Genocea, B-ball & Hayek

Big news I alluded to last week from vaccine breakthrough company Genocea co-founded by my venture firm Lux Capital. Led by my brilliant and tenaciously tireless partner Robert Paull, Genocea just publicly announced a $23 million first round. A remarkable feat in this environment! Especially as vaccines as global health take the center stage of attention they deserve.

Also: we just wrapped a Forbes TV interview with friend and CTO of Lockheed Martin, Ray Johnson. Stay tuned to watch it early next week. Ray oversees nearly 150,000 people and 4,000 projects, as part of the $40 billion technology and security giant, which helps keep us--and our allies--safe around the world. What’s more: with layoffs looming at other firms, Lockheed is one of the few growing and hiring top engineering talent. You’ll hear what Ray is focusing on and who he’s looking for.

Meanwhile, money culture chronicler, Michael Lewis bounced his moneyball onto the hardwood in last week’s New York Times magazine. Basketball is the next sport to get the better-strategy-by-statistics treatment. Shane Battier is the protagonist. He’s remarkable for being unremarkable: his stats stink. But he makes the opponents play worse and his teammates play better.

Analogies to investing are even more powerful with basketball than in Lewis’s penned Moneyball (baseball) and The Blind Side (football). Baseball is a game of serial events. Pitch. Hit. Run. Catch. Throw. It’s more like a series of one-on-one competitions. The outcomes are less chaotic than basketball.

Consider: Battier divides up the basketball court into discrete squares analyzing which zones all-star players like Kobe Bryant miss more shots. Then he’ll try to push Kobe there. It’s like baseball great Ted Williams, who divided his strike zone into 77 little squares (11 x 7) and only swung at “fat pitches”. And in investing .Warren Buffett has done the same thing: only waiting for fat pitches, companies that fit his sweet spot, since as he’s fond of saying, there are no called strikes in investing.

Also noteworthy: Battier and his coaches have a strong belief in the value of process over outcome. Like poker and investing, you have to play the odds and make the most rational decision possible under conditions of uncertainty. Luck plays a huge role in outcomes, but it’s maximized in your favor if you focus on your process.

Time value and optionality in investing have analogies n basketball too. For example: there’s a rough rule of thumb that if your point lead exceeds the minutes left in the game, then you’ve got an 80% chance of winning. (Say: you’re up by 4 point with 3:26 left). Like investing the further out an event is, the cone shape of uncertainty expands. You can think of it like an open zipper.

Science tries to zip the uncertainty (invent the future, not predict it), with each new discovery laying down teeth to close the zipper. It’s like rails upon which to advance forward through time.

The nearer the event, the more predictable, the more actionable, the more immediately falsifiable (and thus the more quickly the predictor can be held accountable). Predictions a century hence (like those being made 100 years into the future about emergencies from climate change) say more about adherents and believers than the espousers improbable to be exposed. Longer than lifetime timeframe are hard to collect bets on.

It may sound cynically libertarian of me, but Nobel economist Friedrich von Hayek had it right that “emergencies” have always been the pretext on which the safeguards of individual liberty have been eroded. He was a respectably a quick apologist for his profession, economics, saying both: “we shall not grow wiser before we learn that much that we have done was very foolish” and “we have indeed at the moment little cause for pride: as a profession we have made a mess of things.

Here’s Hayek’s Nobel Prize acceptance speech on the nature of uncertainty in complex systems, the physics envy that defines so much of economics and finance and the futile search for precision that more often leads, invoking Keynes, to being precisely wrong rather than roughly right. Pay special attention to his ball game example:

“…The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events.

This may even be the ultimate reason why we single out these realms as "physical" in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events - although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories.

They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions - with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

A simple example will show the nature of this difficulty. Consider some ball game played by a few people of approximately equal skill. If we knew a few particular facts in addition to our general knowledge of the ability of the individual players, such as their state of attention, their perceptions and the state of their hearts, lungs, muscles etc. at each moment of the game, we could probably predict the outcome. Indeed, if we were familiar both with the game and the teams we should probably have a fairly shrewd idea on what the outcome will depend. But we shall of course not be able to ascertain those facts and in consequence the result of the game will be outside the range of the scientifically predictable, however well we may know what effects particular events would have on the result of the game. This does not mean that we can make no predictions at all about the course of such a game. If we know the rules of the different games we shall, in watching one, very soon know which game is being played and what kinds of actions we can expect and what kind not. But our capacity to predict will be confined to such general characteristics of the events to be expected and not include the capacity of predicting particular individual events.

This corresponds to what I have called earlier the mere pattern predictions to which we are increasingly confined as we penetrate from the realm in which relatively simple laws prevail into the range of phenomena where organized complexity rules. As we advance we find more and more frequently that we can in fact ascertain only some but not all the particular circumstances which determine the outcome of a given process; and in consequence we are able to predict only some but not all the properties of the result we have to expect. Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear - relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.

Of course, compared with the precise predictions we have learnt to expect in the physical sciences, this sort of mere pattern predictions is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is precisely the belief that in order to have a claim to be accepted as scientific it is necessary to achieve more. This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based - a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”