Tuesday, August 18, 2009

How To Make The Right Decision Without Seeing Every Option

Here's a fascinating little mathematical tidbit, courtesy of an entertaining article about the mathematics of gambling in New Scientist:

Suppose you are told you must marry, and that you must choose your spouse out of 100 applicants. You may interview each applicant once. After each interview you must decide whether to marry that person. If you decline, you lose the opportunity forever. If you work your way through 99 applicants without choosing one, you must marry the 100th. You may think you have 1 in 100 chance of marrying your ideal partner, but the truth is that you can do a lot better than that.

If you interview half the potential partners then stop at the next best one - that is, the first one better than the best person you've already interviewed - you will marry the very best candidate about 25 per cent of the time. Once again, probability explains why. A quarter of the time, the second best partner will be in the first 50 people and the very best in the second. So 25 per cent of the time, the rule "stop at the next best one" will see you marrying the best candidate. Much of the rest of the time, you will end up marrying the 100th person, who has a 1 in 100 chance of being the worst, but hey, this is probability, not certainty.

You can do even better than 25 per cent, however. John Gilbert and Frederick Mosteller of Harvard University proved that you could raise your odds to 37 per cent by interviewing 37 people then stopping at the next best. The number 37 comes from dividing 100 by e, the base of the natural logarithms, which is roughly equal to 2.72. Gilbert and Mosteller's law works no matter how many candidates there are - you simply divide the number of options by e.

So, for example, suppose you find 50 companies that offer car insurance but you have no idea whether the next quote will be better or worse than the previous one. Should you get a quote from all 50? No, phone up 18 (50 ÷ 2.72) and go with the next quote that beats the first 18.

Much of life is set up like this hypothetical marriage game. Opportunities come and go, and if you don't seize them immediately, you usually don't get a second chance.

In response, many of us freeze up, paralyzed by the pressure of choosing.

This is a great way to use math to defeat the paradox of choice--simply apply Gilbert and Mosteller's law, and act with confidence

Why Founders Reap Disproportionate Rewards

Mark Suster keeps knocking the cover off the ball with his posts about the startup ecosystem. Here's a key passage from his latest:

The fact is that most people lack the willingness, ability or nerve to start a company from the very beginning with just an idea or a desire to start a company. These same people will join you and your one other co-founder (maximum) 6 months later when you’ve established the company, done your Powerpoint deck, built a prototype or product and started fund raising discussions.

They’ll happily join for 5% or less and they’ll have options and not stock. That’s the difference between a founder and a non-founder. You’re the one who gets paid extra rewards for taking the extra risk and more importantly taking the initiative.

As I've remarked before, being a founder generally adds an extra zero to your shareholdings. They key is your own risk perception and tolerance.

If you think starting a company from scratch is really hard, you're unlikely to take the leap, regardless of the rewards. Thanks to a decade of experience as a founder, I view starting a company as a relatively low-risk process. Remember, focus on what's easy for you, but hard for others. Either that, or I'm just pathologically optimistic (also a good possibility).

When I start a company, my internal calculation is as follows:

Risks:
1) Going without salary for 6 months
2) Working A LOT

Rewards:
1) 10X as much stock
2) Getting to tell people that you're a founder (sounds great at parties!)

Bottom line, if you have low expenses and you like to work, being a founder is a pretty compelling deal.*

* Note that I ignored my own advice to join PBworks. In that case, I saw a unique opportunity to work with old friends on both the management and VC side, and the chance to bringing in a number of other old friends to beef up the management team. Sometimes, the chance to have fun and work with great people (while tackling a billion-dollar idea in a hot space) is enough to override the usual considerations.

Monday, August 17, 2009

Becoming Self-Employed? You Already Are!



Zen Habits has a post up called "The Get-Started-Now Guide to Becoming Self-Employed"

As with most ZH posts, it's well-written and thoughtful, but that's not what I'm blogging about.

Regardless of what you think or what your W-2 says, you are already self-employed.

If you want to be successful, start thinking of yourself as a business.

Want to take a training course, but your boss won't pay? Evaluate the course as a business investment. If it pays for itself, why not pay for it out of your own pocket? If not, you shouldn't be surprised that your boss wasn't willing to pay!

Your employer is your customer. Sick of your job? Sounds like you need to find a new customer base. And if no one is buying your current product, better come up with one that will sell.

Before you run out and quit your day job for the joys of self-employment, try focusing first on the self-employment you already have.

If you can't make that work, I doubt that quitting your job will make a big difference.

Sunday, August 16, 2009

Why Moral People Vote Republican

Jonathan Haidt, the author of the excellent "The Happiness Hypothesis," has written an essay that explores what Democrats consider a fundamental paradox of American politics: Why do working-class Americans vote Republican, when their narrow economic interests would be better served by the Democrats' redistributionist policies.

Haidt, a self-professed liberal atheist, concludes that there are two fundamentally different approaches to building a moral society. The Millian (John Stuart Mills) approach imagines society as a social contract between individuals, invented for their mutual benefit. Here, the values of caring and fairness are paramount. The Durkheimian (Emile Durkheim) approach views society as a composed of nested and overlapping groups, where the individual is less important. Here, the values of self-control, duty, and loyalty are paramount (as opposed to self-expression, rights, and compassion for outsiders).

Haidt's research explored these five principles:

In several large internet surveys, my collaborators Jesse Graham, Brian Nosek and I have found that people who call themselves strongly liberal endorse statements related to the harm/care and fairness/reciprocity foundations, and they largely reject statements related to ingroup/loyalty, authority/respect, and purity/sanctity. People who call themselves strongly conservative, in contrast, endorse statements related to all five foundations more or less equally. (You can test yourself at www.YourMorals.org.) We think of the moral mind as being like an audio equalizer, with five slider switches for different parts of the moral spectrum. Democrats generally use a much smaller part of the spectrum than do Republicans. The resulting music may sound beautiful to other Democrats, but it sounds thin and incomplete to many of the swing voters that left the party in the 1980s, and whom the Democrats must recapture if they want to produce a lasting political realignment.

In other words, Democrats appeal strictly to adherents of a Millian view, while leaving Durkheimians with the impression that they ignore the majority of what makes a society moral.

This ties in neatly with some of the thoughts Ben Casnocha and I have had about the secular church; specifically, that secular humanism needs a stronger foundation for expressions of self-control, duty, and loyalty than the small beer of lengthy philosophical discussion. Indeed, were the Democrats wise, they would try to create the equivalent of a secular church based on American patriotism, this providing themselves with both a moral foundation and the means to dispute the Republican monopoly on flag-waving.

Finally, while I continue to stick to my policy of avoiding political affiliations (remember, "Republicans buy shoes") I thought I would reward my loyal readers with a peek inside my moral world, courtesy of YourMorals.org:

* * *

In the graph below, your scores on each foundation are shown in green (the 1st bar in each set of 3 bars). The scores of all liberals who have taken it on our site are shown in blue (the 2nd bar), and the scores of all conservatives are shown in red (3rd bar). Scores run from 0 (the lowest possible score, you completely reject that foundation) to 5 (the highest possible score, you very strongly endorse that foundation and build much of your morality on top of it).