When you were a kid, your parents taught you right from wrong. They also tried to teach you how not to get hurt. But you rarely listened.
You ceased to touch that burning stove only when you were burnt. You stopped climbing that tree only when you fell. You stopped over-speeding only when you fell off of your bike and broke your arm.
No from of warning led to even the tiniest bit of cautiousness on your end. But you were a kid. You thought you were special and the rules didn’t apply to you. You can’t be blamed.
The problem is that even though you’ve become an adult, there’s a high probability that you still suffer from such a condition.
As an adult, you are extremely lax in the area of detection and prevention. You smoke, even though in all probability, it’s highly likely to give you cancer. Every other person in your family is either obese or diabetic, yet you can’t help give up desserts after a meal.
You think that you are somewhat special (young and healthy, immune to diabetes), and you refuse to consider your risks that are derived from the probabilities computed on others (i.e. last couple of generations of your family).
This constant disregard of the experience of others is not limited to children or to people like yourself; it affects business decision makers and investors on a grand scale as well.
You can’t learn from others’ advice, warnings, and studies. Similarly, you can’t really learn from others’ mistakes without making them first hand. Simply put, you don’t learn history just by reading from textbooks. You have to experience it first hand.
Dr. Claparède, a Swiss doctor in the 19th century had conducted a famous experiment. He had an amnesiac patient who had such a bad condition that he would have to introduce himself to her every 15 minutes for her to remember who he was.
One day he secretly put a pin in his palm while shaking her hand. It pricked her. The next day she quickly withdrew her hands when he tried to greet her, even though she didn’t recognise him.
Plenty of studies have been conducted following this. It has since been established that some form of learning happens without you being consciously aware of it. Much of the risk avoidance that comes from experiences is part of System 1—your automatic memory system.
The only way you can develop a respect for history is by making yourself aware of the fact that you were not programmed to learn from it in a textbook format. History lessons address only System 2.
Truth be told, things actually might be more bleak than this. A lot of times, you don’t even learn from your own history. You fail to learn that your emotional reactions to past experiences (both positive and negative) were short-lived—yet your are continuously biased to think that the purchase of the latest iPhone/that new sports car will bring long-lasting joy, or that breakup/business failure will cause severe and prolonged pain. You fall for these biases even though in the past similar purchases of material goods brought only short-lived joy, and similar setbacks did not affect you very long.
In a profession that includes a fair amount of asymmetry and randomness (such as in startups and stock markets), anyone who denigrates history is very likely to blow up spectacularly. Blowing up doesn’t just necessary mean losing a spectacular amount of wealth, it’s losing a spectacular amount of wealth when you don’t believe that such event is at all possible.
As a startup founder (or anybody involved in a profession involving uncertainty), you are not wrong for being a risk taker, as long as you accept it. It becomes a problem when you fool yourself by declaring that a risk is small or non-existent, or even worse—that it doesn’t apply to you. You act like that overspending teenager who thinks he is smarter, or worse, luckier that the rest of his lot.
Businesses who blow up characteristically think they know enough about the world they live in, and reject the possibility of any adverse event that might take place. There’s no courage in taking such risks, only your ignorance. Risk only what you can lose. There’s no virtue in irrational exuberance. They work only in the movies.
As Nassim Nicholas Taleb writes in The Black Swan:
I have noticed plenty of analogies between those who blew up in the stock market crash of 1987, those who blew up in the Japan meltdown of 1990, those who blew up in the bond market débâcle of 1994, those who blew up in Russia in 1998, and those who blew up shorting Nasdaq stocks. They all made claims to the effect that “these times are different” or that “their market was different,” and offered seemingly well-constructed, intellectual arguments (of an economic nature) to justify their claims; they were unable to accept that the experience of others was out there, in the open, freely available to all, with books detailing crashes in every bookstore.
You, like every other man, believe yourself to be quite different from others, perhaps being endowed with some special genes, until lighting strikes one day. You are shocked and can only think, ‘Why me?’ Well, now you know.