Outsized Returns – Alpha Ideas

“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right.

Given a 10 percent chance of a 100 times payoff, you should take that bet every time.

But you’re still going to be wrong nine times out of ten … We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs.

The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs.

This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

-Jeff Bezos