Superlinear returns

Whilst Marc Andreessen’s essay talks about the benefits of technology at the macro level (economy and society), here’s another thought leader from Silicon valley, Paul Graham talking about superlinear returns at the individual level. He begins by saying inequality is inevitable as it is naturally embedded in the way the world functions.

“It’s obviously true that the returns for performance are superlinear in business. Some think this is a flaw of capitalism, and that if we changed the rules it would stop being true. But superlinear returns for performance are a feature of the world, not an artifact of rules we’ve invented. We see the same pattern in fame, power, military victories, knowledge, and even benefit to humanity. In all of these, the rich get richer.”

He cites two factors driving this superlinearity – exponential growth (compounding) and thresholds. Exponentiality is akin to the virtuous cycle where success begets more success and so on, whilst thresholds are akin to step functions i.e, winner takes all.

He cites ways we can expose ourselves to compounding at work:
“There are two ways work can compound. It can compound directly, in the sense that doing well in one cycle causes you to do better in the next. That happens for example when you’re building infrastructure, or growing an audience or brand. Or work can compound by teaching you, since learning compounds. This second case is an interesting one because you may feel you’re doing badly as it’s happening. You may be failing to achieve your immediate goal. But if you’re learning a lot, then you’re getting exponential growth nonetheless.

This is one reason Silicon Valley is so tolerant of failure. People in Silicon Valley aren’t blindly tolerant of failure. They’ll only continue to bet on you if you’re learning from your failures. But if you are, you are in fact a good bet: maybe your company didn’t grow the way you wanted, but you yourself have, and that should yield results eventually.

Indeed, the forms of exponential growth that don’t consist of learning are so often intermixed with it that we should probably treat this as the rule rather than the exception. Which yields another heuristic: always be learning. If you’re not learning, you’re probably not on a path that leads to superlinear returns.

But don’t overoptimize what you’re learning. Don’t limit yourself to learning things that are already known to be valuable. You’re learning; you don’t know for sure yet what’s going to be valuable, and if you’re too strict you’ll lop off the outliers.”

But getting exposed to thresholds isn’t as straight forward:
“The existence of a threshold doesn’t guarantee the game will be worth playing. If you play a round of Russian roulette, you’ll be in a situation with a threshold, certainly, but in the best case you’re no better off. “Seek competition” is similarly useless; what if the prize isn’t worth competing for? Sufficiently fast exponential growth guarantees both the shape and magnitude of the return curve — because something that grows fast enough will grow big even if it’s trivially small at first — but thresholds only guarantee the shape.”

He reckons the most obvious way of getting exposed to superlinear returns is to do exceptionally great work. He shares a precis of his superb blog on great work:

“Choose work you have a natural aptitude for and a deep interest in. Develop a habit of working on your own projects; it doesn’t matter what they are so long as you find them excitingly ambitious. Work as hard as you can without burning out, and this will eventually bring you to one of the frontiers of knowledge. These look smooth from a distance, but up close they’re full of gaps. Notice and explore such gaps, and if you’re lucky one will expand into a whole new field. Take as much risk as you can afford; if you’re not failing occasionally you’re probably being too conservative. Seek out the best colleagues. Develop good taste and learn from the best examples. Be honest, especially with yourself. Exercise and eat and sleep well and avoid the more dangerous drugs. When in doubt, follow your curiosity. It never lies, and it knows more than you do about what’s worth paying attention to.

And there is of course one other thing you need: to be lucky. Luck is always a factor, but it’s even more of a factor when you’re working on your own rather than as part of an organization. And though there are some valid aphorisms about luck being where preparedness meets opportunity and so on, there’s also a component of true chance that you can’t do anything about. The solution is to take multiple shots. Which is another reason to start taking risks early.”

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