I have been reading again the book The Principles of Product Development Flow by Donald Reinertsen. His reasoning is so precise and so refreshing in how it debunks various ideas that are intuitively appealing but incorrect. There are well over a hundred principles that encapsulate his thinking and observations.

Here’s one: “The Newsboy Principle: High probability of failure does not equal bad economics.”

In his example scenario a newsboy who sells hardcopy newspapers makes a profit of 50 cents on each newspaper that he sells and loses 25 cents on each paper he doesn’t sell. What is the optimal number of newspapers he should keep in stock each day? It turns out that because of the asymmetry between the amount of profit and the amount of loss between papers sold and those not sold, the optimal amount is that he should run out of newspapers one-third of the time.

You can forgive the specific outdated business situation because it makes such a good point about optimizing profits. Two-thirds of the time the newsboy has newspapers leftover. That could add up to a lot of unsold copies, yet the strategy is the most profitable!

The principle made me think of businesses where there is a large asymmetry between potential payoffs and potential losses.

One of those is making movies. I found an article with this quote: “Entertainment is clearly a risky, high-stakes game with both enormous payoffs and calamitous failures that play out in an environment of maddening uncertainty.” That’s from the blog post The Way of The Blockbuster.

Losing money on some bets can be more than offset by the gains from huge successes.

Another field is that of venture capitalists investing in business start-ups. They invest in some number of new companies, expecting that many of them will fail or be modest successes. At the same time they hope to have enough unicorns to do well overall, maybe extremely well. Of course, the investors do their due diligence, and there are strategies to manage the risks, so what I just wrote is really simplistic. (How Venture Capitalists Make Decisions.)

It’s the same concept, though: a high rate of failure is not necessarily a bad business call. It depends on the economics and the probabilities.


I am reminded of an entirely different, non-business activity that many of us have done: dating to find a long-term partner. You might go through a lot of relationships that end up going nowhere, with attendant emotional pain and heartbreak. They feel like failures.

And then you might get a big lifelong payoff. In my case I’ve now been happily married for over twenty years.