I was chatting with some people about thinking in probabilities when a friend quoted Jeff Bezos, Amazon’s founder. What Bezos said is well known, and people reference it all the time:
Given a ten percent chance of a 100 times payoff, you should take that bet every time.
This statement didn’t sit well with me. I decided to get more context. I found the original shareholder letter in which Bezos said this. Here’s the entire paragraph:
One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.
Given the full context, we can see that Bezos is talking about experimentation and the resulting outsize value it can create. He’s thinking about the probability of success and the potential value created when deciding whether to do something experimental.
This isn’t a concept that everyone can grasp. I think his comparison of baseball to business is powerful. The comparison communicates the potential to create value by solving problems in a way everyone can understand.
Creating value for others by solving their problems isn’t easy. It’s a journey of trial and error until you hit upon a solution that will get you a thousand runs.