It's a Wager : Slide 24

Let us imagine a hypothetical world where the player wins, as opposed to the house. It is, in fact, the case for the creation of wealth, either in the stock market, venture capital or research and development. As mentioned earlier, the economists suggest that the only way to create wealth is through raw new technology and the successful application thereof.

An analogy is a horse race. Imagine if you will, a horse race with ten horses in it and where the payoff is a 100:1 for any bet made. Clearly, a wager of $1 on every horse will yield a statistical payoff of $90 per race. It should be noted that independent of the number of horses in the race (horses becoming sick or injured, or the number of races per day, etc.), we are dealing with large numbers over a year. The name and performance of either the horse or jockey is irrelevant. The player always wins this game. On the average, the bettor wins $90 for every race. If no races occur for a week, the player loses $50 for that week, but makes up the losses for next Monday. It is important to note that over the year, the player "can't lose". Using the law of large numbers, portfolio management, or tosses of a coin, it is just about impossible to lose. Predictability of performance depends upon the statistics and application. The concept on many individual events occurring and aggregation of these events is a significant portfolio consideration.

Much like R&D portfolio analysis, it does not matter what the names of the horse are or the technology used. It doesn't matter what field they run on, the marketplace of technology or production application. What matters is that the bets are made consistently. They are independent bets, and there are enough of them to constitute predictability in their aggregate.

Modern corporations seem to run the same analogy but backwards. If a race is to occur the following Tuesday, many corporations hire consultants to analyze all the horses being run. This same corporation, even though the payoff is high on the aggregate, selects only one horse to bet on. It puts all its money on that one horse. As the race is being run, the horse may begin to lose. In these circumstances, the corporation increases its bet in the mistaken belief that more money bet will make a horse somehow run faster! The secret is to bet small sums on many horses, bet on an independent basis, and use group dynamics, rather than individual analysis to insure total success over the long run.

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