Newcomers

Author Robert Coram once wrote about military promotions:

There are officers of great patriotism who are appalled by what they see in the Pentagon. They say to themselves, “I’ll go along for now. But when I get to be colonel, I’m going to change things.” What they don’t realize is that they will be promoted to colonel only if their superiors think they won’t make changes. Study after study shows that the higher in rank a military officer ascends, the less likely he is to make change.

This isn’t unique to the military. It’s what happens when one org structure has to rank thousands of different people, so unique nuance that comes from change gets crowded out by well-known, customary metrics.


Brent Beshore recently raised a private equity fund with a unique structure. I’m being charitable. To quote Brent: “My pitch to investors began with, ‘Plan on never getting your capital back.’ That was a show-stopper for 80% of potential investors, and at least 10% more thought I was joking. I wasn’t.”

But dig through his structure – permanent equity that can make generational bets – and it makes a ton of sense for some investors. It makes a ton of sense for some investors who turned him away, too. I’m confident in that because this industry is filled with flagrant nonsense, but when explaining Brent’s fund structure to people I constantly hear, “That’s so smart. I love that idea.”

So why the pushback? Brent explained on Patrick O’Shaughnessy’s podcast:

We were doing something different. And anytime you’re doing something different the only people who can participate are people who don’t have career risk.

Anytime you introduce the factor of career risk into the decision-making process, you have to do the norm. It’s a divergent system: If you invest in a divergent system and it goes wrong, you have massive downside for your career personally, separate from the organization. It could be the right decision – it was probabilistically a great bet. But if it goes wrong and it looks different, you could get fired. And if it goes right, you still may not have enough upside career-wise.

This is a great way to frame why some weird decisions are made within groups of smart people.

Deciding whether to do something isn’t just about whether or not it’ll work. It’s not even about the probability of whether it might work. It’s whether it might work within the context of a reference point – some gauge of what others consider “normal” to measure performance against. Thinking probabilistically is hard, but people do it. And when judging the outcomes of decisions, a win isn’t just a win; it’s “You won, but that was an easy bet and you should have won.” Or, “You won, but that was a gamble and you got lucky.”

Daniel Kahneman writes that golf is a perfect example:

Every stroke counts in golf, and in professional golf every stroke counts a lot … however, some strokes count more than others. Failing to make par is a loss, but missing a birdie putt is a foregone gain, not a loss.

Par, in this case, is the reference point performance is judged against.

The question you have to answer when looking at something new is, “What’s par?” Where’s the reference point?

When something is familiar and common, you set a low reference point. So most bad outcomes are placed in the “Oh well, you got unlucky. Next time you’ll do better,” category, while all wins are placed in the, “Easy money!” category. Like this:

Screen Shot 2018-09-06 at 9.58.49 AM.png

Index funds live here. Even in a bad year, no one thinks you’re crazy.

When something is new or unfamiliar, you have no idea where the reference point is. So you’re cautious with it, putting most bad outcomes in the “I told you so” category and most wins in the “You probably got luck” category. Like this:

Screen Shot 2018-09-06 at 9.58.11 AM.png

This is what military leaders and Brent’s potential investors faced. When something is new and unfamiliar, the high reference point means not only will bad outcomes be punished, but some good outcomes aren’t good enough to beat “par.” So even high-probability bets are avoided.


Imagine the first person who told his friends, “You guys take a yellow cab like normal people. I’m going to get into this stranger’s Mercury Cougar thanks to this new service called Uber.” That’s a high reference point to clear, even if Uber was cheaper and faster.

Employees have similarly high reference points because of Brent’s point about career risk. Few people only think about decisions that are best for the company; at best they think about what’s best for the company within the context of how decisions make them look, personally and professionally. This isn’t bad: You can’t do anything meaningful at a company if you’re untrusted or fired for originally doing something that looked reckless, even if it wasn’t.

Newcomers have to not only convince other people that their idea has a positive expected value. They also have to show it can clear a high reference point. Nailing the first part but ignoring or discounting the second explains why a lot of good ideas aren’t taken seriously, or take far longer to be taken seriously than you’d imagine.


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