Comment by well_ackshually
1 month ago
If your accountants suggest that you take a single 5% chance deal, they probably skipped maths and statistics and you should fire them.
It's the dumb as rocks MBAs that will go head first into the 5% chance deal.
I guess the reasoning assumes that you have multiple eggs in your basket. A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them, which is basically what venture capitalists do.
> A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them
This is only true if the probability distributions for the values of the individual deals are rather uncorrelated (or even better: stochastically mostly independent).
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It’s easy to predict that, but when has “the whole thing” ever crashed?
Sure, markets can crash, but this idea of “go to zero” never happens.
That’s the whole calculus of these investments. Many of them are expected to fail.
The fact that it’s painful to the average person means nothing to the people who run the system.
4 replies →
Venture capitalists never take on a single deal. The same way you shouldn't put all your life savings into one stock, even if it has a 90% chance of working out. That's not how any of this stuff works.
Would you take 5% chance of earning 100 dollars if it would cost 1 dollar?
You cannot just scale down the numbers and pretend like the world around you doesn't exist. There isn't much I'll do with 1 dollar. There's a shitload Microsoft could do with 10 000 000 000 dollars.
Opportunity costs are a thing.
There actually becomes a point where there’s not that many things you can do with your money when you have so much of it.
This is especially true when your investors/owners expect you to generate better returns than the risk-free rate.