Gambling vs Data
In a recent article, Michael Milken mentioned that some highly touted investors don't do a lick of research into the ventures they are presented with. They make the investment decision on if they feel lucky that day. That is not investing. That is gambling. While most people make gut decisions, the real question is whether or not we "educate our gut". So, are you managing by gambling or are you a management investor?
Many a raffle contest of guessing how many items are in a jar is won by someone guessing. In many cases, there is someone who measures the jar and computes a very good number but comes in second. Most people guessing do not win.
Unlike most contests, in business there can be multiple winners. So, while the contest winner is someone who guessed, more consistent business results are gotten by looking at the data. Whenever there can be multiple winners, it is better to go with the data than with a guess.
In business, consistently coming in second in predicting would yield a very good profit margin. Whereas over time, gambling winds up with less than average results. (And if you wondered why that hot shot money manager wasn't returning good results this year, it is more likely that he was just lucky last year.)
When we are managing through gambling, we go with our gut feelings or even "invest when our team wins". We neglect the hard work of getting the available data and figure out what is real information and what is "noise". Just like an amateur gambler placing large bets to show off, we make big decisions based on how being successful would make us look instead of whether or not it is a good decision.
This type of management has led to bulking up teams when the market for that product or service wasn't there. It has led to trying to dominate a market that is about to disappear. It has put billions into companies that do not have good business fundamentals, but are media darlings.
In order to make a good profit, we only need to have good approximations of what the values are. Yes, it hurts when the numbers and our approximations are far apart, but when they are close, that is often good enough to profit.
One key datum is the cost of failure. Failure can come in many different forms. But gambling is an activity where it is very easy to lose everything. The same is true with management by gambling. There are many, many companies that have started off on a gut feel that a market is there but have crashed when that market proved to not exist. The reality of the small to non-existent shared economy is starting to affect a number of the startups in that field.
As human beings, we can never get away from making gut level decisions. However, we can "educate" our gut by seeking out what data we can get. The more information, the more our gut decisions will benefit us.