How To Lose 150k In a Single Day.Oct 04, 2023
5 minute read...
A while back, I read a story about a young writer and former stock trader named Jack Raines.
His story took place in the crazy wild-west days of 2019-2021. I’m sure you saw a few news stories from the period: the price of Gamestop stock randomly increasing 30 fold in less than a month, the wild and still hard-to-understand run up in the price of Bitcoin, the 2500%+ increase in Tesla in two short years.
Jack, then just 23 years old, managed to turn about $6000 into $400k. And then he promptly lost most of it. His portfolio went from $257K to $106K in a matter of minutes and $365K to $106K in a matter of months.
Still a pretty good return. And when all was said and done, Jack reflected on his wins and losses and the assumptions he made, turned his experience into wisdom, and moved on.
How might we use Jack’s experience to help us as Assumption Hackers?
Assumption Hacking Irrational Exuberance
“Irrational exuberance” is a term that former Federal Reserve Chair, Alan Greenspan, coined during the run up to the dot-com bust in the early 2000’s. He used it to describe the unfounded assumption among investors that stocks would continue their indefinite climb and that fundamentals didn’t really matter any more.
Though stock-trading is perhaps its most extreme manifestation, irrational exuberance is a form of inertia that happens all time time. It even occurs within businesses and teams.
What irrational exuberance looks like.
At the core of irrational exuberance is our propensity to follow Newton’s definition of inertia: an object at rest remains at rest, an object in motion remains in motion at constant speed and in a straight line unless acted on by an unbalanced force. In other words, people tend to keep on doing what they're doing.
In Jack’s case, he “really wanted to hit that $1M level” and never wanted to have to work again. So he just kept on going. He assumed that if he just kept on going, the returns would keep on climbing. That is, until the “unbalanced force” of losing $150,000 in one minute happened.
Case-in-point: Single piece flow
One way that many companies improve flow is by reducing the batch sizes they work with. For example, instead of producing 1,000 units of an item each month, producing 500 units every other week would be an example of reducing the batch size. The result of reducing the batch size is typically improved availability with less overall inventory. Many companies have taken on the mantra of “single piece flow”. Instead of producing 1,000 or 500 at a time, they aim to produce only 1 at a time. In certain situations, there are significant benefits to attaining the holy grail of single piece flow. But in so many more, the benefits are gone and can even be reversed after the first couple iterations of cutting the batch size.
It’s also true that people do “irrational exuberance” in reverse. For them, fear of the risks overpowers desire for the benefits. In contrast to Jack, these are the folks who keep all their money in a checking account, or perhaps even stuffed into their mattresses.
In a business context, they don’t invest in people or technology or new solutions for their customers. They only spend what they have to in order to keep the business afloat. But ultimately, they lose out to others who do invest.
Why Course Correcting Is So Hard
When our frame of reference is that the world is a harmful, dangerous place, we’ll over emphasize the potential downsides of making a change and under emphasize the gains. Conversely, when we view the world from purely rose colored glasses, we’ll tend to over emphasize the potential gains and under emphasize the risks.
How can we protect ourselves from irrational exuberance and irrational paranoia? So that, unlike Jack, we can make important decisions before we’ve driven our stock portfolio back down the mountainside.
Assumptions are for Hacking
Your aim is to understand whether or not the action you are considering could really cause the outcome you are seeking.
The first step in Assumption Hacking is Attune - to settle into the Assumption Hacker’s mindset. To recognize that we might be making an invalid assumption and by doing so, we could be making a more harmful rather than helpful decision.
Then it’s time to expose the assumptions being made.
For those who may be irrationally exuberant, ask yourself:
- Why do I think that doing this will cause such an amazing result?
- What downsides might I be missing? Note that this is your blindspot - don’t hesitate to ask other people this question.
For those who may be irrationally paranoid, ask yourself:
- Why do I think that doing this would cause a dire outcome?
- What benefits might I be missing? Note that this is your blindspot - don’t hesitate to ask other people this question.
Then, no matter which side of the exuberance/paranoia pendulum you are on, use these questions to help you surface and challenge the assumptions you’re making.
- When has it worked elsewhere and why?
- When has it not worked elsewhere and why?
- How is my situation the same or different than either of these?
Once you've got those question answered, follow the rest of the Assumption Hacking ABC’s to make and implement any needed course corrections.
Til next time,
Whenever you're ready, here are a couple of ways I can help you:
- Assumption Hacking Essentials. Dr. Eliyahu Goldratt said in his forward to The Goal, “The challenging of basic assumptions is essential to breakthroughs.” In this digital course, I'll take you through a five step process for challenging those basic assumptions and creating breakthrough in the process. Join the waitlist and get notified when the course is released.
- Jenrada Programs. Customized workshops and longer engagements to help you create an organization of aligned problem solvers delivering extraordinary results. Complete this form, send me an email, or schedule a discovery call.
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