Cheap Options and Venture Capital

With a few isolated exceptions, most of the optimism in answers to The Edge’s annual question — “What are you optimistic about?” — make me … pessimistic. There is too much self-serving stuff from the assembled Big Brains, with physicists engaging in inside-baseball debates about string theory, anti-religionists imaging dream worlds without faith, dreamers imagining world without wars, sociologists engaging in physics envy, journalists and academics imagining a world where people aren’t superstitious, and so on.

The contrarian in me wishes he could fade all the deluded happy-talk.

I did like, however, my friend Nicholas Taleb’s comment on the world giving us more cheap options. He cuts to the heart, indirectly, of how the venture capital business is changing:

[The U.S. economy] fosters entrepreneurs and creators, not exam takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional and theoretical studies is where it very strength lies — it produces “doers”, Black Swan hunting, dream-chasing entrepreneurs, or others with a tolerance for risk-taking which attracts aggressive tinkering foreigners. And globalization allowed the U.S. to specialize in the creative aspect of things, the risk-taking production of concepts and ideas, that is, the scalable and fat-tailed part of the products, and, increasingly, by exporting jobs, separate the less scalable and more linear components and assign them to someone in more mathematical and “cultural” states happy to be paid by the hour and work on other people’s ideas. (I hold, against the current Adam Smith-style discourse in economics, that the American undirected free-enterprise works because it aggressively allows to capture the randomness of the environment — “cheap options”–  not much because of competition and certainly less because of material incentives. Neither the followers of Adam Smith, nor to some extent, those of Karl Marx, seem to be conscious about the role of wild randomness. They are too bathed in enlightenment-style causation and cannot separate skills and payoffs.)

The world is giving us more “cheap options”, and options benefit principally from uncertainty. So I am particularly optimistic about medical cures. To the dismay of many planners, there is an acceleration of the random element in medicine putting the impact of discoveries in a class of Mandelbrotian power-law style payoffs. It is compounded by another effect: exposure to serendipity. People are starting to realize that a considerable component of the gravy in medical discoveries is coming from the “fringes”, people finding what they are not exactly looking for.  It is not just that hypertension drugs lead to Viagra, angiogenesis drugs lead to the treatment of macular degeneration, tuberculosis drugs treat depression and Parkinson’s disease, etc., but that even discoveries that we claim to come from research are themselves highly accidental, the result of tinkering narrated ex post and dressed up as design. The high rate of failure should be sufficiently convincing of the lack of effectiveness of design.

But if the success rate is very low, the more we search, the more likely we are to find things “by accident”, outside the original plan — or the more an unspecified original “plan” is likely to succeed. Looking at the swelling pipeline, something tells me that the discovery of cures, or near-cures for unspecified diseases is about to happen — except that I do not know which one, nor do I know where it is coming from. More technically, I see the sign of fractal randomness in these payoffs from the fact that results are more linear to  the number of investments than they are to quantities invested — thus favoring the multiplication of small bets.

Related posts:

  1. Options as the Immaculate Compensation
  2. The Venture Capital Crisis
  3. The New Venture Rules, Part XXIV: Get Big Cheap
  4. What’s Broken, Venture Capital or Venture Capitalists?
  5. TheStreet.com is “Exploring Options”

Comments

  1. John K says:

    I would argue that you’ve been on a pessimisstic streak for a while now. Bubbles, global warming, etc…
    Or maybe since you are a natural contrarian, the pessimism is simply a side effect of the current overwhelmingly positive environment, …. hmmm…
    I found Danny Hillis’ answer to be interesting as well. He says the world population growth is slowing and the future looks good because of that…

  2. Fair enough. It could be my natural contrarianism at work.
    Yeah, Hillis’s take was fine, but he wasn’t saying anything I hadn’t heard/said before. I was trying to find someone whose optimism really struck me as new/interesting/different, and Taleb’s comments were one of the few.

  3. Ehh … Taleb’s giving his own version of a everything-look-like-nail, in punditese.
    “there is an acceleration of the random element in medicine putting the impact of discoveries in a class of Mandelbrotian power-law style payoffs.”
    What? Does this even make sense? If it does, is it other than trivial that more research means more accidental breakthroughs? It’s not exactly new that major research results can derive from accidents – everything from penicillin to X-rays shows that.
    And his basic point strikes me as somewhere between silly and reactionary – it’s a dressed-up version that the US is made up of “idea people” while Third-Worlders are drones (how convenient for the world’s wealth distribution!).