How Jeff Bezos' Principle of Regret Minimization Can Make Investors Rich

When Jeff Bezos started Amazon.com Inc. as an online bookseller in 1994, he thought his company would probably fail.

And he was upfront about it with Amazon’s investors — starting with his parents.

As Bezos told an interviewer in 2000, three years after Amazon went public, “I thought there was a 30% chance that we might build a successful company. I never thought we’d build what Amazon has turned into, and I’m the most surprised on the planet.”

He told his parents it was very likely they would lose all of the $245,573 they were investing in Amazon.

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Bezos calls his approach “regret minimization.” Yes, the odds were against him, but there were only two possible negative outcomes.

One was the risk Amazon failing after he launched it. That failure would cost him time and money, along with losses for his investors.

Or — worse, in Bezos’ eyes — he would never take the plunge on Amazon and spend his life not knowing what he could have achieved. That would have been a bigger source of regret than trying and failing so he tried while being clear-eyed about the risks.

It’s realism and humility that should speak to investors. Even in 1994, when Amazon was just an idea, Bezos had much to boast about. He had risen from flipping burgers at a McDonald’s to a stable job at a hedge fund. He could have emphasized Amazon’s many advantages while downplaying risks.

Instead, he was upfront about the long odds his company faced. And happily, the investment worked out well for his parents.

And the principle of regret minimization applies to investors, too. If you have money you can afford to lose — risk capital — you may be able to minimize regret by investing it rather than keeping it on the sidelines.

Examples of this abound, but the most famous is probably crypto.

‘Even if the odds against Bitcoin succeeding to this degree are slim, are they really 100 million to 1 against?’

Take the story of Hal Finney, the computer programmer who was likely the second person in history to mine Bitcoin, after its pseudonymous founder Satoshi Nakamoto himself.

Upon mining a block of Bitcoins — 50 in total — he sent a congratulatory email to Satoshi Nakamoto along with some musings.

Before sending, he capped his congratulations with a final thought.

“Even if the odds of Bitcoin succeeding to this degree are slim, are they really 100 million to 1 against? Something to think about.”

At the time, Bitcoins were officially worth nothing. Only a handful of people knew they existed, and they could easily mine 50 Bitcoins for just a few cents worth of electricity.

And the principle of “regret minimization” applies to startup companies most of all.

Like Amazon and crypto in their earliest stages, startup companies are risky. For many of them, the most likely outcome is that investors lose 100% of their money.

So investors should tread cautiously and never invest more than they can afford to lose.

The Benzinga team is tracking a handful of opportunities that could present similarly asymmetrical risk-reward ratios, including one startup with several paths to glory in a $152.5 billion market.

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Original story found here.