Wednesday, June 09, 2010

Success and Convexity Part 2

This is Part 2 of a series exploring personal success and Convexity. For purposes of this blog I have defined convexity as opening the door to many good things, while limiting the access of incoming bad things. I suggested that convexity means seeking an unbounded upside and a bounded downside.Why do we have such a two-sided concept such as convexity? There might be a lot of explanations, but one way of looking at it is this: the same forces that can contribute to a bright and successful life: passion, energy, curiosity, attractiveness, charisma, intelligence….can also morph into destructive forces. Even “pure chance”, which has often contributed to spectacular breakthroughs, can, in the form of entropy, seep in and undermine the finest career, the most sterling reputation, the most secure future.

Another scenario is single-focus “tunnel vision” in which the individual makes progress on a given front, but ignores the errors and defects accumulating on other fronts which can sabotage the hard-won success.

Still another common occurrence is that a person who has achieved excellence in one field assumes he or she has excellence in another field, or even all fields, which of course, leads to blind alleys and failure.

For Instance :

Consider the countless stories of sports and entertainment greats who made tens of millions of dollars, but ended up destitute due to some combination of personal defects (drugs, over-spending, or other unsavory activities). These people succeeded in achieving an “unbounded upside” but failed to create a “bounded downside” to secure the benefits of that success.

Consider Long Term Capital Management, a team of brilliant financial minds, including some Nobel Prize Winners, who caused a near-meltdown of the world financial system when those same , previously-successful money-making formulas imploded.

Consider that Leonard Nimoy made …vocal albums?

Pat Boone made Rock albums???

Bill Clinton achieved the Presidency but was nearly impeached because he …ahem…allowed access to,…unbounded downside????

The above areas demonstrate the potential of “negative convexity”.

However, it is also important, while guarding against downside risks, to consider this: where can I generate “unbounded upside”? How can I maximize the “happy accidents” that can put me on the path to success? How can I maximize my “luck”, opportunities, or skills to geometrically or exponentially improve my situation over the years and decades?

A starlet gets discovered on Hollywood and Vine.
A graduate student (
William Sharpe) changes his thesis topic and leaves the path of obscurity ending up with a Nobel Prize.
The molecular structure of Benzene is discovered in a dream!!!

Yes, we can try to avoid the unbounded downside, but, also, how do we discover the unbounded upside?

We’ll consider these factors in upcoming posts.

Tuesday, June 08, 2010

Success and Convexity Part 1

I am going to do a series of posts about personal success and Convexity. It’s an interesting word and can be used as a lens to view personal success from multiple angles. In a previous series of posts I explored the metaphor of entropy and personal success. However, recently, as I was reading the magnificent books by Steven Drobny Inside the House of Money and The Invisible Hands , I noticed that many of the brilliant hedge fund managers he interviewed repeatedly used the term “convexity” to define the characteristics of the financial returns they were seeking. Now there are precise financial definitions of this term, but my overall impression was that these investors were using convexity to define an investment that had a strong potential to do increasingly well if conditions were right, but had the additional property of not creating a ruinous loss if things went bad. In short, they were seeking something like this:

Now, this blog has often tried to take concepts from the business and scientific world and examine them for their potential to facilitate personal success. So, it occurred to me one day that Convexity might be one of those concepts.

Simply put, convexity (and here I am speaking of positive convexity), might be defined as opening the door to many good things, while limiting the access of incoming bad things. We seek convex outcomes. Things that could get better and better. And a much-to-be hoped-for corollary of those outcomes would be: we also want to achieve those outcomes at as low a risk as possible. Strictly speaking, we would like an unbounded upside and a bounded downside.

We’ll examine this concept further in upcoming posts.