Tag: Risk

Conquering Uncertainty, Dhoni & Vinod Khosla Style

What does Cricket legend MS Dhoni have in common with Silicon Valley legend Vinod Khosla?

Both believe in breaking down ambitious goals into achievable Base Camps. Here’s how you can use this idea to manage uncertainty in your own life.

One of my favorite sportspersons of all-time is former India cricket captain MS Dhoni. Not because he won every title there was to win during an illustrious international career, but because I learnt the importance of “process over results” by observing him. India winning the 2011 Cricket World Cup under Dhoni’s leadership had a major impact on me personally at the time. I ended up gorging everything he had to say about his philosophy & approach to both cricket & life.

Post that milestone win, I started trying my best to adopt Dhoni’s playbook of “showing up every day & doing the small steps well” as one of the core elements of my value system. Here’s a quote of his that captures this idea really well (paraphrasing a bit for clarity):

What if this happens? What if we don’t win the game? What if we don’t get selected?

Worry about the “controllables”. Focus on taking care of them.

If we don’t get the desired results, we’ll improve. We’ll change our plans. We’ll execute better and we will get another chance to prove ourselves.

Thinking about the result never gives you the result. Yes, you may have a target in mind but what’s more important is taking care of the small steps in life. What needs to be done, what I am supposed to do, what extra I can do. That is what will help us achieve the target.

MS Dhoni

Fast forward a few years, as I was building my startup 0-to-1, I found most thinking models I had experientially grasped as an operator & investor till then were completely failing me in this new chapter. I was wading through risk & uncertainty the level of which I had never experienced before. This was causing immense personal stress & I figured that I better search for some sort of a new philosophy that could help me reframe my approach before I tapped out in the first round itself.

This is when I chanced upon this insightful chat between Vinod Khosla and Sam Altman. Vinod is known for not mincing his words. While he spoke on several interesting topics, what really stayed with me was the concept of “Base Camps”. Here’s how Vinod explained it (paraphrasing for clarity):

If you have a large vision, say you are looking to climb Mount Everest, it’s never a straight line. You get to Base Camp, Camp 1, Camp 2, Camp 3 and so on.

The right approach is to be obstinate about the vision (getting to the top of Mount Everest) but be flexible on the tactics as things change. When you zig and zag, when you pivot.

You could easily set up Base Camp at the wrong place (revenue, customers, investors) such that it doesn’t help you get to Everest. Or you could work a little longer, a little harder, and set up Base Camp at a place that helps you eventually get to Everest.

Vinod Khosla

This idea of Base Camps really resonated with me, especially as I then connected it back to Dhoni’s philosophy of breaking down a large goal into small, “controllable” daily steps and focusing on executing them to your best ability.

As a founder, this idea helped me to disconnect from the stress of achieving a far-out goal, the path to which is understandably fuzzy at this stage, and instead divert my energy towards thinking through:

1/ What’s my next Base Camp? And;

2/ What should I be doing today to get to it?

Focusing on large & far-out goals naturally leads to a heightened sense of uncertainty, which triggers fear-related emotions. However, once you break down the goal into a series of Base Camps & focus only on the next one you need to get to, it dramatically brings down uncertainty, making the immediate path less blurry & abstracting a set of daily controllables that one can focus on.

This approach helps bring down overall stress in the system, thus making it easier to start what I call the Progress Flywheel:

©️Soumitra Sharma

The vision (goal) can still be in the back-pocket, easily referenceable for inspiration on an ongoing basis. However, daily execution is only focused on the controllables that can help get to the next Base Camp. That’s it, no more, no less!

This idea can also be applied to other contexts like fitness, learning a new skill or building new relationships at work. Essentially, this is one of the core approaches behind persevering at anything where the goal is long-term, the path is fuzzy, and overall, the endeavor has high perception of uncertainty & risk.

The idea of Base Camps is at the heart of the milestone-based financing mechanism that Silicon Valley has mastered as an approach to deploying risk capital.

I believe this idea is also at the core of “living in the moment”, often cited as the key to happiness (whatever that is!).

Through the highs and lows of life, I have discovered that the best way to decrease daily stress & internal conflict in your life is to focus on a one-two combo comprising of an ultra-long-term “Mission” + the next immediate “Base Camp” on that Mission. Avoid anything in between those two, the intermediate planned future, as that’s where stress lives.

