Daniel Vassallo: A Portfolio of Small Bets

 

Daniel Vassallo: A Portfolio of Small Bets

 
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On this site, you can find a synopsis of a six-part online course called A Portfolio of Small Bets by Daniel Vassallo, founder of SmallBets.com. This course dives into Daniel’s unconventional approach to entrepreneurship, focusing on making small, intentional bets to navigate the uncertainties of business and life. Each session summary provides key insights, from understanding randomness and survivorship bias to identifying opportunities, managing productivity, setting selection criteria, and designing a lifestyle aligned with your true preferences. 
 

#1 The Role of Randomness

In entrepreneurship, randomness often plays a larger role than we’d like to believe. In the first session of A Portfolio of Small Bets, Daniel Vassallo explores the nuances of randomness in business and the implications for people who want to pursue multiple small ventures instead of a singular path. Success in business often combines structured planning with elements of unpredictability, leading to a fine balance between what can be controlled and what must be accepted as random.
 

Embracing Uncertainty

Daniel begins with a fundamental question: What is a business? At its core, a business is an activity controlled with an expectation of profit. However, the payoff is often uncertain and doesn’t always meet our expectations. Success requires a complex mix of factors, and even if they’re all met, they don’t guarantee positive outcomes. Because business success relies heavily on human behavior—an inherently unpredictable variable—it exists within a framework of uncertainty.
 

The Two Worlds of Predictability

Daniel explains two distinct types of worlds in business: the Predictable World and the Stochastic World. Each has a unique impact on business decisions and outcomes:
  • The Predictable World: This is the world we’re most familiar with. Here, success is highly correlated with effort, and if enough work is put in, a positive result is almost guaranteed. Though this path may be challenging, it’s accessible and reliable. Following a well-defined path typically yields a predictable payoff.
  • The Stochastic World: In this unpredictable world, randomness and competition dominate. Success isn’t guaranteed, and outcomes vary widely. Only a few succeed, often due to chance, but those who do might achieve great results. Success here tends to breed more success, but it also requires embracing a high degree of uncertainty.
 

Stochastic Operators: Lessons from Industries of Uncertainty

Certain industries thrive in the stochastic world by embracing randomness. For example, book publishers, venture capitalists, and movie studios often place many bets simultaneously. They reduce uncertainty by continuously generating opportunities and selectively choosing which ones to pursue. This approach allows them to thrive in a world where chance plays a massive role.
Similarly, Daniel suggests that individuals can benefit from this approach by creating their own “portfolio of bets.” By not putting all their time and energy into a single project, they avoid becoming too dependent on one outcome. Instead, individuals should treat ideas like “cattle, not pets,” meaning they shouldn’t become emotionally attached to a single concept but instead approach each one with objective detachment.
 

Building an Individual Portfolio: Generators and Filters

For individuals, Daniel identifies two critical elements to manage a portfolio in a stochastic world: the Generator and the Filter.
  • The Generator: A generator of ideas is essential for exploring new ventures. To maximize opportunities, individuals need spare time, flexibility, continuous inspiration, and a range of skills to seize different possibilities as they arise.
  • The Filter: Not all ideas are worth pursuing. With a filter, individuals can select projects with higher odds of success. Daniel advises focusing on smaller bets with favorable odds rather than extreme long shots. The key is to trade potential upside for a higher likelihood of success, knowing that small wins will often lead to bigger ones over time.
 

Navigating Predictable and Stochastic Worlds

Daniel outlines the strategies for success in each world, emphasizing the importance of recognizing where a venture falls. In the Predictable World, he recommends hard work, focus, optimization, and consistency. Following proven methods and setting clear goals can yield predictable outcomes.
In the Stochastic World, on the other hand, he advises a more flexible approach. Embracing trial and error, placing multiple small bets, and maintaining slack in the system are vital. Probabilistic thinking and resilience can help individuals navigate the unpredictable nature of this world, ensuring they remain in the game long enough to capitalize on luck when it strikes.
 

