Categories

## The Fallacy of Entrepreneurship’s Expected Value

There are plenty of popular entrepreneurship motivational bloggers who preach along the lines of “just do it.” Some even attempt to mathematically show the rational move is to initiate your startup. At the core of one  popular analysis is a false premise that leads people into deciding that they should “go for it” despite their intuition.

The following is from the popular poker entrepreneur Billy Murphy:

“So, if I was trying to decide whether I should work a job or start a business, could I use EV to help me?”

Absolutely— it’s a perfect spot to use EV.

Here’s how his expected value analysis would apply to deciding whether to start a business:

1. You can choose to “work for the man” or build your own business
2. You can calculate your expected earnings (the sum of all potential earnings outcomes times probability of each outcome) as an entrepreneur, and compare this to your known earnings as an employee
3. If your expected earnings as an entrepreneur are significantly greater in entrepreneurship, then you should go for it

Let’s overlook the success bias that entrepreneurs in general will have in assigning a probability to their chances of success, and assume that the entrepreneur is conservative in his estimates. The problem I want to point out is that of the marginal utility of wealth.

Consider that the incremental value of any dollar amount you receive will decrease each time your account increases by that amount: e.g. your first \$50,000 matters a lot more to your well-being and happiness than does the next \$50,000. This is known as the diminishing marginal utility of wealth.

In the probability analysis, this is not accounted for. The reason your intuition tells you not to start a business is the same reason that people play it safe and “work for the man.” They have a correct gut feeling that the \$50,000 / year guaranteed salary provides greater expected utility to them than entrepreneurship. Going broke in entrepreneurship means losing out on the first \$50,000 (having \$0 – or worse, \$0 and debt). Such a great amount of the expected utility of wealth is front-loaded into that. Your quality of life would probably decline much more in this case (\$50,000 to \$0) than it would from the effects of going from a \$100,000 salary to a \$50,000 salary.

Mr. Murphy’s expected value calculations are great in situations like poker games because many games are played over the course of life and you, the exceptional poker player, always come out ahead by playing the greater expected value (assuming you are wise enough never to risk everything in one hand, where you can lose everything). In the game of life, we have to consider the expected utility, not the expected value. And the expected utility of entrepreneurship is very low for most people.

Categories

## The Butterfly Effect

“The Butterfly Effect” is a fascinating theory. Even if you’re not very familiar with it, you likely believe one of its variations to be true at some level. You’ve likely seen two of my favorite movies with interpretations of this idea, “Back to the Future” and “The Butterfly Effect.” The version of the theory that interests me holds that changing small, seemingly inconsequential variations on the state of things has profound effects on the future.

This version is difficult to grasp for most of us, since our assumptions about the nature of the universe are often fatalistic. For example, say that your home football team lost by a touchdown, and you were not at the game. Would your presence have made any difference in the game at all? People generally think it would not have, unless you directly interacted with the team during the game.

But, consider: you’re interacting with the fans next to you, which sets off a small divergence in the way they act, which in turn affects others next to them. Effects compound over time; they are changes that continue to multiply with each other in increasing magnitude, similar to how a seemingly inconsequential change in a shot in the game of pool would have large effects if the table were sufficiently frictionless, giving the balls a chance to move around enough.

Our intuitions will normally disagree with this. They are fatalistic in that we tend to believe on some level that there’s an inherent dampening effect in the universe, where our small actions that effect small changes will be mitigated over time, such that any long-term future state of the world will be indistinguishable whether we do one action or another (so long as that action is sufficiently small). In other words, the confusion seems to come from an unrecognized assumption that the effects of our actions are buffered, leading to some tendency for small actions to lose consequence over time as the state of things settles toward some “normal” state, which supposes a universe with laws akin to fate or predestination.

It seems The Butterfly Effect will always stay an unprovable “theory” since we cannot test it. However, computers will be able to model the world with increasing accuracy, giving us a much more clear understanding of the butterfly effect through simulation.

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## The Problem

Coupon site startups share a problem with most web startups that benefit from network effects: a serious chicken-or-the-egg problem, or a catch-22. You want to attract publishers to add coupons to your site, but to do so, you need to already have coupons and traffic! At first, it seems that the solution to getting a lot of coupons on your site is through a feed – but unless you already have original coupons, your site will not rank well or attract any attention if it shares the same data feed that thousands of other sites are using. It needs something unique to please both your users and Google; if you base your site entirely off of feed-based coupons, you run a high risk of Google considering it to be a clone of existing sites, and users will not find much value in your site either.

## The Solution

To address this initial hurdle, you’re going to have to start with a large amount of manual data entry. You will start by finding coupons listed on existing sites – especially the sites of the businesses that publish their own coupons, since these coupons are often not listed on other websites, and are therefore relatively unique. Often, these coupons are image-based and are not even indexed yet in search engines.

