Making good decisions requires courage and reasoning from first principles

I went out with my wife for dinner, and we had an interesting conversation about some observations that I have been having in the back of my mind. I have also been playing with ChatGPT and it seems like a great opportunity to write this blog post.

I explained to my wife that lately, I’ve been noticing two distinct types of mindsets when it comes to making decisions: the optimizer mindset and the mindset of reasoning from first principles.

I asked chatGPT what the opposite of first principle thinking was, and this is what it had to say:

The opposite of first principle thinking is relying on assumptions or preconceived notions without critically examining the underlying principles or reasoning. This type of thinking often involves accepting information or arguments without thoroughly evaluating their validity, or making decisions based on tradition, authority, or convenience rather than on reasoning from first principles. It can lead to flawed or incomplete solutions to problems and may hinder progress and innovation.

Surprisingly, chatGPT is spot on. The bolded part in particular was the argument I was trying to make at dinner, and how I’d define the optimizer mindset. When making decisions through the optimizer mindset, we choose the option that feels safe and traditional. An example of a traditional decision might be a person deciding to attend a particular university because their parents went there, or because it is the most prestigious or well-known institution in their area.

I’m guilty of this, I sometimes make decisions based on tradition, authority, or convenience, and it all comes from not truly applying first-principle thinking, and not being bold and courageous in decision-making as often as I would prefer to be.

This is also highly influenced by this idea of mimetic desire by Rene Girard. In a nutshell, we want what others have.

Copying competitors in business

Let me illustrate my point with a business case. You’ve seen it: A business does something, and the competitor then follows suit to be able to remain “competitive”.

Apple if you measure by market cap is the biggest company in the world. It’s also the boldest company that I know of when it comes to decision-making around its products.

They’re famous for making controversial decisions that from a business perspective might often time feel anti-competitive.

I asked chatGPT about some of these controversial decisions, this is what it had to say:

The removal of the headphone jack from the iPhone 7, sparked a backlash from users who were accustomed to using wired headphones.

The decision to replace the traditional charging port on the iPhone with the proprietary Lightning connector required users to purchase new cables and accessories.

The removal of the home button and Touch ID fingerprint sensor on the iPhone X, introduced new gestures for navigation and introduced Face ID facial recognition technology.

The decision to switch to proprietary screws on the MacBook Pro made it difficult for users to open and repair their own devices.

Apple’s decision of removing the headphone jack

If we evaluate this decision through the lens of the optimizer mindset you would never agree with this decision: all your other competitors have a headphone jack and this might be a significant disadvantage in the market, a headphone jack feels like an essential part of a smartphone, and its been part of it since day one, you might argue.

I asked chatGPT why Apple removed the headphone jack and this is what it had to say:

Apple has not publicly commented on the specific reasons for removing the headphone jack from the iPhone 7. However, it is likely that the decision was driven by a combination of factors, including a desire to make the iPhone thinner and more compact, the increasing popularity of wireless headphones, and the potential to create new business opportunities by selling proprietary accessories.

Removing the headphone jack allowed Apple to make the iPhone 7 significantly thinner than its predecessors, which may have been seen as a desirable feature for many users. In addition, the popularity of wireless headphones had been growing in the years leading up to the release of the iPhone 7, and Apple may have felt that the time was right to make the switch.

Finally, by removing the headphone jack and replacing it with the proprietary Lightning connector, Apple effectively forced users to purchase new headphones or adapters if they wanted to use their existing headphones with the iPhone 7. This may have been seen as a way to generate additional revenue for the company and create new business opportunities for accessory makers.

I think this is accurate enough, the analysis for Apple probably went like this:

People want to listen to music and audio privately, a headphone jack exists to enable that through wired headphones
A headphone jack is not important if we allow people to listen to music and audio privately anyway
We’ll continue supporting the real reason people use the headphone jack: to listen to music and general audio privately with wireless headphones that make the headphone jack obsolete, which in turn opens up a world of possibility for us:
- We’ll differentiate ourselves in the market by not having a headphone jack
- We’ll make the iPhone more compact, and this will increase the demand enough to justify the potential loss of demand by not having a headphone jack
- We’ll increase the popularity of wireless headphones and create a new business unit in the process

Apple is selling as many iPhones as it ever has, the company didn’t take a hit for removing the headphone jack, and funnily enough, some competitors are copying this decision, it also created a massive business with its AirPods, in 2021 they made 12.1 billion in revenue, for context, Shopify made 4.6 billion and Spotify 9.67 billion. Adobe the creative giant made 15.8 billion, and AMD made 16.4 billion.

