Commencement speech given at D’Amore-McKim School of Business, Northeastern University, Boston, August 30 2018

Life Objective, Life Subjective

By Gerald Chan

I am often asked the question, “How do you make investment decisions?” People who see a successful investment outcome today are curious how the decision was made when the future outcome was unknown. People who see my unsuccessful investment outcomes rarely bother to ask me questions about them. This asymmetry of interest in the successful and the unsuccessful has contributed to creating a distorted perception out there that I only make successful investments. I can assure you that this is far from the truth.

Furthermore, I would be lying if I say that all my successful investment outcomes resulted strictly from my foresight, decisions and actions. Another way of saying this is that in many instances, I just got lucky and things worked out.

At this juncture, the inquiries bifurcate. One line of inquiry would ask, “How then do I get lucky?” In a simplistic sense, this is a perfectly logical question, one that also speaks to the absurdity that mere logic can land us. The more thoughtful inquirers would reason, “Surely it cannot be all luck. Your pattern of return over time does not conform to the distribution of outcomes that one would expect from a random process.”

Such questions speak as much about the inquirers as the subject of inquiry. When I attend lectures, I gauge both the quality of the presentation from the speaker as well as the quality of the questions from the audience. This habit has its root in my belief in the power of the case study method and the Socratic method in developing the intellect. Callow or indolent minds seek formulaic answers in the misguided belief that mindless application of a formula will give a sure outcome.

In recent years, formulaic decision-making has gained more currency by virtue of Big Data and the computational power to process that data. Add to it recursive mathematical manipulations and we now have artificial intelligence. The subliminal message seeping out from the popular press is that artificial intelligence is superior to human intelligence and therefore we should outsource decision making to data gathering and operation of algorithms.

I have no doubt that artificial intelligence will help us make better decisions in certain domains of human endeavor. For example, I think AI will improve the practice of medicine both in terms of diagnosis and choice of therapeutics. What remains challenging to AI is when no relevant data or insufficient data are available, or when the available analytical methods require assumptions that are incongruent with the real world, or when the desired outcome cannot be reduced to data, for example, the value of the desired outcome being a subjective one. It would be a grave mistake if we ascribe superiority to artificial intelligence over human intelligence without regard to the nature of the problem at hand.

As a venture investor, I operate in a realm of scant to no data. I invest to create what does not yet exist. In contrast to the Warren Buffett type of investment in companies that have historical financial statements to be analyzed, the kinds of companies I invest in are non-existent as of yet, or if they had been formed, they only burn cash and have no prospect of cash generation for years to come. In other words, there are no financial performance data that can lend insight into the future course of the company. On the scientific front, these companies are often started with only data of how a drug works in a test tube or in experimental animals. Whether the drug works in the same way in human patients is entirely a matter of extrapolation which in turn is no better than a judgement call. It is not for no reason that my line of work is called venture capital. The dictionary defines venture as “an undertaking involving uncertainty as to the outcome, especially a risky and dangerous one.” A recent New York Times editorial pronounced, “Discovering a new drug is perhaps the riskiest bet in all of American business.”

Let me digress from investment decisions and talk about life decisions. Now that I have lived my life long enough as to be able to extract meaning from a backward look, I have come to the conclusion that life is like one big venture investment. No wonder that life can be at times so scary and at other times so exhilarating. Even if you were not investing monetarily, your every action in life is an investment of your time, or more aptly for you graduates, your youth, a form of capital that I no longer possess. Like venture investment decisions, important life decisions are rarely driven by data notwithstanding the proliferation of all kinds of data nowadays. I cite but one important life decision — the choice of your spouse with whom you will traverse life’s journey. This decision is hardly ever made as an exercise in data analytics even though social media has produced voluminous data on people — some are real, some are just noise, some are staged, and some are outright fake.

What I like to highlight to you is that data, by definition, are from the past. Data-driven decision making, often lauded as evidence-based decision making, leads necessarily to decisions that are historically based, or in other words, decisions made by looking backward. Such decisions are fine and good if the past is completely, or at least sufficiently, predictive of the future. There are phenomena for which this is true, and better be true, such as phenomena of nature. This is why experiments in natural science like physics and chemistry work. Every time you did the same experiment in high school physics, you got the same outcome. But even in nature, not everything is entirely predictable. Weather pattern is one such example. The field of Chaos Theory has helped us to see how the world, without violating deterministic relationships such as Newtonian physics, can still be so unpredictable.

