Stop Taking Bets

We need to change the language we use to talk about strategic risk

This week I was in a meeting about a strategic shift at Speechmatics. We were talking about how we’d chosen to allocate resource in the past and how that would be changing going forwards.

Just before we signed off, one of our product managers asked us a question which got me thinking. He asked how we thought the company should take bets.

And the thought that popped into my head was, why should we take bets at all?

In business parlance, to “take bets” is to invest resource in a risky proposition. The outcome of that investment is not guaranteed. Businesses that are not incompetent normally only invest in these scenarios when the outcome has a long tail of positive outcomes.

This is a sensible thing to do. You have to take risks to reap rewards. If you didn’t, everyone would end up equally successful (or unsuccessful - hello, Soviet communism!).

The problem with it isn’t taking risks. It’s the language.

The risks we’re taking aren’t bets at all. The analogy we’re using is dangerous and flawed.

Let me explain.

If I place a bet on the Grand National, I pick a horse. I stick some money on it. I hope the horse wins.

The race kicks off. The horse starts falling behing. I wish, against all hope, that I could change my bets midway through the race. But I can’t. The inevitable happens. My horse loses. I’m out of wampum.

In another world, my horse pulls ahead. I get increasingly excited as it nears the line. With the taste of victory fresh on my mind, I collect my winnings. At the end of the day I get to go home a thousand smackaroos heavier. I’ve learnt a valuable lesson - gambling’s great!

Compare this to the how a business invests.

I have a new product I’m interesting in developing. I put a team of three people on it. They get a budget of $100k to play with. I want to see what they can do.

Over three months, the product grows into a promising prototype. I give them two more people and $100k more to turn it into a shippable MVP.

The product keeps growing. We’ve signed up 100,000 DAUs. I keep expanding the team’s resource. Ten people. Twenty. A budget of $2m. The investment looks like a better and better choice as the product grows. Everyone is happy.

Alternatively, I give these three folks $100k to develop a prototype and they come back with a lump of shit. After three months of work, I kill off the project and reallocate the budget.

The point is, I don’t need to go all in. If my horse starts falling behind, I can switch my bet (so to speak). If my horse looks like it’s doing well, I can put more money behind it. The money I put behind it helps it do better. This money seems to have a flywheel effect. The more money I throw at it, the better it does, the smoother the machine runs.

Think about the comparisons.

Gambling is all-or-nothing. Business is the strategic allocation of risk.

Gamblers ignore signal. Businesses embrace it.

Gamblers double down. Businesses constantly reassess.

Gamblers take value off other people. Businesses create value for other people.

When success starts to become inevitable for a gambler, the odds grow shorter and they get diminshing returns. But when success starts to become inevitable for a business, the opposite often happens. The more money they pour in, the more money they get out.

When you think about it, business doesn’t look like gambling at all.

Now you’re thinking: Okay, Tudor, we get it! You’re a pedant. Whoopdeedoo. Not all of us are obsessed about the language we use. You get what we mean when we talk about bets.

Let me stop you there with this quote:

If language is not correct, then what is said is not what is meant; if what is said is not what is meant, then what must be done remains undone.

That’s from The Analects¹ by Confucius. I think wisdom that lasts two millenia is worth listening to.

The language we use shapes how we think. It is how we think (in the rational thought space). It’s what creates the mental model we have of the world.

If we use the wrong language, our mental models will be wrong. If our mental models are wrong, we’ll act incorrectly and the world will surprise us with its refusal to conform to expectations.

If we talk like gamblers, we act like gamblers. Gamblers are bad role models for business strategists.

If we want to implement good strategy, we must use language that allows us to think about and discuss the subtle allocation of risk. Without that, we’re in danger of doubling down on bad bets.

And if you do that, the house always wins.

Let me know what you think! Do you talk about taking bets? How do you think we should talk about risk in business?

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