I figure this is one of the most misunderstood memes in business… most people think that the great ideas are obvious. That they can spot them. That anyone with a bit of common sense can see them.
I don’t think there’s been a more greatly hyped product than the iPod, ever. Yet no one saw it coming (no you didn’t, otherwise you’d be rich and getting fed grapes in the tropics where there is no internet).

What else were investors buying if not Apple? They were buying stocks of those ‘great ideas’ like
Iridium satellite phones and Hummers. Did you know that Google was passed over by several VC’s who thought “search is cooked”? Do you think it was obvious that Facebook would take over the world before it did?
“Don’t worry about people stealing an idea. If it’s original, you will have to ram it down their throats.”
Howard Aiken
The way I’m trying to get around my own inability to pick the winners is by no longer trying to predict, and instead just learning to react faster.
“Put one dumb foot in front of the other and course-correct as you go.”
Barry Diller

If you’ve heard anything about ‘lean startups‘ or ‘agile development‘, you’ll have seen that wonderful success can be had by accepting that great ideas are only obvious in hindsight.
Some examples:
  • Big 5 year budgets and business plans? They’re a crock, don’t bother. You’ll just be revising it again every 6 months. And if you do manage to stick to it, you’re admitting that you hadn’t learned how to get better since writing the budget. Instead put in place great metrics and then learn to measure and respond quickly.
  • ‘Playing’ the share market? If you beat the average, it was a fluke. Even Buffet says you’re better investing in index funds. We always see some people outperforming the market, but we always pick them with the benefit of hindsight. They are statistical flukes, who rarely back it up.

“In retrospect, all revolutions seem inevitable. Beforehand, all revolutions seem impossible.”
Michael McFaul

Further reading (only for the geeks amongst us)
The scary thing about how our minds work is that we remember our good predictions, and rapidly forget those we got wrong. We have a much lower hit rate than we realise.

If you’re still not convinced, here are some great reads about how we are fooled by randomness. Most of them retell similar anecdotes, so you really only need to read one or two for some strong insights.

Fooled by Randomness and The Black Swan have probably had the most coverage, and are compelling reads.

Index Funds vs Active Managed Funds: The Economist had a wonderful edition a couple of years ago looking at investment approaches. Two articles discussing the superiority of Index funds from it are:

(It’s subscriber only content, but you can get a free 14 day pass).Or for a similar summary: http://mutualfunds.about.com/od/activevspassivefunds/a/indexvsactive.htm

Still not convinced? Go to PredictionBook.com, start recording some of your predictions, and see if you’re better than the average.