Monday, January 12, 2015
Wilkinson, The Creator’s Code
I’m going to touch on three of these skills: drive for daylight, fly the OODA loop, and fail wisely.
The “drive for daylight” concept is borrowed from race-car drivers who say that “the trick to managing speed at 200 miles per hour is to drive for daylight. They go too fast to navigate by the lines on the pavement or the position of their fellow drivers. Instead, they focus on the horizon and, at high speeds, their hands follow their eyes.” Similarly, creators “navigate around immediate obstacles by keeping their long-term mission in mind. … creators don’t benchmark themselves against the competition or focus on industry norms. … they set their sights on the horizon, scan the edges, and avoid nostalgia.” (p. 49)
Integral to the “drive for daylight” mindset is a “to-go” way of thinking. That is, a person doesn’t focus on how far he’s already come but on what remains to be done. “To-go” thinking, researchers have found, accelerates momentum. “Motivating yourself by thinking about how much of the marathon remains before you cross the finish line can inspire you to run harder, faster, more competitively, and with greater enthusiasm.” (p. 55)
The notion of the OODA loop comes from John Boyd, an Air Force fighter pilot who “crafted a framework for making rapid decisions that would ensure success in fast-changing environments. Boyd’s ‘OODA loop’—observe, orient, decide, and act—is as pertinent to business [and to trading] as it is to aerial combat.” (p. 68) Since there’s a fairly extensive literature on the OODA loop, I’ll not say more about it here.
Finally, let’s look at the failure ratio. We’ve all read the advice to fail early and often, but how much failure is acceptable? The author found that “a surprising number of creators decide that ratio ahead of time. They aim not for perfection but to ensure that they take enough risk.” (p. 94) This is, I think, an important metric to consider. Entrepreneurs worry if they experience too few failures. As LinkedIn cofounder Reid Hoffman said, “Frankly, if you tune it so that you have zero chance of failure, you usually also have zero chance of success.” (p. 96) Just think of that beautifully over-optimized trading system that crashes in real time.
Traders focus on minimizing their risk by setting stops or keeping their position size small. But the other side of the equation is equally important. Their portfolio can grow only if the risk they assume is large enough. Institutions have metrics to look at both sides of the equation. Individual traders rarely do, and then they wonder why they come up short.