pessimism, empiricism, and risk alignment

i wrote this because i’m tired of “pessimism” and “realism / empiricism” being confused with each other, and in the back of my mind I kind of hate “narratives / story-telling”.

EDIT: I’m realizing halfway through that pessimism rhymes with “low-risk-tolerance”, and vice versa

• i’ve often said that i’m a realist when it comes to future events and heard that word confused with pessimist by people who are optimists

• but in the same room as realists, i’ve also found people who drift towards pessimism in a way that i don’t

• this is especially prevalent in the startup world since people talking about startups talk about the probability they succeed and asymmetrical bets and a bunch of stuff that has macro level probabilities assigned but at a micro level have really compelling narratives given that you’re necessarily overcoming overwhelming odds if you do make it

• so here’s my breakdown of the alignment chart predicting

empirical vs narrative

empirical vs narrative is driven by how much you think about forecasting the future using a series of statistics based on how frequently they happen vs thinking about the past in terms of compelling narratives

1. empirical - you considered working at a trading firm, you use the word “prior” in conversations regularly, you look for base rates when you think about a startup and ground your predictions in conditions

   • see also: superforecasting, trading firms

2. narrative - you think people operate on vibes, memes are powerful, you think of in terms of arcs, feel like things were destined to happen, and streaks of luck are real, and you look for founders that have an epic story that can compel a cult

   • see also: alchemy, cocacola, brands

optimistic vs pessimistic

optimistic vs pessimistic is driven by what you focus on. do you prioritizing guarding against downside risk in the worst case or do you prioritizing setting yourself up to take advantage of the upside opportunity on the best case

1. optimistic - you’re thinking deep into the positive timeline, 3-4 steps ahead of how you can maximize upside, and often treat risk as a thing you’ll deal with if it happens - which usually involves just taking more shots

   • see also: companies w/ long time horizons like nvidia / waymo

2. pessimistic - you’re thinking broad into several downsides, stubbing failure conditions to make sure they don’t snowball. you’ll take advantage of the upside if it happens but making sure your downside is covered makes you think you’ll get more shots

   • see also: lean startups that iterate quickly and pivot fast [vanta, yc]

i’m realizing i don’t actually have anything interesting to say on this topic in terms of what’s good & bad, other than that obviously different roles should be selecting for different things.

when you’re in a protracted legal battle w/ a jury, your ability to guard against downside in a narratively compelling way to the jury is critical. if you’re investing in outliers over a career of 25 years and are going to make ~50 bets, empirical optimism is critical.

also these are normalized around axis - an alignment chart for lawyers can see the most data-driven & optimistic lawyer contrasted to the most narratively compelling & pessimistic lawyer

alignment chart for what each class likes to invest in

• empirical optimists - nuclear has better energy efficiency. nuff said. the public is irrational…

• neutral optimists - optimism is obvious - but the numbers are kinda double sided, and so is the narrative

• narrative optimists - believe we’ll converge on a singularity & AGI… no elaboration needed

• neutral empiricists - hedging, hedging, hedging, math math math…

• true neutral - duh

• neutral narrativists - coca cola = captialism - the narrative of the century

• empirical pessimists - so you see, if you forecast every single stat out according to a Fourier… then the sharp ratio on my short position in…

• neutral pessimists - gonna buy insurance. all the kinds of insurance

• narrative pessimists - when it all comes crashing down.. my certificates for gold in another state are going to be worth so much…

go make your own… or don’t, idc