Determinate Optimism
Breaking down a talk by Peter Thiel about luck, fear and promise — and how our perception of the future impacts how we act today
At SXSW 2013, I had the chance to hear Peter Thiel’s absolutely masterful talk on luck.
In the few days prior, I had managed to catch excellent conferences with, amongst others, statistician Nate Silver and investor Esther Dyson. However, on the plane ride home, it was Thiel’s talk that I could not stop thinking about. It is so relevant yet timeless that I believe it should become mandatory content for all college economics classes.
In his talk, Thiel explains how our perception of the future impacts how we act today. Let’s recap a few highlights from the hour long talk.
A Framework For The Future
The key framework that Thiel uses throughout his talk is the following 2x2 matrix:
Determinate optimism is a state where individuals have a pretty definite view of how the future will be better than the present. On the other hand, indeterminate optimism is a state where individuals generally believe the future will be better than the present, but are not very sure how that will actually happen.
Determinate pessimism is a state where individuals believe the future is worse than the present, but have a clear plan to counter it or at least understand the forces underpinning the bleak outlook. On the other hand, indeterminate pessimism is a state where individuals fear a worse future and are unsure how things will play out.
To make this more concrete, Thiel maps a few countries on the 2x2 matrix.
Determinate countries are those whose governments have a long-term plan about the future and work in a coordinated way to execute that plan.
How The Future Impacts Our Behavior Today
Thiel shows that our perception of the future impacts how we act today. Optimists find promise in the future, where pessimists fear it. More interestingly, individuals who believe in a determinate world have convictions about specific ideas, while individuals who believe in an indeterminate seek to diversify their resources across multiple ideas.
In Financial Terms
Perhaps the most critical link Thiel makes is that our outlook on the future will play a major role defining our interaction with money today. Determinate optimists will invest in their specific ideas in the future and often even double down on large bets, while indeterminate pessimists will seek to save or diversify their investments.
Very interestingly, Thiel notes that indeterminate optimism is an “unstable quadrant”, with both low savings and low investment. This is especially alarming since indeterminate optimism is currently the state the North American society seems to be in. Here, both no one is saving and no one is investing, since everyone is outsourcing their thinking to others.
Ideas About The Future
In the somewhat dire scenario of indeterminate optimism that Thiel describes, the prevalent conclusion is that generally “no one knows what to do with money”. In other words, money cycles through the financial system, from the investor to financial institutions, with everyone passing the risk along to someone else.
In this view of the world, ideas about the future are seen as “dangerous” and companies are instructed to be “very profitable and cash-flow generating”, since the aim is to pass on as much cash-flow as possible to the next intermediary in the financial chain. In this view of the world, investors diversify their portfolio, measure everything with probability and statistics, and buy insurance. They do this because they have no clear view about what the future holds.
Thiel starkly contrasts this to Thiel’s own investment approach, investing in deficit-generating companies where the founders have a big definite vision and know what to do with the money.
One such example of a current project with a clear determinate vision is the Hyperloop project proposed by SpaceX and Tesla Motors founder Elon Musk (and ex Thiel co-founder at Paypal). Announced yesterday, one only needs to glean at the 57 page guide to witness how determinate Musk’s vision is for the future of transportation. The Hyperloop would bring passengers from San Francisco to Las Angeles in 30 minutes, radically faster than current transport options.
The Official Religion
Thiel denounces the new “official religion” where financial investors put an overbearing faith in statistics, associate success to luck, A-B test outcomes to infinity and expect returns in about a year. He mentions that a a goal of his talk is to “make us aware” that we are currently living this reality. He implores us to actually make bold centralized bets and take a longer multi-year approach to the future.
In the past, both individuals and governments conceived and led major multi-year initiatives. Thiel mentions the construction of the railroad, city planning in SF and NY and spaces missions as such examples where a concrete plan was laid out for the future. In the corporate world, Thiel also points to Apple, where Jobs had a very definite idea of the future and had multi-year product plans to get there. As Thiel points out: “In a determinate world, one of the most important metrics is the robustness of the secret plan”.
Interestingly, this seems to lead us to believe that startup founders should try to “think” more in order to develop a determinate view of the future, instead of iterating constantly on your product towards product-market fit as they lean startup movement would most likely suggest. This would imply an elevated role for intuition-driven product design process led by visionary founders like Jobs.
Companies That Do Not Sell
A logical outcome from Thiel’s previous reflexion is that companies that have solid plans for the future are not inclined to sell. Of course, this is an offshoot of classic microeconomics. Managers who have projects with high net present values generating large expected cash flows discounted over time will want to reinvest profits in their business. These founders do not look to take money off the table. They look to double down. Money is “a means to an end”, not an end in itself.
Thiels mentions managers like Jeff Bezos, Larry Page and Mark Zuckerberg. He recounts the story of how Zuckerberg walked away from a $1 billion acquisition offer from Yahoo since he had a very clear idea of the product he wanted to build and did not believe that Yahoo was fully valuing his future product.
Introspection
I’ve reflected quite a bit on Thiel’s talk, which extends much beyond financial considerations to more philosophical ones.
I think my current startup Busbud has an very determinate view of the future. We are focused on a very specific opportunity and have a precise understanding of how the world will look like in 5 years in that market.
In the past, I’ve been much more indeterminate. When I co-founded a startup that undertook freelance software development projects in my teens, I did not have at all a clear idea of the future. I outsourced this responsibility to someone else: my client. Our clients would pay us to execute their plans for the future.
Even through my college years, my outlook was again somewhat indeterminate. Having started a business, I did have a pretty strong sense that I would for sure be an entrepreneur for life. That said, I still “bought insurance” by investing in my education, completing two masters degrees. A part of this decision was motivated with learning new skills, another may have been a hedge against some sort of an indeterminate future.
Thiel interestingly notes that a majority of Americans complete college to avoid “dropping through the cracks” of society in an indeterminate world, even though the education system has shown major flaws and decreasing value over time. Higher education can be very formative. Further, many students do not have specific ideas they wish to pursue instead of education. That said, many students do. And for those students, Thiel has developed the The Thiel Fellowship, a program that gives $100K to 20 youths under 20 to build a company (and perhaps reconsider pursuing higher education).
With the years, I think I’ve moved much more towards a determinate optimistic outlook. Perhaps this is the result of experience and confidence gained over time.
Even when I work on side-projects (re: my TED talk on 20% time), I also generally view them with this determinate optimist lens. I do not work on side-projects as a hedge against a main project. I tend to also have a specific vision for each side-project and work towards hopefully executing that vision in the long term. Side-projects are thus not a way to diversify risk away, but rather a way to have a bit of variety in the work week and exercise different muscles.
I believe determinate optimism also underpins a solid investment philosophy. Determinate optimism leads to making bold bets on entrepreneurs solving problems with a clear vision of the future. The investor should ideally also believe that each investment can have a major positive outcome in the future, rather than looking for success in aggregate over a diversified portfolio of investments.
Towards a Radically Better Future
In conclusion, Thiel’s superb talk (see below) on economics actually leads us to reconsider the role of luck as a “dominating force”. It actually encourages us to demote it. Rather, Thiel challenges us to change the world and build a radically better future in a very coordinated, deliberate, determinate way.