This is more from Taleb’s Fooled by Randomness – which I am still enjoying very much.
Taleb is mostly talking about traders in publicly listed highly liquid securities, but much of what he says has relevance to venture capital (which after all is trading of a sort – albeit with long time horizons and the ability to work with the investment to improve your outcome).
With these characteristics Taleb seeks to expose traders who doesn’t understand that a currently successful strategy won’t necessarily hold going forward. I.e. their world view doesn’t allow for the fact that things change. I think they are useful for us as investors and entrepreneurs to check that we are not ‘being fooled by randomness’ – i.e. that we haven’t developed any such blind spots. Success is a seductive partner and can blind us to many things.
- An overestimation of the accuracy of their beliefs in some measure – in VC this crops up when applying successful models to new markets – e.g. software as a service, open source, term licensing, I could go on
- A tendency to get married to positions – beware of the person who does this – and don’t become him!
- A tendency to change their story (their reason for believing the investment is a good one) – a classic bad sign this, and one that crops up frequently
- No precise plan ahead of time as to what to do in the event of losses – if you don’t have such a plan then you are probably not adequately considering all the potential outcomes
- Denial – a failure to understand that things have changed, or will never develop as expected. In VC this probably most often happens in the relation to the opening up of new markets