in the economy as a whole, we are facing significant changes in most of our service areas. I think an awareness of what’s going on and reacting quickly and flexibly to it is important.

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