How to Manage Mistakes and Gain from Niches. A Sustainable Approach for Life and Wealth
Wisdom of the crowds, tinkering small bets with big potential, The Long Tail, Reddit and Football, luck vs skill and how to not make money on bitcoin as a bitcoin enthusiast since the beginning of the ride
Augusto Ramos, 50 years old, divorced and a small business owner. As an addicted to social media, Augusto was very fond of sports and politics discussion groups. A turned libertarian by the South American large governments, Augusto was an early believer in bitcoin. He had the chance (and a lot of opportunities since he knew about the coin at its inception) to buy when it was valued at less than 1 USD, but he did not buy it. The lack of Skin in the Game on his own idea cost him, years later, a millionaire life, as Bitcoin topped near 20 thousand USD (before going down to the 6000 USD level, which would still make him a rich man).
Use an incremental part of your portfolio to make those types of bets and let your luck work for you.
“Like a bee colony, it sends out lots of foragers and assumes that one of them will find the best route to the flower fields. You can let a thousand flowers bloom and them pick the one that smells the sweetest.”
From James Surowiecki, Wisdom of the Crowds
One can argue that the Wisdom of the Crowds and the Long Tail from Chris Anderson requirements for understanding better the world, especially our Extremistan world, a world more Black Swan prone as Nassim Taleb points out on his Incerto works.
We can summarize technological progress as a group of people, tinkering, and the results being dominated by the surviving ideas. Ideas may survive even if they are not right. They survive because they can survive.
This is a form of Wisdom of the Crowds (I’m adapting some of Surowiecki ideas). It is quite similar to the way that Nature works. On a big scale, it is an Antifragile process. As we already discussed in prior texts, to be Antifragile you need to survive and to take advantage of random events and the way to do that is to have lots of small bets with big payoffs and a huge safety net, because if mistake on any bet, your loss is small when you are right, gain big and wipe out your losses, the huge safety net is because you have to stay alive and this allows you to deal with everything whenever an unexpected event happens.
To gain from the randomness you need to survive and take advantages of random events. To do that, you need to have a safety net and tinker with small bets with huge potential.
The idea of the Long Tail is focused on niche products and an understanding of the Pareto Principle — Pareto was an Italian economist that on one of his works, found that the majority of the Italian land was dominated by a small parcel of the population and we can find this pattern on a lot of things in the world, like the popular 80/20 rule shows.
The Long Tail is the idea that the internet allowed that niche groups around the world reunited themselves in groups — Discussion groups, Age of Empires II players, K-pop fans, discussion boards of electric engineering, Frank Sinatra fans at their 20s—.
I would say that Reddit is the best example on the internet that we can find that. I was discussing Canadian Football (soccer for the Americans) in a subreddit with Europeans, Indians, Koreans and Argentinians fans. Of course, Football is the most popular sport in the world and it can’t be called a niche because of the scale. But you can find groups of everything, I’m active on subs as of Finance, Mad Men and The Sopranos discussion, Finance for Canadians, Real Estate in Toronto... You find groups for everything for everybody around the world.
As the Long Tail expands, more niche creation is allowed, more diversified the economy and more the generalist companies suffer from that, because an infinity of small focused brands starts to dominate groups of people and offering more what it is demanded (they don’t need to create an average product for big masses). Shopify stores are good examples of that. And this is also the model that Netflix and Twitter try to operate.
Take advantage of the Long Tail. Everything can be a niche and if you find along the world a thousand people who likes what you like, you should take advantage of that. Monetary gains, intellectual gains and others.
To summarize all that, go to parties, go to big cities, allow Fortuna to help you, save money and maintain a sizable amount of income and safety net for your survival but take advantage of small bets that can have a huge payoff. I don’t care about my mistakes because I try to make them small. As Taleb points out, be very defensive and very aggressive at the same time.
Going back to our South American friend, the problem with Augusto was not his lack of knowledge of Skin in the Game or Austrian School of Economics. Neither was his lack of experience as a risk-taker.
The issue was the lack of exposition to an unlimited upside idea, at a minimal cost (he expended more money on poker and beer). He can argue that he took the best decision with the knowledge Augusto had at the time (and it would be probably right) but he could have made a small value bet, at least.
An sustainable way to wealth is to focus on antiknowledge (what we don’t know) and try to collect as much as we can from positive Black Swan events. Entrepreneurs already know that, so instead of focusing on top-down planning, they tinker as much as they can, trying to benefit from lucky.
It is better to be lucky than skilled, so let your luck work for you. Don’t limit it.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.