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If You Want High ROI Always Look For Asymmetries

If You Want High ROI Always Look For Asymmetries

In his book Skin In The Game, Nassim Taleb explained how underlying asymmetries rule our lives in a way that is hard, if not impossible, to see when not broke apart.

In fact, asymmetries find their spot in many decisions that we make.

And even though these asymmetries are hard to notice, we shouldn’t be afraid of that phenomenon and rather strive to make decisions that favor such asymmetries. Especially when we’re optimizing for ROI.

The real return that we all want to see (e.g. 10X) will always lay on the right edge of the spectrum.

Oftentimes when we’re making decision we judge the outcome as fair.

What fair means in such situations is that we get more out of what we put on. That’s a fair deal, we say then.

While that’s a fair 😉approach that shouldn’t be the only determinant on whether the decision is worthy or not.

To best understand it, imagine the Gaussian Distribution where the majority lands at point 0.

Now, let’s say that the further you go from on the left from point 0 the worst the outcome is.

Further on the right the better, the outcome is.

Most of our decisions, as the distribution suggests, will land near the point 0 with little returns and minor losses.

But…

Some decisions are highly asymmetrical.

The best one that I can think of is the story of Sam Zell’s father that he told on his appearance on the Tim Ferriss Show.

Namely, his dad who was a Jew living in Western Poland right before the 2nd World War had two options.

Stay where he lived knowing what’s “going on” (His father was a salesman who has frequently traveled West. Thus he knew about these plans.) or sell their belongings, take the family (wife and children or two) and travel East.

What was stunning to me in this story was the fact that when Sam’s dad told about the plans to the rest of his family (parents) and friends, they all agreed that he was blowing the thing out of the proportion.

Yet, he understood asymmetrical returns and made the right decision.

Why moving East was the right decision?

In scenario A when they stay where they are there are two outcomes possible.

1 - No one invades Poland, they carry on with their life.

2 - Nazis invade Poland, a ~100% chance of death.

Now scenario B.

1 - No one invades Poland, they move back to where they lived. The only thing they lost is probably some money and the fact that everyone will say “You see, we were right!” for the next couple of months.

2 - Nazis invade Poland killing millions of people but they stay alive.

Scenario A must include the chance of disaster and scenario B includes none of it.

Thus, influenced by this underlying asymmetry the choice to move East is the right one.

When making decisions that are highly asymmetrical when it comes to their outcomes or the decisions that we want to optimize for the ROI, always try to break it down into such A/B/(maybe)C scenarios.

In such situations, it’s not about being sure or about gauging the pros/cons ratio.

You want to avoid the case of a total disaster at all costs.

And you want to favor the side that gives you the 10X of what you put it.