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Kelly Criterion, Compounding Relationships and Calculating Hidden Costs of Products

Kelly Criterion, Compounding Relationships and Calculating Hidden Costs of Products

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Kelly Criterion: Avoid Ruin

The Kelly criterion is a popularized mathematical formulation of a simple concept: Don’t risk everything. Stay out of jail. Don’t bet everything on one big gamble. Be careful how much you bet each time, so you don’t lose the whole kitty.

The number one way people get ruined in modern busine...

Schelling Point: Cooperating Without Communicating

It is a game theory by Thomas Schelling. It’s about multiplayer games where people respond based on what they think the other person’s response will be.

 How do you get people who cannot communicate with each other to coordinate?

Seems impossible, but you can use social norms to conve...

Turn Short-Term Games Into Long-Term Games

Negotiations are won by whoever cares less. Negotiation is about not wanting it too badly. If you want something too badly, the other person can extract more value from you.

If someone is taking advantage of you in a negotiation, your best option is to turn it from a short-term game into a ...

Compounding Relationships Make Life Easier

Once you’ve been in a good relationship with somebody for a while whether it’s business or romantic life gets a lot easier because you know that person’s got your back. 

The most under-recognized reason startups fail is because the founders fall apart.

A startup is so difficult to pul...

Price Discrimination: Charge Some People More

Price discrimination means you can charge people based on their propensity to pay.

You can’t charge people different amounts just because you don’t like them. You have to offer them something extra. Something rich people care about.

It works because rich people are willing to pay more...

Consumer Surplus: Getting More Than You Paid For

Consumer surplus is the excess value you get from something when you pay less than you were willing to pay.

I’ve made some money and get a lot of joy from my Starbucks coffee. So if my coffee cost $20, I would pay it.

But Starbucks can’t price the coffee at $20 just for me, because ...

Net Present Value: What Future Income Is Worth Today

You’re joining a startup and getting stock options, and the founder says, “This company is going to be worth $1 billion, and I’m giving you 0.1% of the company; therefore, you’re getting $1 million worth of stock.”

The founder is negotiating based on what it’s going to be worth in the futur...

Externalities: Calculating the Hidden Costs of Products

An externality is where there’s an additional cost imposed by whatever product is being produced or consumed, that’s not accounted for in the price of the product.

The environment is finite and precious, so we have to price the product properly and fold that back into the cost of products....

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