Everlasting Lindy
Lindy’s Effect
Disruption is all around us. As a venture investor, I am aligned with disruptive ideas and, in fact, seek to profit from them by backing the right set of founders who are about to change the world. As fantastic and alluring an investor’s day job sounds, it is fraught with risks that are possibly among the highest across all investment asset classes. To ensure you manage these risks well, you must focus on the polar opposite of disruption: persistence. As you stand here today, how do you decide what will get disrupted (everything is not the correct answer) and what will continue to exist as it is (everything is certainly not the correct answer)? I lose a ton of money by backing an idea that doesn't live up to its disruptive promise.
I think of persistence in terms of a simple construct called the Lindy Effect, named after a
New York Deli near Broadway in the 1960s. It became accepted wisdom here that a higher number of appearances of an actor meant he was likely to get more roles; the number of weeks a show lasted told it would stay that many more. Lindy Effect can be summarised as “With each passing moment, the life expectancy of perishable items (human life, fruits, vegetables) diminishes while that of non-perishable items (ideas, projects, technology, business) increases.” Benoit Mandelbrot and Nassim Taleb gave life to this simple metaphor Lindy's Effect by theorising about it and backing it up with some mathematics, thereby giving it the sanctity of a profound construct or a general law.
“With each passing moment, the life expectancy of perishable items (human life, fruits, vegetables) diminishes while that of non-perishable items (ideas, projects, technology, business) increases.”
Humans, and all living beings, have a limited life span. With each passing day, we get closer to our ‘best by’ date. Not so with inanimate things like ideas, books and the like. We often over- estimate the young and new and don't give enough credit to the old. This is true for most new things: new ideas, new books, new technologies, innovation, etc. I was most excited by DVDs when they replaced CDs; my joy knew no bounds when I bought my first iPod replacing the walkman. There are numerous such examples you will have as well. It will do us well to remember that CDs, walkman and the like were all 'the new craze' at some point in time, not too long back before they became obsolete. Most new things perish. However, this doesn't detract entrepreneurs from taking on the risks inherent in any new venture or investors from backing them up with oodles of capital. 85% of them fail in the startup world, another 10% become zombies, the living dead. Not so with old, mature businesses. Among them, 85% survive. As venture investors, we endeavour to figure out the 5% of startups that survive, grow and flourish. Let's say that startups are fragile and mature businesses, anti-fragile. For startups, survival is paramount. A business that has been around for three years is likely to survive another 3, provided it is not inherently fragile. All they have to ensure is that their business, idea, technology and innovation is, let's say, Lindy-proof.
Let's explore some other real-life applications of this phenomenon. I often get asked about book recommendations. It is very tempting to recommend the flavour of the season and the 'must-read' books recommended by Bill Gates, Warren Buffett or Barack Obama. If I follow Lindy's advice, I should instead recommend books that have been around for a long time. No, don't think about the Ramayana or Mahabharata. It's not what I had in mind but let's say Peter Theil's "Zero to One", published in 2014, has valuable lessons and is likely to survive another seven years at least. In contrast, some new books published in 2020 may not share that long a future. Another area where I frequently apply Lindy's Effect is the cryptocurrency mania, which is all the rage nowadays. I'll refrain from commenting on its price fluctuations and any recommendations on whether one should be buying them or not. Still, we can undoubtedly comment on its comparison to gold as a store of value. Gold has been around, by some estimates, since 3100 BC, while
“For a company to be valuable, it must grow and endure, but
many entrepreneurs focus only on short term growth. They have
an excuse: growth is easy to measure, but durability isn’t.”
Bitcoin (BTC), the poster boy of crypto, has lived for only 12 years. If you think in Lindy terms and invest in BTC, be sure you can digest some huge loss that comes your way if BTC is not Lindy-proof. If you can't stomach such risk, stay with gold, I'd say. Or you can apply the same logic to compare BTC with Dogecoin, Ethereum or the entire plethora of cryptos. I must share with you that I stopped reading newspapers and watching television news about 15 years ago. At the time, it was a simple productivity hack for me as it kept all the 'noise' away and allowed me to focus on making better investment decisions by focusing on relevant updates on companies, industries and economies. It later struck me that, in effect, I have been reading more of stuff that has been in print for a while and had more permanence. Important events get covered in monthly publications or research reports, company presentations, etc. Yes, Lindy is relevant here and in many more walks of life. Think about it, and you will significantly benefit by focusing on permanence rather than fleeting, attention depleting and distracting noises.
One word of caution, though: refrain from applying Lindy's Effect arbitrarily to everything. There are clear cases where it is applicable and many where it is not. Everyday examples include newspapers and books being replaced by digital publications and nuclear families replacing joint families.
“The longer an idea has been around without being falsified, the
longer its future life expectancy.”