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The real risk is the unknowable, not the unknown

Image Source: BBC Wildlife

I was discussing the SVB blowup situation yesterday with one of my friends who manages the public markets portfolio for a large family office. He and I both have deep financial services backgrounds, having worked across diverse services & asset classes (VC, PE, public markets, Investment Banking, debt etc.). Both of us came to the same conclusion regarding what has unfolded:

Given the complexity of financial markets, with many direct & indirect stakeholders, influencers, interconnections, interdependencies, manual & robo decision engines at play, it’s almost impossible for even the smartest operating teams & regulators to stay on top of systemic risks building up across thousands of organizations in our financial system.

Of course, this risk management challenge gets further exacerbated in pure capitalist markets such as the US, that consciously allow free market cycles, driven by excessive greed followed by excessive fear, to play out without much intervention.

Going beyond the macro discourse around SVB, of which there is enough now in the media & on Twitter, I want to highlight one learning that all of us need to pay attention to from this episode – the real risk in most things in life is in the “unknowable”, not the “unknown”.

What does this mean? In most planning exercises we do around risk management both professionally (eg. what’s the sensitivity around my company’s 2023 revenue?) & personally (if I plan to do a startup, how much personal runway do I need to be able to operate without a salary?), we focus mainly on outlining the “unknowns” – variations in outcomes of visible & obvious elements. Things like revenue from existing customers, attrition of top performers, house rent, holiday budgets etc.

Planning for unknowns is largely driven by first-order thinking. This includes the classic sensitivity analysis playbook of (1) listing out all obvious elements of the game, (2) thinking of a range of values for them (best case/ likely case/ worse case) & (3) using these values as inputs to model out various output scenarios that consequently drive the overall decision-making process.

But if most organizations & individuals follow this kind of solid decision-making framework, why is the real-world full of surprising blow-ups – bank runs, hedge fund unravels, fast-growing companies unexpectedly going bankrupt etc.?

It’s because the real world is a complex adaptive system with emotion-driven humans as actors. Michael Mauboussin, legendary analyst, academic & public markets investor, beautifully outlined the qualities of this type of system in his recent conversation with Tim Ferris:

So, “complex” means lots of agents. Those could be neurons in your brain, ants in an ant colony, people in a city, whatever it is. “Adaptive” means that those agents operate with decision rules. They think about how the world works, and so they go out in there and try to do their thing. And as the environment changes, they change their decision rules. So that’s the adaptive part, their decision rules that are attempting to be appropriate for the environment. And then, “system” is the whole is greater than the sum of the parts. It’s very difficult to understand how a system works, an emergent system works, by looking at the underlying components.

Michael Mauboussin

In such a system, while some risks fall under “unknowns”, a majority of them are “unknowable” given the system is self-evolving & therefore, impossible to predict at a granular level. Many words are used to describe these unknowables – edge cases, tail events, black swans etc.

Even if we do get some additional visibility into a few of these probabilistic unknowables & can foresee their 1st-order impact to an extent, their 2nd & 3rd order effects are really hard to model out.

Given this context, classic risk management approaches work well most of the time, until they don’t. And when they don’t, participants are caught unaware, unprepared, & often facing the Risk of Ruin.

So, how can organizations & individuals prepare better to deal with the unknowables? The following steps can help:

  1. Start by recognizing the presence of “unknowables” – a major first step is to acknowledge one’s ignorance, & consciously keep overconfidence bias at bay by reminding oneself that even after all this data & analysis, there is a lot that is just not possible to predict. Approaching risk management with humility & in defense mode creates a conducive mindset for this.

2. Add a significant “Margin of Safety” on top of your analysis – while a rigorous Sensitivity Analysis will cover the unknowns well, adding a Margin of Safety goes a long way in providing a buffer for the unknowables. How much of it you want to add depends on context but given we live in a highly risky world, it should be significant enough. As an example, legendary value investors like Buffet & Munger insist on a 50% Margin of Safety while buying public securities (buying at half of the intrinsic value of a company).

Btw, this isn’t anything new. Engineers who design everything from trains & storage tanks to nuclear reactors & space shuttles, recognize error rates in their assumptions & therefore, always include an “allowance” in their computations. Millions of lives depend on this method!

3. Routinely stress-test & update your assumptions – with software continuing to eat the world at an exponential pace, cycles are becoming shorter & feedback loops quicker. The Fed raised rates from under 0.5% in Mar’22 to ~5% in less than a year! With information transmitted in real-time, especially via networks like Twitter, & decisions manifested at the push of a button, we saw how SVB unraveled in literally a day. Given this speed of change, it’s important to frequently stress-test your state-of-state, accounting for changes in external & internal environments & updating your assumptions (esp. Margin of Safety) accordingly.

