Inc. Magazine
Warren Buffett emphasizes that discipline is crucial in both small and big decisions. Refusing risky bets, like playing the lottery or gambling on unlikely outcomes, builds better decision-making habits. Success comes from making smart choices consistently, no matter how small, rather than relying on big, risky opportunities.
Would You Bet $10 to Win $10,000? Warren Buffett on Why Discipline Is the Key to Wealth, Success, and Smart Decision Making
Author: Jeff Haden
Every once in a while I’ll play the lottery when the payoff gets over $800,000 or so. I’m not alone: Mega Millions ticket sales tend to spike between 500 and 2,000 percent when the jackpot reaches $1 billion.
Why not? Twenty dollars to win $1 billion is a spectacular rate of return.
But it doesn’t change my odds of winning.
Nor does it make sense, even though it would also be a spectacular rate of return, that I won’t put $20 down to win $20 million. Sure, I’m disciplined in that regard… but clearly my discipline is, in this case, situational.
Situational discipline is something Warren Buffett understands—or, more accurately, understands but disagrees with. As Shane Parrish explains in his Farnam Street newsletter, Buffett believes discipline isn’t only important when we make big decisions. Discipline is actually built by small decisions.
Situational Discipline
Here’s Parish, quoting a story told by Wall Street legend Walter Schloss:
Warren [Buffett] was playing golf at Pebble Beach with Charlie Munger [Berkshire Hathaway’s vice-chairman], Jack Byrne [chairman of Fireman’s Fund], and another person. One of them said, “Warren, if you shoot a hole-in-one on this 18-hole course, we’ll give you U$10,000. If you don’t shoot a hole-in-one, you owe us U$10.”
Warren thought about it and said, “I’m not taking the bet.” The others said, “Why don’t you? The most you can lose is U$10. You can make U$10,000.”
Warren replied, “If you are not disciplined in the little things, you won’t be disciplined in the big things.”
He’s right. If I think 300-plus odds are too great to waste on a “small” lottery payout, why would I think those odds make better sense if the payout is huge? After all, $800 million is life changing, $20 million is life-changing. If I think the risk is worth the reward, why shouldn’t I play the lottery all the time?
Because I think I shouldn’t play the lottery all the time… in fact, I shouldn’t play the lottery at all.
That’s a simple example. So is Buffett refusing to bet $10 on making a hole-in-one. While the payoff is 1,000 to one—another huge payout—I feel sure I can’t make a hole-in-one on a par-three hole no matter how many balls I hit. Sure, I could win $10,000… but then again, I can’t. I won’t. The return isn’t worth the risk when the return is less likely than getting hit by lightning or being attacked by a shark.
Calculating Odds
Other bets you probably shouldn’t make? A study of more than 5,000 entrepreneurs over a 15-year period published in Academy of Management Journal found that the startups of people who kept their day jobs—an approach the researchers call “hybrid entrepreneurship”—were a third less likely to fail than those who quit their day jobs. By reducing the overall risk, hybrid entrepreneurs gave themselves time and space to experiment. To test. To learn. To develop and refine and iterate.
All-in entrepreneurs, unless they have considerable capital, don’t enjoy that space and time. Most need to fund their businesses (and put food on the table) through revenue. The pressure is on, almost immediately—and the risk of failure is much more imminent. As the researchers write, “the survival advantage is driven by a learning effect that takes place during hybrid entrepreneurship.”
Or in non-researcher-speak: No idea or its execution is ever perfect, so the more time you can give yourself to adapt, evolve, and develop a great product or service, the better.
Small Decisions, Big Payoffs
Discipline in the small things—keeping your job, doing a great job at your job, working night and weekends to build out your startup—leads to discipline in the big things. If you aren’t willing to devote your so-called spare time to starting a business, you probably shouldn’t go all-in on that business.
As Buffett says, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
Especially in the small things, because the discipline to make smart big decisions comes from the discipline to make smart small decisions.
Credits: TCA, LLC.