Mixing Both Worlds

Ultimately, Daniel suggests that blending strategies from both worlds can lead to a balanced approach to entrepreneurship. By optimizing known processes while remaining open to randomness, individuals can maximize their chances of success across a portfolio of ventures. The ideal entrepreneurial mindset combines structure and spontaneity, allowing individuals to thrive in a world where both hard work and luck are essential.
 
 

#2 Bias for Survival

 
In the second session of A Portfolio of Small Bets, Daniel Vassallo explores the concept of survivorship bias and its implications for entrepreneurs navigating the unpredictable, or stochastic, world. Survivorship bias often leads us to overvalue the advice and strategies of successful individuals while overlooking the role of randomness in their success. Daniel emphasizes the importance of approaching entrepreneurship with a mindset that accounts for uncertainty and focuses on small, achievable wins.
 

Understanding Survivorship Bias

Survivorship bias is a cognitive distortion that occurs when we focus on successful outcomes and ignore the vast number of unsuccessful ones. In the context of entrepreneurship, this often means taking advice from those who succeeded in the stochastic world, which leads to unrealistic expectations.
According to Daniel, some common pieces of advice that stem from survivorship bias include:
  • “Just focus on solving a real problem.”
  • “Just build something useful.”
  • “Just follow your passion.”
  • “Just make your product 1% better every day.”
  • “Just obsess over your customers.”
  • “Just keep showing up.”
These recommendations might work in the predictable world, where outcomes can be reliably replicated. However, in the stochastic world, such advice can be misleading because it underestimates the role of chance and overemphasizes specific actions.
 

Spotting Survivorship Bias

Daniel identifies several warning signs of survivorship bias:
  • Ignoring the role of randomness in success.
  • Cherry-picking stories of success from the stochastic world while ignoring the failures.
  • Believing that what worked once will always work.
  • Assuming that failures are definitive, rather than considering the potential for a different outcome under new circumstances.
By understanding these signs, entrepreneurs can avoid the trap of survivorship bias and develop a more realistic approach to building a business in an unpredictable environment.
 

Acquiring Knowledge in a Stochastic World

The stochastic world requires a different approach to acquiring knowledge compared to the predictable world. In predictable scenarios, observing what has worked for others often provides a reliable blueprint for success. However, in the stochastic world, separating signal from noise is more challenging, and success may not be easily replicated.
In the stochastic world, Daniel advocates for what he calls “probabilistic knowledge.” Instead of trying to understand every variable, entrepreneurs should focus on learning strategies that improve their odds of success. This approach acknowledges the complexity of the world while aiming to enhance the probability of favorable outcomes.
 

Embracing a Bias for Survival

Daniel argues that embracing a “bias for survival” is essential when operating in the stochastic world. Rather than ignoring randomness, he encourages entrepreneurs to recognize and prepare for it. This survival-oriented mindset involves a few key principles:
  1. The Prepper Mindset: Visualizing potential negative outcomes helps create a peace of mind that prepares for unexpected challenges. With a downside-first attitude, entrepreneurs can avoid catastrophic failure.
  1. Avoiding Failure: Survival-oriented entrepreneurs maintain a sense of urgency and aim to “earn” every day. By starting with low-hanging fruit, they can achieve small, steady wins that help them remain resilient over time.
  1. Pursuing Small Wins: Large, risky bets often result in failure, while small wins accumulate valuable knowledge and capabilities. These wins build momentum, enhancing both motivation and capability, and creating an upward spiral of success.
 

Why Bias for Survival Matters

Daniel concludes by reinforcing that, while the world may be complex and uncertain, embracing survival-oriented strategies helps entrepreneurs remain adaptable and prepared. This approach builds a portfolio that acknowledges randomness, aiming to capitalize on both predictable and unpredictable opportunities. In this way, success becomes a matter of resilience and adaptability rather than sheer luck.
 