While the Treasury, the Fed & FDIC have joined forces to save everyone impacted by this specific SVB case, most of us can’t count on such White Knights bailing out our families or our startups each time. A pragmatic & defensive risk management approach that accounts for unknowables, incorporates a healthy Margin of Safety, & includes periodic stress testing, can help us cope with outlier events & keep us in the game.

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The futility of Plan B

Image Source: LinkedIn

Growing up in India, where inherent chaos makes sure most things don’t go according to plan, I got organically trained to always have a Plan B. The classic fallback option – the bylane you take when the main road is clogged because a minister is scheduled to pass through, the backup college seat you block in case you ranked low in the entrance exam for your top preference, or the autorickshaw you hail when the car refuses to start.

Look, I get it! Now that I am a father to 2 boys, I see the instinct parents have to ensure their children are tangibly & emotionally “safe” in all situations. So, I can appreciate why my middle-class upbringing was designed this way. To top it up, my technical education & early analytical jobs further pushed me into the world of scenario analysis & fail-safes.

Down the road, as I entered the risky world of startups, I naturally brought this instinct with me. While building, operating & investing in high-risk-high-reward endeavors, my animal brain would always push me to have a Plan B in my backpocket:

  • If this startup doesn’t work, I can always go back to Company X.
  • What if this investment fails? Let me spread my resources & take a smaller bet.
  • If I don’t like living in Country Y, I can always go back to India.

A few years into taking these asymmetric bets (presumably backed by Plan Bs), I expectedly started encountering failures, both big & small, one after another. They ranged everything from major projects going South & unforeseen external risks coming to the party to unexpected company restructurings & gross misjudgment of certain people’s skills & intent.

During a recent introspection of these adverse experiences, something interesting jumped out – every time I attempted to call on a Plan B for a specific situation, more often than not, it wasn’t really there. In some cases, the “backup” companies had changed their strategy & weren’t a fit anymore. In others, I had grown in a different direction & going to a fall-back option would be a negative step. Many times, people I was relying on to help materialize a certain Plan B had either fallen out of touch, were themselves dealing with adversity, or had changed their context & therefore, relevance.

So this was my lightbulb moment that inspired this post – in high-risk-high-reward situations, Plan Bs are….fictitious. The very nature of extremely risky situations is that they take you in unpredictable directions, change your context in unimaginable ways & leave you with baggage that’s hard to foresee. And all this happens in parallel to a rapidly-changing external environment that in most cases, becomes increasingly incongruent with your endeavor (most asymmetric projects are by definition, contrarian in relation to established rules of the game that the majority operates by).

This complex system renders even the most thought-through Plan Bs useless. Given asymmetric bets are driven by power laws (a few will drive a majority of the total outcome) & compounding (need a long enough timeline for ideas to mature, which is when outcomes start growing exponentially), positioning yourself to be on the right side of these rules requires going all-in for a significant period of time.

While having a Plan B provides the initial psychological space to initiate a risk, in my experience, it unfortunately also creates a mental mechanism to cop out of it, & even worse, often doesn’t provide the safe landing space it initially promised.

Going forward, my aim is to ditch the “Plan B” mindset in all asymmetric bets. A fall-back instinct comes from a place of fear, and while controlled fear can be a useful tool to drive alertness & urgency, it becomes adverse when acting as a roadblock to going all-in & persevering on a thoughtfully-chosen path.

It’s important to add here that while ditching the Plan B outlook, I will still proactively focus on avoiding the Risk of Ruin at an overall life level. Asymmetric bets require multiple shots at the goal & therefore, safeguarding the ability to keep playing is paramount.

On a related note, a mental heuristic I have recently started using while making asymmetric decisions I am 50-50 on – “which option is the fear side of my brain asking me to choose?”. In most cases, I then lean towards the other option!

I have found the following quote by Swami Vivekananda to be hugely inspiring in driving this mental transformation:

Take up one idea. Make that one idea your life – think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to success.

Swami Vivekananda

As you consider this approach, I want to leave you with this outstanding scene from Christopher Nolan’s ‘The Dark Knight Rises’. As a frustrated Bruce Wayne is trying to catch his breath after yet another failed attempt at climbing out of the pit (he was using a rope each time), an old & wise prisoner gives him the mantra for successfully making the climb:

You do not fear death. You think this makes you strong. It makes you weak.

How can you move faster than possible, fight longer than possible, without the most powerful impulse of experience – the fear of death!

Make the climb…as the child did. Without a rope!

The Dark Knight Rises (2012)

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