Ergodic Entrepreneurship

Last November I spent a full week in the basement of a masonic temple in Manhattan, an oddly appropriate venue for a workshop about risk. The Real World Risk Institute was founded as a hedge against a very specific real life risk - the possibility that author and risk expert Nassim Taleb might lose (or quit) his part-time position as a professor at NYU. Tired of the bureaucracy? Why not start your own institute?

My RWRI Certificate

One of the key concepts that we discussed at the workshop is the notion of ergodicity. An ergodic system is one in which the time average of an individual object converges to the space average of the full ensemble of objects. For example, an ideal gas is ergodic at equilibrium: if you average the path of an individual ideal gas molecule in a box over infinite time, it will give you the same spatial distribution as the average position of the ensemble of all of the ideal gas molecules in the box (at any given time).

When we are talking about human-scale systems, very few probability distributions are truly ergodic. Nevertheless, we often underestimate risk because we make the mistake of treating a system as if it is ergodic. (Like estimating our odds of winning at the Casino.) I have been putting off writing this post for a few months now, because I was too lazy to attempt an “everyday” explanation of ergodicity. Thankfully, Taleb’s newest book, Skin in the Game, just came out last week and has saved me the trouble. (I highly recommend it, along with the entire Incerto.) One easy example from the book: Russian Roulette is definitively non-ergodic. An individual’s time average of playing many times is 99.999% dead, even though the ensemble average after a single round is only 18.666% dead. Dead is an “absorbing barrier”.

In thinking about how ergodicity applies to my own life, one of the things that has been really bothering me is the asymmetry between the exposure of an entrepreneur (time average of a single company) and that of an investor (ensemble average of the portfolio). In other words - it bugs me that my investors only need a few of their companies to work out to succeed, while I am freaking out daily about how to keep polySpectra alive (aka cap my tail risk). (To be clear, I am not complaining - the job of the founder is to freak out daily about capping the tail risk.) During the Real World Risk workshop, when I had the opportunity to share this concern with Nassim over some bad coffee, he quickly interrupted me: “But it is ergodic for you, because you are young!” His answer surprised me. I felt somewhat encouraged, but at the time it felt more polite than right. This did not sit well with me, because, as you can find out on Twitter - Nassim is not always polite, but he is usually right.

Now, four months later, I think I finally understand what he meant. Here is my breakdown of five ways in which a young entrepreneur is effectively ergodic, followed by some caveats and precautions:

  1. Low Ballast – Financially, one way in which individuals do not have the same expected return as the ensemble (“the market”) is that they have “uncle points” (an absorbing barrier). If you cannot feed your family, it is probably going to be hard to build a successful startup. The fact that I currently have modest taste, no kids, no mortgage, no car payments, and the incredible privilege of having no student debt - means that I’m sailing a pretty light ship. This is an unambiguous advantage of young entrepreneurs - they are very buoyant and (even if they sink) they have little to lose. (I will save the student debt discussion for another post.)

  2. Badge of Honor – Right now it is “cool” to be an entrepreneur. Silicon Valley is obsessed with “failing fast”. This societal badge of honor encourages risk taking. There is a social safety net…which I admit can be hard to appreciate when you are constantly feeling anxious about how much runway your company has in the bank. Nevertheless, even the most overconfident and unskilled entrepreneur I have ever met in my life now has a really great job, after completely sinking his company a couple of years ago. But please do not confuse this with general advice for everyone to start a company! There are already enough’s in the world. (See last paragraph.)

  3. Corporate Law – This one is boring, but important. Regardless of how you feel about major corporations abusing their powers of limited liability, the legal structure of a corporation is very important to preserving the ergodicity of the startup system. Simply put: you are not your company. If the company fails, you are not (necessarily) personally ruined. Maybe emotionally, but not financially. In this way, there is no absorbing barrier to the entrepreneur (even after the startup screams “uncle”).

  4. Get Paid to Learn – I feel very strongly that the #1 job of an aspiring innovator is to get paid to learn, both as an individual and as a startup. When you (or your startup) are really young, it is not always possible to get paid, so just focus on learning. But once you are out of your parent’s garage (or your incubator) - find a way to get paid to learn something that you are passionate about. Regardless of the outcome, they can’t take the knowledge and experience back.

  5. Network is Net Worth – This is closely related to the point above. If, through the course of running your company, you are able to build a network, a platform, an audience - you get to keep that regardless of what happens to the venture. If you can hit a “critical mass” of professional contacts who respect you, you can be confident that you will never be out of work again. We might consider this as a positive absorbing barrier, (which in statistical mechanics technically breaks ergodicity, but) in this context I am suggesting that it metaphorically balances out the negative absorbing barrier of going bust. Keep in mind that this does not necessarily mean you will want the jobs that are available to you via that network…but that is more of an existential problem.

Be warned! This reciprocity breaks down very quickly if you do not keep in mind two key assumptions:

  • Honesty – If you dick people over, you will not get another go around. Definitely not in the same industry. In SITG, Nassim calls this the Silver Rule, a negative formulation of the Golden Rule: Do not treat others the way you would not like them to treat you. In my experience, (apparently) successful people forget this one quite often, which probably does not make much difference to them until they are not on top anymore.

  • Soul in the Game – Ergodicity breaks down if you are not passionate about what you are doing. This is my take on Taleb’s concept of “soul in the game”: if you don’t have soul in the game, starting a company is not worth the opportunity cost. Most people talk about opportunity cost in terms of other potential employment possibilities. That is certainly a part of it, but I think the more important aspect to consider is the opportunity cost to your mental and physical health. The existential anxiety of running a startup is a big burden to bear. There are much easier ways to make a buck. Is this a job or a vocation? If you are so passionate about what you are doing that you can truly say you have your soul in the game - then go start a company.