 

#3 Finding Opportunities

In the third session of A Portfolio of Small Bets, Daniel Vassallo delves into the art of finding opportunities, focusing on how luck, preparation, and credibility play crucial roles in recognizing and capitalizing on them. He explains how aligning personal assets with external demand can increase the likelihood of discovering profitable ventures in a world of uncertainty.
 

Luck Recognition

Luck, as Daniel defines it, is favorable randomness. To benefit from luck, we must not only attract it but also be ready to recognize it. Quoting Seneca’s famous line, “Luck is what happens when preparation meets opportunity,” Daniel emphasizes the value of being prepared. This preparation begins with taking stock of our personal assets—such as skills, interests, knowledge, experience, and connections—which can act as the foundation for future opportunities.
 

Preparation

Preparation involves understanding and stacking one’s assets. Daniel encourages individuals to look at their unique combinations of skills and resources that can be brought together to form competitive advantages. For example:
  • Coding + Web Design
  • Traveling + SEO + Ecommerce
  • Certified Accountant + Ecommerce + SEO
By combining assets, individuals can create a stronger value proposition. Daniel suggests running this preparation process continuously by identifying missing assets and acquiring them through small bets. This method enables ongoing growth and readiness to seize new opportunities.

Inspiration Generator

An essential part of preparation is cultivating an inspiration generator. This can be viewed as a catalyst for luck, offering chances for serendipity. Daniel compares it to the dynamics of a cocktail party, where random conversations can lead to unexpected ideas and connections. By surrounding oneself with sources of inspiration, individuals can increase their chances of stumbling upon lucrative ideas.
 

Defining Opportunity

Daniel defines an opportunity as someone wanting something that you can provide. The challenge, then, becomes finding these people, convincing them to choose you, and ensuring a steady flow of such opportunities. This boils down to two critical factors: attention and credibility.
 

Attention and Credibility

To attract opportunities, you first need attention. Daniel suggests various ways to build attention, including:
  • SEO, ads, and platforms (YouTube, Amazon, etc.)
  • Website referrals and followers
  • Conferences and personal networks
  • Public forums and private communities
  • Word of mouth and freebies
Equally important is credibility, which establishes trust with potential clients or customers. Key sources of credibility can include:
  • Testimonials and reputation
  • Success stories and skin in the game
  • Credentials and domain names
  • Selections by reputable publishers, investors, or employers
Daniel advises studying people or businesses you trust and examining how they captured your attention and earned your trust. By learning from their strategies, you can better understand how to cultivate attention and credibility.
 

Overcoming Luck Blindness

“Luck blindness” is a term Daniel uses to describe the barriers that prevent people from recognizing opportunities. Common forms of luck blindness include:
  • Not knowing or stacking your assets
  • Narrow goals and overly selective criteria
  • Lack of freedom due to busy schedules
To overcome luck blindness, it’s essential to cultivate assets that generate both attention and credibility. By broadening goals and freeing up time for exploration, individuals can enhance their ability to recognize opportunities.
 

#4 Selection Criteria

In the fourth session of A Portfolio of Small Bets, Daniel Vassallo discusses the criteria for selecting small bets and how to approach decision-making in the uncertain, or stochastic, world. He highlights the importance of choosing opportunities that minimize risk while maximizing learning and potential success, using real-world examples to illustrate the importance of sound selection criteria.
 

Lessons from Famous Rejections

Daniel begins with two well-known examples: J.K. Rowling’s Harry Potter and Ring’s appearance on Shark Tank. Both were initially rejected—Harry Potter by multiple publishers and Ring by investors on Shark Tank—yet they ultimately achieved phenomenal success. Daniel points out that judging decisions based on outcomes can be misleading. Instead, we should focus on the underlying selection criteria. For instance, the investors who passed on Ring weren’t necessarily wrong; their goal was to avoid risks that might lead to business failure, a priority in the high-stakes venture world.
 

Avoiding Business-Ending Risks

Daniel emphasizes that the first priority in any entrepreneurial journey is survival. Before focusing on potential rewards, it’s essential to ensure that a small bet doesn’t threaten one’s financial stability. Small wins are not only easier to achieve but also pave the way for bigger successes by helping entrepreneurs understand what works in their unique context. This approach, he suggests, increases the chances of building a sustainable portfolio of bets.
 

