In the last two weeks, my book tour brought me to Microsoft, Google and Facebook. I joked to friends that I was having my Ebenezer Scrooge moment and visiting the Ghost of Technology Past, Present and Future.
Appropriately my first visit was to the Future and Facebook. This was my second time speaking at Facebook and as was the case the first time, I spoke to a packed house. The Facebook crowd was alarmingly young. Certainly their reputation is such but seeing is believing and I was at least two standard deviations above the median age. (I'm 37)
The most interesting part of my visit to Facebook came when I started to discuss loss aversion in blackjack. Defined as , loss aversion is an important bias for the winning blackjack player to overcome. Whether you are doubling soft 18, splitting 9s or even splitting 10s, the goal of maximizing wins not minimizing losses must take precedence.
Specifically an unconventional decision like splitting 10s against a six, illustrates the impact of falling for this psychological bias.
(Excerpt from The House Advantage")
As the cards come out and you see your 20 and the dealer's 6 you have essentially already put that money in your bank account. You see that money as yours. To split the 20 puts that money, your money, at risk. It doesn't matter that there is greater potential gain to splitting those 10's. Your new frame of reference has made you subject to "loss aversion", a principle first discussed by Amos Tversky and Daniel Kahneman.
There's a strong carryover to building a business where established companies like Facebook, Google and Microsoft begin to look at protecting their gains rather than establishing new ones.
It just so happened that the day I spoke at Facebook was the same day they reached 500 million active users -- growing over 10 times since the last time I had spoken there. It would be natural for a company experiencing that type of success to fall prey to loss aversion and look to become a bit more conservative.
"So now that you guys have reached 500 million users, are you going to take the same risks now and in the future that you have for the last few years?" I asked the young crowd.
No sooner were the words out of my mouth then a slightly older voice from the back row screamed, "Hell yeah!"
The voice belonged to Chamath Palihapitiya, Vice President of User Growth, Mobile and International and a long time member of Facebook's Executive team. Palihapitya, who once contemplated a career in professional poker, represents an important attitude for growing companies.
Risks are necessary to build a business and as long as the expected value of those risks is positive they should be taken regardless of your company's size or success to date.
As I rounded out the rest of my tour I thought about the executives at Google and Microsoft. Did they share Palihapitya's attitude or were they more fixated on protecting their gains? Would they stand on 20 or put an extra bet down to split those 10s.
Examining recent decisions by both you certainly see a desire to take on new risks, yet you wonder if those decisions were made proactively or protectively. The Microsoft Kin certainly was reactionary and its failure (iPhoone4 sold more in 48 minutes than the Kin did in 48 days) was indicative of a company playing not to lose. Google Buzz wreaks of "keeping up with the Joneses" and in general their social strategy has yet to gain the normal Google-level of success.
But "loss aversion" does present an interesting lens to view the decisions of established companies - do their decisions seem more like standing on standing on soft 18 or splitting 10s? I'd rather back the company that is willing to split 10s when appropriate.