Was this a decision that a business or person with an optimizer mindset would’ve been willing to take though? Probably not.

The strategy that allowed Apple to remove the headphone jack and create a 12.1 billion dollar business required first-principle reasoning. However, simply having the strategy was not enough. This type of decision-making also requires confidence and courage. Without both of these qualities, it is unlikely that truly incredible decisions can be made.

We’ll fund TV shows and movies in the future and get dividends and capital gains in return

Hernan Casciari is always on the edge of content distribution and business models for creative work. He released all of his works for free and most of his novels and short stories were first published on his blog, and yet he still makes money and sells a ton of books.

Hernan’s brand new project is exciting, he’s producing a movie and he’s selling bonds, for up to $600,00, which is the total estimated production cost, the bonds already sold out.

He explains it as following: if they sell the distribution rights of the movie for $1,200,000 and you bought a bond for $100 you will get $200 back, similarly, if the rights to distribute the movie sells for $800,000, you’ll get $133 back. Effectively you’re buying shares and they’re sharing the financial upside with backers of the project.

You might lose all your money and perhaps the movie might never get sold, or it might sell for less than the production cost, or worse, it might never get made—very unlikely knowing the trajectory of Hernan, which I’ve been following for over 15 years. Despite all these risks, there’s upside in other areas as well, you’ll get a seat in the front row to the whole process of creating the movie, including voting rights for picking the cast and how the story evolves, setting the stage, etc.

If you’d like to learn more about Hernan Casciari’s project, go here. I’m proudly backing it—not for profit, though it would be nice, I’m backing the project because I like Hernan, I like the story, and I like the idea of participating in this project and having a glimpse of how a movie gets made.

How are we going to fund movies or TV shows and get capital gains and/or dividends for them?

Right now it’s the right time to see emerging new online platforms that enable creators to raise money, while backers can also be partial owners.

I’ve never been bullish on a particular crypto project, however, at this point, I can’t ignore the fact that the internet is primed to be revolutionized and the underlying technology powering crypto and NFTs might play a big part in it.

Without getting overly technical, NFTs and smart contracts, both relative new innovations in a space that’s innovating really fast, can be the foundation of this mechanism, where backers of projects are not just backers but also partial owners.

You could potentially sell the shares that you own on a project, and earn capital gains, or you could keep the shares and earn dividends.

The key difference is how easy this could be.

This will overtake crowdsourcing

Platforms like Kickstarter allows individuals to back projects, usually in exchange for the product, and perhaps for other perks, but never for a stake in the business or any financial upside.

What if you could have both? As a stakeholder, you’d also be incentivized to let the world know more about the project and you’d be a small part of its word-of-mouth distribution.

The early signs

Projects like Hernan’s are magical and are proof that there’s demand for this and there are creators willing to sell a stake in their projects. People from all over the world are backing it, and I’m pretty sure that from a legal and financial point of view replicating this as an individual would be very problematic.

Republic wants to democratize investing which is also an early representation of this, this platform was only possible, however, due to some changes in US investment regulations. The crypto world right now feels like the wild west, and we might see regulation in the future, but for now, there’s nothing that’d prevent this from being built.

You’re crazy!

Yes, this is a wild prediction, but we’ll see in five years. Right now, on Opensea you can only buy things that exist, but what if you could buy things yet to be created and you could have a financial upside for stakeholders, aside from bragging rights? It’s not that big of a leap…

What I wish I knew when I started a bootstrapped business as a young person

I’ve been trying to make money from a very young age. My first time was in second grade. Eventually, that same drive made me start many businesses. This is a collection of things I wish I knew when I started my first real business. Currently, I’m the founder of Kapa99 – Unlimited Graphic Design Help, you can read the whole story here.

Understand what’s a business

If you’re thinking about starting a business because you want to make money, that’s alright. However, if you want your business to be successful, you need to understand what’s a business.

In simple words, a business is an entity that solves problems in exchange for money.

