# Unreasonable People and the Power Law: Three Quiz Questions That Exposed the Cracks in My Investing Instincts
> Notes from reading the introduction to Sebastian Mallaby's The Power Law: three quiz questions that reveal the gap between a retail investor's instincts and how the power law actually works — hit rate vs. the single winner, mean reversion vs. watering weeds and cutting flowers, courage vs. position sizing. Pure reflection and method education; disclaimer at the end.
Published: 2026-07-08
Locale: en
Tags: venture-capital, investing-psychology, mental-models, education
TL;DR: This post turns the introduction to The Power Law into three investing quiz questions: hit rate, adding to winners, and high-expected-value bets. The core reminder is that retail instincts often see the world through normal distributions and mean reversion, while right-tail returns require letting a few huge winners survive and using position design to contain total-loss risk.
> *The great Peng bird rises one day with the wind,*
> *whirling straight up ninety thousand li.*
> —— Li Bai, "To Li Yong" (High Tang, c. 8th century); translation mine
> Notes from reading the introduction to Sebastian Mallaby's *The Power Law*. This isn't a book summary — it's a record of getting schooled by a book.
## First, three questions for you
Before you read on, answer three questions honestly — I answered them myself first, and I'll lay my answers out for you in a moment.
**Q1**: A fund invests in 20 companies. Nineteen go to zero; only one returns 60x. Is this a good fund or a bad one?
**Q2**: You can add to only one stock: A is already up 3x, B is already down 40%. Which do you add to?
**Q3**: A life bet with a very high expected value but a real chance of total loss — do you dare to make it?
My answers: Q1, "bad." Q2, "B, because price always reverts to the mean." Q3, "no — I have a family to support."
Looks reasonable, right? The book spends an entire chapter telling me: **all three answers are wrong — and the way they're wrong happens to expose the single brain most retail investors share.**
## Q1: You score by hit rate; the power law scores by "that one winner"
Just do the math: put in 20 units, 19 go to zero, one returns 60, and the whole fund triples. **That's not a bad fund — that's top-tier venture capital.**
The numbers in the book are even more extreme: across the seven thousand startups one fund-of-funds had backed, about 5% of the capital produced roughly six-tenths of all the returns. For a stretch, three-quarters of Y Combinator's profits came from **two** companies out of more than two hundred. One winner pays for the whole table.
I answered "bad" because my head was running on a normal distribution: a 95% failure rate = bad. But the power-law world doesn't look at hit rate — it looks at **the size of the single winner.**
The most ironic part is that my gut already knew. Ask me "which mistake hurts more: holding something to zero, or selling too early and missing a huge run?" and I answer "selling too early" without hesitation. There's a stock I got off too soon, and the run that followed still stings to this day. **My instinct was already standing on the power law's side; only my math was stuck on the normal distribution.** What this book does is force the two into alignment.
## Q2: Watering the weeds, cutting the flowers
"The one that dropped 40% will bounce back; the one that's up 3x has run enough" — the belief underneath that sentence is **mean reversion**: there's a "proper middle" the world holds, and any deviation gets pulled back to it.
The venture world in the book is exactly the opposite: **winners tend to keep winning.** One venture capitalist held a company Cisco offered to buy — he thought the price was too low and refused to sell. A few months later, the number had been bid all the way up to $7 billion before the deal closed. He dared to hold because he knew that in a right-tail world, how good the good ones get will exceed everyone's imagination.
And adding to the one down 40% while cutting the one up 3x is the very move the book despises most: **watering the weeds and cutting the flowers.**
This question was especially humbling for me, because I've spent hundreds of hours on quantitative backtesting, validating a pile of "sounds right" signals with a strict process (excluding survivorship bias, cross-model red-teaming against each other) — and **moving-average signals were wiped out entirely, with no excess return whatsoever.** The only two things that actually showed a real edge: avoiding the worst stocks, and staying close to companies whose fundamentals are improving at the same time.
In other words: my own data stands with the book, while my gut stands on the opposite side. Do you trust rules you spent hundreds of hours validating, or the knee-jerk "it'll come back, right?"
## Q3: The question isn't courage — it's position size
"No, I have a family to support" — the book doesn't tell me to be brave. Bravery is the cheapest advice there is.
What the book gives is **position design.** Top venture capitalists dare to place absurd bets not because they have big guts, but because the structure protects them: "The most I can lose is one times my capital." A single bet going to zero doesn't touch their survival.
So the right way to open up Q3 isn't the binary of "dare or don't dare" — it's a continuous dial: **without harming the foundation, how small a bet can I set aside to chase that right tail?** First get the foundation of your life solid (stable cash flow, not living off this money), then let a small bet take the risk. Between zero and a hundred, there are a lot of notches.
## "All progress depends on the unreasonable man"
The "unreasonable" in the title comes from George Bernard Shaw: the reasonable man adapts himself to the world; the unreasonable one insists on making the world adapt to him — therefore all progress depends on the unreasonable man.
The venture capitalist's version is more practical: the revolutions that truly matter **cannot be predicted by extrapolating historical data.** If tomorrow were just an extension of today, why bother predicting? True disruption, precisely because it disrupts so completely, can't be extrapolated — it can only be **discovered**, round after round of experiment, never **predicted.**
One venture capitalist tests founders the other way around: instead of asking them to prove "this will definitely work," he asks himself **"can I find a reason it clearly won't work?"** — and if he can't find one, it's worth a bet. This is the same thing as the scientific spirit of falsifiability: don't predict the future; design a mechanism that "dares to bet, and can also recognize when it's wrong."
## Three questions to take with you
1. When you evaluate your own portfolio, are you using **hit rate**, or **whether the biggest winner pays for the whole table**?
2. Your most recent add — was it watering the weeds, or watering the flowers?
3. That "high expected value but I don't dare" bet in your life — is the problem really courage? Or have you just never seriously worked out "how small a bet would be painless even at total loss"?
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*Source: Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future (2022); Traditional Chinese edition 《矽谷創投啟示錄》 (CommonWealth Publishing, 2022). This piece is a reading reflection and self-examination, and does not constitute any investment advice; the cases herein are personal experience, for educational reference only.*