To do this at scale, you will need to build functionality into your site that allows for outsourced labor to contribute to your coupon site; this data entry and management feature should include multiple user types: data entry users and data entry reviewers.

The data entry users are responsible for finding, categorizing and entering coupons into your site’s database. To ensure that a high level of quality is maintained (good coupons with accurate category tagging, descriptions, valid URLs, etc), your data entry reviewers will have privilages beyond the data entry users. They will be responsible for ensuring that your coupons meet your standards, and the links to coupons on external pages do not point to expired sites (they need to be checked regularly to maintain quality, since you’ll be linking to sites that often go down, have their URLs changed, and have coupons taken down). The data entry reviewers need to provide feedback to the data entry users, letting them know why their coupons were rejected. The data entry reviewer criteria requires more trustworthiness and skill than a data entry user, since the reviewer acts as a moderator that controls the coupons entered by many users.

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## Impossibly Difficult Custom Jetpack Levels

Jetpack: anyone remember playing this 15-year-old DOS-based game? You could build your own levels where you navigate through mazes. I uploaded a couple of my own, created years ago for your enjoyment*

Download the above level to play it. While there are few enemies, this level will make you think.

If you really want to play the level above, here it is. Don’t be fooled by the lack of enemies, and get ready to have your patience tested – or, just give up now and avoid the pain! (updated 10/14/12 to fix a cheat)

Here’s another level (above) left by Vektor. Download here.

To play jetpack online, visit JetpackHQ.

### Most difficult campaign award goes to Balmipour

Update: Balmipour (from the comments) has shared an extremely challenging campaign that will test the patience of any human. Download Balmipour’s full campaign here. Here are screenshots of the first 3 easiest levels in his campaign. To see the next levels (of increasing difficulty), you’ll just have to download the full campaign!

### A new level from Balmipour!

Get ready for a “custom torture room.” Don’t try this one at home. Or do. You won’t be able to beat it, so here is the solution.

### The Batcave

Here’s a new level created by ill4death. I have not beaten this level yet. Your comments on it are welcome! The author has posted the solution here

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## Vacation and Perspective

Science backs up the idea that vacations give us a fresh perspective on things. The main takeaway is that your mental efforts are most valuable after a vacation, so you should make use of this period for decisions requiring this state of mind: you will have better potential for insights and creative solutions to problems that you were previously stuck on. Perform routine tasks for when your mind is not fresh, and no deep insight or new perspective is needed.

More generally, just recognize that you find yourself shifting among various states, and then use your peak mental states to address your most significant decisions. At the same time be aware of when your mind is weak, saving yourself from the consequences of decisions made in that state.

Categories

## The Problem of Free Will and Divine Judgment

Judgment by an omniscient deity is an important, common theme among the world religions.

In explaining this judgment, religions assert that we have free will. The type of free will that we are supposed to have is the kind that allows for us to be responsible for our actions from God’s perspective (hence we hear of divine judgment). We are supposed to hold sufficient responsibility for our choices for God to hold us morally accountable, who then judges us on the spectrum of good and evil.

The possibility of the necessary type of free will for this judgment to make sense is under increasing scrutiny by scientists and philosophers. As we learn more about the mind and the effects of environment and genetics on our decisions, we are able to attribute an increasingly greater amount of the reasons for our choices to these outside factors, leaving less room for the ultimate cause of decisions to originate from within ourselves.

The problem of determinism challenges this fundamental theme of judgment that is shared across religions: unless we are at least in some manner the ultimate cause of our choices, the notion of praise and blame from a god’s-eye perspective is inconsistent with our idea of fair judgment.

The problem is this:

There will always be an explanation for our decisions (however complex it may be), or a causal regress explaining how we came to the point where we made that decision. There is a story to be told for why we have certain values over others. You have the freedom to show compassion over violence; but did you have the freedom to be shaped into the type of person who favors compassion? It seems we cannot possibly have ultimacy if our agency itself is always completely determined by prior events. We simply lack the ability to see and explain the link, giving rise to the illusion of a freedom of an ability to do otherwise than that which we did.

Without free will from a gods-eye perspective, the notion of divine judgment becomes rather absurd. A flawless system designer with perfect, complete knowledge would not praise or blame his system for its behavior – just as an omniscient being, who would completely understand our behavior (a part of the system he created) would have no more reason to hold us morally accountable than we have to seek retribution on a kitchen knife for an accidental, self-inflected cut. If the universe is completely controlled and understood by an omniscient being, it would not make sense to speak about our actions as “good” or “bad” with respect to the creator’s point of view; all actions would be precisely in line with and predicted by the creator’s laws of the universe and its initial conditions, leaving us morally neutral from the creator’s perspective.

The thoughts in this post are inspired by William Ramsey’s intro philosophy course at Notre Dame, Shuan Nichols‘ work, and Sam Harris‘ book, “Free Will.”