Pick an entrepreneur from your local tech scene. How can you tell if he’s a “good” entrepreneur? The kind of guy you might ask for advice with your own business? Well if he’s been successful he must be good, right? Not necessarily.
All that matters is results?
Humans have always held a high regard for results. It mattered little that Johnny Caveman made a valiant effort to defend his family from a pack of wolves if he failed. The prevailing rational is that someone who has produced desirable results is someone worth following. “Self-help author and motivational speaker” Tony Robbins:
If you want to be successful, find someone who has achieved the results you want and copy what they do and you’ll achieve the same results.
You can just imagine this line on a PowerPoint slide at some seedy “make millions in 7 days” seminar. But this logic is actually quite pervasive. The salesman with the best annual figures gets the promotion or the movie producer that drops a box office hit gets a bigger budget for his next film.
The Law of Small Numbers
But our intuition about the relationship between the results of someone’s efforts and their actual abilities is just plain wrong. In fact, the misguided thinking whereby we make assumptions about an underlying probability—in this case, the probability that an entrepreneur has the abilities to be successful—based on a small sample of results has a name; psychologists Kahneman and Tversky called it The Law of Small Numbers, a sarcastic reference to The Law of Large Numbers.
In The Drunkards Walk, Leonard Mlodinow illustrates the problem with this example: Take a CEO who, because of his abilities, has a 60 percent chance of success in a given year. Over the course of five years, how many will be a success? Three? Mathematics from Jacob Bernoulli shows that this is unlikely. “[The] chances that in a given five-year period a particular CEO’s performance will reflect that underlying rate are only 1 in 3,” says Mlodinow. Looking at the CEOs of the Fortune 500 companies, this means that “over the past five years about 333 of the CEOs would have exhibited performance that did not reflect their true ability.” In fact, by sheer luck, “about 1 in 10 of the CEOs [will have] five winning or losing years in a row.” Funny, huh?
Good or lucky entrepreneurs?
For entrepreneurs, you can replace “five winning or losing years” with “five winning or losing startups” or “five winning or losing products” and the odds still hold. So what does this teach us? That it’s all just a game of chance? Definitely not. A “good entrepreneur” will make their own luck. As Calvin Coolidge said:
Those who trust to chance must abide by the results of chance.
Then what can we actually learn? Well back to my original question, when taking business advice, be careful how you choose who to listen to. And about the much lauded, serially successful entrepreneurs: investors of money (like venture capitalists) and time (like startup employees) should understand how easily results can fall against the odds—there’s no such thing as a “sure thing”.
But to oppose The Law of Small Numbers takes balls; questioning the abilities of a successful entrepreneur is almost heretical and won’t make you many friends! As Ken Blanchard says:
People who produce good results feel good about themselves.
Merits before results
So if you’d like to sidestep these pitfalls of standing up for mathematics and rational thinking, please at the very least give the losers the benefit of the doubt! Often failing plays a natural and healthy part in the learning process, but it can also come about through chance alone—many times in a row! Judging an entrepreneur, or anyone for that matter, is harder than looking at a small sample of results and drawing neat conclusions. It takes instinct and tacit knowledge. It’s not for everyone. It really requires true character to be able to analysis a person’s action and logic, and to judge them on their merits rather than take the shortcut, skipping straight to the bottom line. As Bernouilli advised:
One should not appraise human action on the basis of its results.