The everything store
36-year old Jeff Bezos had already made a name for himself as the founder of a promising young technology firm, but in the year 2000 Amazon was just one of many companies storming the frothy capital markets to achieve improbable valuations. Even at that stage Bezos was circumspect about his success, emphasizing the word “lucky” to characterize his story.
He recognized the confluence of enabling events was largely out of his control—coming of age in the era of computers, the rise of the consumer internet, a stable economic environment, increasing acceptance of digital commerce, plus a career that positioned him to observe these trends.1
At the time Bezos had no idea just how lucky he was. Though reasonably successful, nothing indicated he would eventually become the richest person on Earth on the back of Amazon’s insatiable business model. The path to get there would be neither smooth nor obvious.
First would come a long slog through the wilderness, as Amazon’s stock plunged from a high above $95 to below $10, as the wreckage from the dotcom bust engulfed the Microsofts and Pets.coms of the world alike.2 The company wasn’t clear of the insolvency talk swirling around competitors. Had it gone that way society might today be bereft of one-day shipping and proliferating streaming shows and smart speakers that translate your conversations into revenue.3
A single retrospectively prescient move may have saved the firm. Leaders assessing the tight financial situation decided to build up a cash cushion, issuing a debt offering that was completed only weeks before the market crashed and funds dried up.4 The money gave Amazon flexibility many of its peers no longer had, and given their burn rates they ended up liquidated for their Aeron chairs and other dotcom-era detritus.5
In hindsight it’s easy to trace a continuous path from the early bookselling days to dominance as a platform underpinning multiple sectors of the economy. For example cloud services now account for more than half the company’s profits, but this new business only materialized years later, after the storm had passed. One unfavorable choice could easily have tipped Amazon into bankruptcy. It helps to be smart, as Bezos certainly is, but circumstances can be determinative.
A fool and his money
The effects of randomness are vividly at work in the investing sector, where managers jockey to attract capital based on track records of outperformance. Those who fail quietly disappear from the market only to spring up again in different form, this time with a surefire idea. Some are mathematically bound to be better than average and those outliers will attract attention, even if results don’t stem from genius.6
Consider an investment advisor who accurately predicts the direction of the market, and then repeats the feat several more times in a row, without a miss. This is the basis of a classic scam, in which a conman mails letters to a group of people with a prediction—with the caveat that half are told it will increase and the others given the opposite information, thus covering both options.
Those who received the correct guess are further split and the process repeated, until after a few cycles there remains a small group of prospective marks who are absolutely convinced this advisor possesses some profound insight. His machinations are invisible to the person who has received several accurate predictions in a row, and it will sure look like he knows something.
During the 2010 World Cup, one of the more captivating stories came not from the matches in South Africa but from an aquarium in Germany, which housed an octopus named Paul. Before each national team match his handlers would place two boxes of food in his tank, one featuring the German flag and the other that of their opponent. The box he chose first was counted as his prediction for the match.
After his first few “choices” proved correct, interest grew until the aquarium became the site of a whimsical media spectacle.7 Germany faced seven teams, and each time Paul correctly predicted the outcome of the match, leading alternately to calls for his consumption or protection, depending on which side one’s fandom lay.
Owners of other animals around the world got into the action, but none were able to demonstrate a similar run of luck.8 Although octopi are not known for their expertise in sporting matters the masses were eager to put great weight into Paul’s prognosticating powers.9 In similar fashion people want to see wisdom and foresight in past decisions, even when it must be retroactively applied and there’s zero basis for doing so.
The best laid plans
The phenomenon has been well-codified as survivorship bias. Out of large groups we focus on the few that succeed despite long odds—startups, mutual funds, soccer-loving cephalopods—and then backfill reasons for their success. In some aspects their lessons might be emulated, while in others there was a healthy dose of randomness or circumstance that can’t be. No matter how improbable the chances somebody eventually wins the lottery, and while we may be tempted to ascribe significance to their number selection the reality is it was entirely out of their control.10
Leaders who discover a path that leads to exceptional success may discover painfully that those choices don’t work in another setting. Some organizations can trade on the legacies of fortunate decisions whose benefits redound to the present day, like universities that chose to build up endowments early, or corporations that chose headquarters cities which grew up into thriving magnets for talent. It’s risky to assume that the same patterns will hold, or that you can replicate the circumstances which led to them.
The role of luck doesn’t discount foresight, or genius, or diligence, and observers confirm that folks like Bezos operate on a different level than most. Without massive, sustained effort Amazon would be nothing today. Yet that’s not the only thing that mattered. While Bezos is brilliant enough that some entrepreneurial success was reasonably certain, the world-beating status of Amazon was far from a sure thing. To his credit Bezos recognizes this and further understands that Amazon will one day stumble, just as its predecessors have. Starting over and viewing the world fresh is embedded in his corporate ethos.
Individuals may develop a type of pattern recognition based on past successes. Sometimes these reflect the random survivors of a process more than anything else. Discount these appropriately or risk learning lessons that are outdated, irrelevant, or just plain wrong.
What paths are you on because of what you’ve seen in other people or organizations? How might they reflect chance and a bias to unique circumstances? How could you build a fuller view of reality?
Not receiving these articles automatically? 1/week, subscribe here.
References
Bezos “lucky” anecdote from a live event on the University of Pennsylvania campus in 2000.
Math professor John Paulos described the stock market scam in a 1988 book.
German magazine Der Spiegel wrote an obituary of Paul the Octopus that catalogued his many accomplishments.
- Warren Buffett has discussed the concept of winning the ovarian lottery, which meant he was born in the United States at a time in history when his skills were unusually valuable. ↩
- The latter was a company dedicated to selling pet food online, with expensive and memorable marketing campaigns involving a sock puppet. It was incidentally the recipient of heavy investment from none other than Amazon, which sunk money into several ill-fated ventures. ↩
- “Alexa, what’s Amazon’s share price?” Over $1,700, and it’s been as high as $2,000. #winning ↩
- It turned out the supply of investors willing to pump hundreds of millions of dollars into any concept with an “e” prefixed to it was finite. ↩
- No one knows what might have been, though plenty of would-be tycoons have ideas. The founder of Pets.com still believes that business model was sound, though the alternate history is unprovable. ↩
- Hence the rise of index funds, which recognize that a small fraction of managers might outperform the market, but its almost impossible to figure out who they will be a priori. ↩
- Helped along by a very savvy marketing team, who really milked their moment in the spotlight. ↩
- Including a parrot and a camel, neither of whom were as familiar with Die Mannschaft as Paul. ↩
- Or kick themselves after the fact for not betting based on his predictions. ↩
- Except in those rare cases when someone found a flaw in the game design, as with this American couple.↩