What if I told you that Amazon is a massive success because they mastered the art of failing. This might seem like an oxymoron but once you understand the mental model behind this strategy you will understand what I mean by this.
The secret sauce that allows Amazon to stay innovative can be explained by a mental model called Optionality. Nassim Taleb popularized this term in his book Antifragile where he talks about things that gain from disorder.
What is Optionality?
In an uncertain world where the conditions are always changing and information is limited, instead of trying to predict the future, thinking in options might be a better strategy for success.
Optionality is a strategy where you pursue a large number of options where the potential downsides from errors are small while the potential upsides are large or in some cases unlimited.
Nature and Optionality
The best teacher of optionality is nature itself. Evolution is nature's way of testing a variety of options so that it can choose the ones that further the survival of the species.
Nature is continuously making small errors through genetic variations. As we know, not all the outcomes are positive. The variations that fail to improve the odds of survival kills individual organisms. However, it uses these small errors as a way to make the larger species even more Antifragile.
Technology and Optionality
The world of business and technology is a domain that benefits the most from optionality. Entrepreneurs pursue a variety of business ideas using garage scale startups until they find a winning idea that eventually turns into a billion-dollar unicorn.
Most breakthrough technologies did not happen through top-down planning from a corporate strategy team. In fact, the majority of them were accidental by-products of tinkering by a crazy inventor or common workmen.
Amazon’s Day One Philosophy.
No one understands the power of optionality better than Jeff Bezos. At the core of Amazon is a philosophy that Jeff Bezos refers to as Day 1. The internal slogan that drives the company culture is "It's aways Day 1 at Amazon".
According to Amazon's website:
"Our approach remains the same as it was on Amazon’s very first day — to make smart, fast decisions, stay nimble, innovate and invent, and focus on delighting customers."
“Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight”
-Jeff Bezos.
This allows Amazon to have the courage to try new things, kill the ones that do not work, and move on to their next project taking the lessons they learned from past errors into the future.
This is the manifestation of the classic saying, “What doesn’t kill you makes you stronger”. Nassim Taleb calls this the convexity bias. Convexity bias happens when the difference between the results of trial and error in which gains and harm are asymmetric. In simple words, the pain due to errors is small and the gains from wins are large.
From the Fire Phone to Amazon Local, a daily deals site similar to Groupon, the number of failed products under Amazon's belt outnumbers the number of successful ones.
In a 2018 letter to his shareholders, Bezos explained why failing is as important as winning:
“As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn't growing, you're not going to be inventing at a size that can actually move the needle.
Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won't undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately payout.
This kind of large-scale risk-taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.”
- Jeff Bezos
By building a portfolio of small bets, Amazon has created an engine of innovation built on the basic principle of optionality. The massive success of a single good bet pays for all the bad ones made in the past and provides even more fuel to keep the process going.
If you would like to learn more about Optionality, here are a few sources that can help you.
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Nassim Taleb: Trial with small error
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