Risk Taking, Blackjack, and the Entrepreneur

At a speaking engagement a few weeks ago, an incredibly insightful blackjack-card-counter-turned-author named Jeff Ma made a claim that caught my attention via Twitter:

“Four times as many mistakes are made due to inactivity versus activity.”

I found this interesting, so I retweeted it and set out to do some research on what exactly he meant.

Turns out there’s a study by two finance professors making its rounds in the intellectual community that was the source of Ma’s assertion. Bruce Carlin of UCLA and David Robinson of Duke analyzed Casinos’ data on their blackjack tables and discovered the following counter-intuitive fact:

Players make 4 times as many mistakes by being too conservative versus being too aggressive.

Said differently, 80% of the mistakes blackjack players make are from not hitting when they statistically should have, and only 20% are from overly-aggressive actions such as doubling down or hitting. On the whole, blackjack players are way too conservative. This strikes me as counterintuitive because we already know that these people enjoy taking risks—they’re in a Casino playing blackjack—yet for some reason this proclivity doesn’t apply to their decision-making in the heat of the moment.

This is an example of the many cognitive biases behavioral economists have unearthed that differentiate people from perfectly rational risk-taking machines. It suggests that too often, people equate inaction to safety—even when not doing anything is actually the riskier course of action. Carlin and Robinson speculate that the players may view passive failure—say, standing on a 15 and losing to the dealer’s 18—as more painful than failure caused by the player’s own actions—busting by hitting on the same 15.

As usual, this got me thinking about entrepreneurship. Does the cognitive bias described in this paper apply to business decisions as well?

Unfortunately, we don’t have anywhere near as clean data on entrepreneurs as we do on blackjack players, so it’s tough to make a judgment with certainty. But my feeling is it probably does. In a recent blog I talked about the startup pivot, a term for making dramatic changes to your company’s business model. I speculated that it was likely under-used by entrepreneurs who are too enamored with their original business plan. This study suggests that I might have been onto something. If blackjack players, a group not generally known as overly conservative, are biased towards inaction, it seems logical that entrepreneurs would be as well.

So what does this mean for your small business?

I wouldn’t immediately go taking irrational risks just to compensate for a vague generalization about the human psyche. But it is important to understand the situations in which your instincts might fail you, and this is one of them. Whenever big financial risks are involved, it’s especially important to analyze the possible outcomes thoroughly and analytically.

Most importantly, remember that inaction isn’t always the safest wager.