Selecting Small Bets

When evaluating small bets, Daniel suggests prioritizing opportunities with these qualities:
  • Low initial input: Can be brought to market with minimal time and resources.
  • Limited obligations: Avoids long-term commitments that might become burdensome.
  • Self-reliance: Can be built and marketed independently.
  • Low maintenance costs: Doesn’t require significant ongoing expenses.
  • Real-world demand: Proven to sell in similar markets.
These criteria help ensure that each small bet is manageable, reducing risk while increasing the likelihood of a favorable outcome.
 

Making Time Your Friend

One of the biggest challenges with small bets is deciding when to quit. Daniel explains that if a venture has high running costs, time becomes an enemy because continued operation drains resources. However, if a venture has low or no running costs, time becomes a friend. By selecting projects that don’t require ongoing expenses, entrepreneurs can keep their options open, allowing time to potentially turn early losses into eventual gains.
 

Choosing Things That Sell

Daniel underscores the importance of focusing on ventures with market demand. Selling, he explains, is rooted in human psychology and often driven by opaque and unpredictable motivations. However, by observing where money is already changing hands in the real world, entrepreneurs can learn probabilistically what types of products or services are likely to sell.
For example, Daniel advises observing one’s own purchasing behavior to understand consumer psychology better. This real-world heuristic helps identify opportunities with a proven market demand, lowering the risk associated with new ventures.
 

Pricing Strategy

Pricing is another essential aspect of selecting small bets. Daniel highlights that pricing involves both economic considerations and psychological factors. He suggests erring on the side of undercharging initially, with the option to adjust later as the market response becomes clear. Additionally, he discusses the implications of one-off versus recurring payments. One-off payments provide an immediate return, while recurring payments, though often cleaner in terms of financial obligations, may require a more significant commitment from customers. Each pricing model has its benefits and challenges, and Daniel encourages careful consideration based on the nature of the product and its audience.
 

#5 Productivity

In the fifth session of A Portfolio of Small Bets, Daniel Vassallo examines productivity by exploring how human nature and evolutionary history impact our modern work environment. He argues that understanding our innate tendencies can help us design a productivity approach that aligns with our natural inclinations rather than fighting against them.
 

Our Nature and the Shift in Environment

Daniel begins with a mental model for productivity based on the premise that we’re most productive when we work in harmony with our wiring. Modern humans evolved over 300,000 years, and for 97% of that time, we were nomadic hunter-gatherers. This context shaped our instincts and motivations, which don’t always align with the demands of today’s world.
 

The Hunter-Gatherer World

Contrary to the common view of hunter-gatherers as constantly struggling, they actually lived with high return-on-investment (ROI) work. They couldn’t accumulate food reserves due to a lack of storage, so they focused on energy conservation, only expending it on high-value tasks. Motivation was intrinsic, and risks were taken prudently, as even minor injuries could be catastrophic.
 

The Farming World

With the advent of farming, food became more consistent, but the lifestyle required hard work and daily maintenance. Farming introduced the concept of wealth and accumulation, leading to extrinsic motivation and stability. Life became more predictable, with less variation and increased protection from adverse events. This lifestyle, Daniel notes, set the foundation for the consistent, steady work ethic that dominates today.
 

The Modern World

Today’s world has fully embraced the farming model, with stability and predictability replacing the randomness that once characterized human life. High-intensity, high-ROI activities have largely disappeared, replaced by steady, linear tasks. While this environment provides security, it also creates productivity challenges, as it doesn’t align with how we’re naturally wired.
 

Productivity Ailments

Daniel identifies several common productivity issues—procrastination, lack of motivation, difficulty with focus, chronic anxiety, and the pressure for consistency—that stem from the mismatch between our nature and the modern environment.
 

