Separating The Signal From The Noise: A New Perspective -Part Two

“As a new investment fund focused on the disruptive technology of tomorrow, we hope to share our world-view and mental frameworks in which we derive our theses. We welcome change and progress, but also strive to understand truths that remain constant and are timeless.”

Volume 3: Statistics

“We Don’t Live In A Normal World; We Live Under A Power Law.”
-Peter Thiel, Zero-to-One

Answers to some of the greatest mysteries lie in hidden universal truths. Social and economic phenomena are not immune to the scientific laws which govern the natural world. Wealth inequality, social injustice and geopolitical crises arise from a contentious battle between our ideal of a “utopia” and the laws of nature. The most notable case of such an occurrence being communism vs. capitalism. The universal power law best illustrates the scientific basis for this conflict.

Vilfredo Pareto, originator of the Pareto Principle, made a seemingly trivial observation of his pea plants which lead to the discovery of a hidden truth. He noticed that 20% of his seeds accounted for 80% of the peas which grew in his garden. The abstraction being that 20% of inputs accounts for 80% of outputs. The 80/20 rule is best illustrated by a power law distribution graph.

In the graph above, unique inputs contribute an outsized representation of outputs. In the case for abilities, it is merely a law of nature that a minority of individuals will contribute a majority of productivity or outputs in an economy, similar to the peas in Pareto’s garden. In the case of investments, it is a statistical law that out of 100 investments, 20 (or less) will represent a majority of returns for a portfolio (at least this is the case for venture capital/investments in innovative companies).

In the case for innovation, the new paradigms which result in new industries and markets are originated by only a handful of individuals. Semi-conductors (responsible for the entire internet and tech industry), modern biology (microbiology), and satellite technology (mobile-device industry) were all created by a handful of theoretical physicists. Sean George, the founder of the genomics company Invitae recently said in a podcast that we have the ability to gather vast amounts genetic data, but a bottleneck arises as only a handful of scientists are capable of finding the biological pathways needed to turn this data into actionable treatments. The elusive method of finding treatment pathways in the body is more of an art than science.

The power law is also at odds with the principles of socialism and on the extreme end, communism. Whenever social constructs are produced in violation of universal laws, conflicts are inevitable. The unequal distribution of wealth, as unfair as it is, is in part due to asymmetric abilities and efforts. Robbing Peter to pay Paul has never been a recipe for peace and prosperity.

In an ideal world, equal opportunities are given to provide vastly more individuals (from diverse backgrounds) with the chance of contributing their unique inputs and receiving outsized rewards.

“So, does our society understand that we live under a universal power law?” — Peter Thiel, Zero to One

We strongly agree with the following point made in Peter’s book. Our schooling system enforces a mandate for being “well rounded” students. In essence, rather than investing resources to find unique inputs, we produce well rounded mediocracy, without asymmetric talents and abilities being valued. In a world that is heading towards automation, finding unique skillsets and abilities that make you irreplaceable is imperative, as machines will always provide mediocracy at a lower cost.

To loosely distill a notion presented in Peter Thiel’s book, Zero to One, If the power law is true, then diversifying efforts to make yourself a “well-rounded” applicant for a school or job, is inefficient at best, and destructive at worst.

Not having a clear idea of what unique abilities one has, results in choosing a profession on the sole basis of money and status.

The Great Mismatch

Volume 4: Paradigms

Many scholars and economists have lamented the global slowdown in growth and productivity. As described in Vol. 2, the asset bubbles and wealth inequality in the world are a combination of excess “money printing”, and that money “sitting on the sidelines”, not being deployed for productive use cases. Hence, the asset bubbles. If this money were deployed towards new ventures and capital investments for future output, such a conundrum would not exist.

Stagnation is not the default setting of humans. The ability to create new things in the world is a hallmark feature of our species, and under the right context, can thrive forever.

We believe the central and non-obvious root of the problem lies in a great mismatch in society, between abilities and the actual careers people choose to pursue.

Consider this thought experiment.

Let’s suppose that a new benign and microscopic tumor is believed to exist in the body of a patient. The job of a radiologist is by definition to find the tumor, and identify its properties. Along comes a computer scientist who is well versed in machine learning/vision, paired with a physicist who is an expert in particle imaging technology. Both tackle the challenge, but the latter team has a success rate of 98%, while the doctor has only a 65% success rate using a traditional screening method (this actually happened).

If we define a radiologist as someone who discovers and identifies tumors (oversimplification), who is the radiologist in this case?

In the near future, if problems are better defined, then this mismatch will become crystal clear.

Take the case of genetics. After decades of the human genome project, we have come to realize that the essence of life resides in DNA nucleotide base pairs, a form of genetic code similar to binary 1’s and 0’s in a computer. If that is the case, then hereditary illnesses are merely a computational problem. An error in our source code.

One can then frame a disease as merely a complex calculation which must be solved. The implication being, the role of a future doctor and mathematician/engineer will be indistinguishable. The question then becomes, who is best suited to innovate in the medical field? The diagram below (with atrocious handwriting) illustrates this case.

“Almost always the men who achieve these fundamental inventions of a new paradigm have been either very young or very new to the field whose paradigm they change.”- Thomas Kuhn, The Structure of Scientific Revolutions

Will those who have unique abilities follow the power law and achieve outsized outcomes with their unique inputs, or will the “well-rounded” narrative win? Will the greatest innovations in the disciplines of science, business and technology come from within the fields of today, or from without?

- The NewField Fund




Disclaimer: Nothing written in this research article, or any article by The NewField Fund should be considered as financial, legal, or investment advice of any kind. Investing in crypto is highly risky, do your own research. #DYOR



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