This framework will help you understand all businesses in the world. If you want to understand any business, ask yourself this question: what problem is that business solving for its customers?

Be aggressive

In my first business, I was always very careful. I had little capital, to begin with, and I was risk-averse because of it. In hindsight in almost every business that I’ve worked on, I could have invested more aggressively in marketing for faster growth, hired faster, and overall move quicker in all business fronts. The upside is that you’ll learn faster and grow faster. The downside? You could burn cash too quickly—when you’re young, you have time to recover if things don’t work out. This is the moment to take risks.

Take risks

When you’re young the worst thing you can do is take whatever safe path exists. There’s no fun in that but more importantly, the safe path will always be there. Face your fears, in the process, you’ll realize that every single roadblock is something that you can overcome, if you don’t have money, you will work with that constraint, if you don’t have any knowledge on how to build the business that you have in mind, there’s at least one book or resource on the internet that can help you get started. Go for it and have no regrets.

Be ready to learn and grow as a person

In the E-myth, a book that you should read, there’s a prophecy: your business is a reflection of you. No matter what career or life experience you have, at this point, there are many unknown unknowns. Be ready to embrace that and never stop learning. Knowing a little bit of everything will give you an edge, and the more you know, the better equipped you’ll be to grow your business.

Triple-down on what works

This should be obvious, but when you’re young it’s not because you’ll not know when something is working. The best way I know to make this distinction is to ask yourself this question: are you getting more demand than the effort you’re putting to generate that demand? If the answer is yes, then you have a great shot. It’s time to triple down.

Rent over buying, when possible

A lot of businesses will need space, tools, and services. When possible, rent over buying, you’ll save money and you’ll be able to test different options. Renting gives you optionality and you should always strive for optionality, as that gives you flexibility.

Systematize as soon as you can

Building systems is your best weapon to do things in a repeatable way, which is key for growth. If you’re anything like my younger self you’ll feel like a beast or worse, like a machine, as if you could work 18 hours a day every single day. Believe me, you’ll not be young forever, but more importantly, your business will suffer from being reliant on you. Whether you like it or not, you will get sick or need time off from time to time. Your customers don’t care about that. Systems make your business stronger and therefore, more valuable.

Delegate as soon as you can

Before you can delegate anything you need systems. You need to be able to track that the work is being done to the standards that you have set for your customers. If you have this, then it might be time to make your first hire.

How do I decide this?

If your business can grow faster if you were to invest that time in other activities, then it’s time. This, of course, assumes that your business can financially support that.

Hire young talent over experienced people

This is not always true but in the early stages, I’d value more hungriness for growth in a small business than experience. I’d encourage you to do the same.

Marketing

Marketing is often misunderstood, some people think marketing is giving discounts or doing promotional activities, in reality, marketing is the simple act of crafting a strategy that connects people that have problems with a solution, ideally the one that you want to sell.

There are channels to help you make that connection, the internet has many like social media or email marketing, the real world also has a lot of channels, in the past TV, radio or printed media were big.

What really matters is connecting and for that, half the equation is to have a solution that truly solves the problem that people have, a big pre-requisite for this is knowing that the problem actually exists. Sounds obvious, but this is the biggest mistake I see in young people starting businesses.

Use prototypes and validate your idea first, always

Rome wasn’t built in a day. Before you spend a lot of money on your product(s) or services, make sure that there’s demand for what you have. Be creative. Validate that the problem that you’re going for is actually there.

You’ll fall in love with your solution, don’t make this mistake.

If anything fall in love with the problem, if it really exists, eventually you’ll land with a great solution that people will want to pay money for.

Quit fast

If you were not able to validate that the problem that you want to go after exists, then quit. You didn’t fail. You learned that the problem doesn’t exist and you should not waste time. You’re young but time passes very fast. Find a new problem and start over.

Move on emotionally

Your first failures will break your heart. Starting businesses is hard. Failing is common. I have failed many times and to be successful, you have to be okay with failing, but not just be okay with it, be prepared to learn from it, and grow from your failures. Be ready to start over and over again.

Embrace the unknown

I could type a thousand more things I wish I would have known, in reality discovering these things are part of starting a business, and you’ll never be prepared for everything, you can be better equipped the more experienced you are but new situations and problems will always happen as you grow and try more things, be okay with that and better yet, embrace it.