Procrastination

Instead of viewing procrastination as a defect, Daniel suggests considering it as potentially valuable information. It may indicate that a task isn’t worth doing, is premature, or is overly complicated. Rather than suppressing procrastination, he advises using it as a guide to identify unimportant tasks and focus on high-impact activities.
 

Motivation

Intrinsic motivation was a core part of the hunter-gatherer lifestyle. In contrast, the modern world often relies on external rewards and punishments. While extrinsic motivation can be effective, it eventually loses its impact, leading to burnout. Daniel suggests incorporating intrinsic motivation by working on tasks with inherent interest and switching between different activities to maintain a natural energy flow.
 

Focus

Hunter-gatherers had intense focus, quickly abandoning unproductive pursuits. Modern life, however, often requires persisting through repetitive or dull tasks. Daniel contrasts the “farming slog” with the adaptive, flexible focus of hunting, emphasizing that modern productivity could benefit from allowing more room for engaging, varied work.
 

Chronic Anxiety

The modern emphasis on predictability and narrow paths to success has led to widespread chronic anxiety. Hunter-gatherers routinely practiced risk-taking, building a “muscle” that helped them handle uncertainty. In contrast, today’s world discourages risk and fosters discomfort with narrow margins for error. Daniel argues that a perfectly predictable environment is not natural for us; we need some level of randomness and pleasant surprises to feel fulfilled.
 

Consistency

We’re often told that perseverance leads to success, but Daniel notes that this isn’t always true. Hunter-gatherers didn’t pursue tasks blindly; they chose low-hanging fruit and only took on ambitious goals when odds of success were high. Consistency, he suggests, should not be pursued for its own sake but balanced with feedback and results.
 

Reconsidering Productivity

Daniel concludes by encouraging a shift toward environments that align with our nature. Productivity strategies should respect our evolutionary wiring, allowing us to leverage our natural inclinations rather than fighting against them. He likens this to planting a palm tree in a tropical climate rather than forcing it to grow in Alaska—when conditions are right, productivity follows naturally.
 
 

#6 Lifestyle Design

 
In the final session of A Portfolio of Small Bets, Daniel Vassallo explores lifestyle design, examining how understanding our true preferences and balancing work, success, and wealth can lead to a more fulfilling life. He emphasizes the importance of intentional choices and the potential drawbacks of extreme success or wealth.
 

True Preferences

Daniel begins by challenging the idea of preferences, suggesting that knowing what we like isn’t enough. Preferences often follow a dose-response relationship, meaning that the effect of something we like changes with its intensity and frequency. The same activity or reward can range from harmless to helpful to harmful, depending on these factors. To design a fulfilling lifestyle, he advises rigorously questioning our true preferences and considering the ideal dose and frequency for each.
 

Too Much Success?

Success, like preferences, also follows a dose-response curve. Daniel explains that while some level of success is beneficial, extreme success can become detrimental, as it can lead to an unsustainable drive for more. This concept applies equally to wealth; the pursuit of endless passive income may not align with our natural inclinations and could lead to dissatisfaction rather than fulfillment.
 

Surplus Income

For those earning more than they need, Daniel discusses two approaches: the wealth hoarder and the wealth prepper. The hoarder never stops accumulating, while the prepper seeks only enough to weather challenges, viewing money as a buffer rather than a goal. Daniel encourages negative visualization to set a practical safety net and then suggests using any surplus in ways that add genuine value without introducing new burdens.
 

Addition vs. Elimination

When deciding how to structure life, Daniel highlights the value of elimination over addition. Knowing what we dislike is often more reliable than what we think we’ll enjoy. He suggests that eliminating disliked activities or obligations provides clearer direction and leads to a lifestyle more closely aligned with genuine satisfaction.
 

Why Work?

Daniel explores different motivations for work, which can range from making a living to accumulating wealth or status. He advises gradually working toward a preferred lifestyle, where work primarily improves one’s quality of life rather than serving external goals. Daniel concludes by noting that the ultimate purpose of a business or project should be to enhance personal fulfillment and create a life worth living.