When we come to human behavior and human society and therefore the course of human history, we see the same element of unpredictability superimposed on top of deterministic relationships. The same is true with each person’s life and therefore the course of one’s personal history. Where there is uncertainty coexisting with determinism, extrapolation of data as a predictive tool works best for small effects. This implies that extrapolation of the past is best used for designing incremental changes. Larger scale disruptive changes, on the other hand, will by definition create non-stationarity of data, meaning that the future is no longer predictable from the past. Historical data become useless or even counter-productive in so far as one wants to imagine or create a future that the world has not yet seen. If you want to think out of the box, bear in mind that historical data may just be the box.

We mostly live stable lives peppered with occasional changes on the margin. These are the incremental changes. Some stability is necessary for us to work out what we have set out to do in that period of our lives. From time to time however, life is also punctuated with larger scale changes which are major departures from the past. In some instances, they may even be disruptive of the past. I use the word disruptive not so much in the sense of just causing commotion, but more in the sense of the term “disruptive innovation” as coined by Professor Clay Christiansen. We may actively seek such disruptive changes, or embrace them when they come along, or they may be forced upon us. If we were to stand back and look at someone’s life in its entirety, it is these major changes that chiefly define it. Dislocations are much more defining than continuity.

Looking back at my own life, the disruptive changes are manifested as my reinventing myself every ten years or so. When I was a university student, I studied engineering, got couple of degrees, then moved to physics, got a degree and then moved to biology. After I finished my post-doctoral training, I made a bold decision to leave science for the investment world when such a career trajectory was very much frowned upon. I later left Boston where I had by then lived for twenty years and went to live in Shanghai to invest there when China’s economy was still quite backward. Then the internet came along, something that had never existed before. I started investing in internet companies. In the early 2000s, I began to curtail my involvement in the TMT, or telecom media and technology sector and gradually moved back into life science and biotechnology. I also moved back to Boston. I dare say that none of these pivotal decisions were made with data, nor did I survey the past, distant or immediate, for any evidence or precedence. When the objective offered no guidance, the subjective was all I had to go by. It felt right and I did it.

Thirty years ago, I would not have dared to make the statement I just made. In this day and age and in heady academic territory, to talk about subjectivity is taboo, neither would you have taken me seriously if I had not racked up the thirty-year track record that I had. It is not with foresight but with hindsight that I am telling you that in venture investing, as in life in general, decision making cannot be completely objectivized. Even if objective data were available and relevant, we reach conclusions by passing the objective data through a subjective filter. This is why in venture firms that are organized as partnerships, the partners do not come to unanimous decisions every time even when they are all looking at the same data. This subjective filter is none other than the person that you are, encompassing your every attribute, every life experience that you have passed through and the marks on you that they have left behind. Cognitive processing should not be used to dichotomize who you are from what you do.

I never went to business school. In my whole life, I have attended only one business school class. Nearly thirty years ago, I was invited to attend a class in Harvard Business School taught by a friend of mine. True to form, the class was a discussion of a case. I sat in the back of the classroom watching the unfolding of the case through student participation. What struck me was that the case was serving as a mirror for the student to see themselves and to come to know themselves. In their business careers, they would never encounter a situation exactly the same as the case they were studying. The outcome of that case is in a sense immaterial. Why then study case after case? My conclusion is that the cases help the students to see themselves and it is through knowing who they are that they will be able to make better decisions.

There is one particular area in investment decision making where subjective considerations must check, or in some instances, trump any objective ones. This is the case where there is tension between profits and ethics. For me, business as an intellectual exercise is about maximizing profit which is the scorecard of business. On the other hand, business as a social endeavor is about maximizing benefit to society. Decisions involving ethics are by nature much more subjective than decision where only profits come into the picture. On this point, we have of late seen some rather bizarre behavior in the pharmaceutical business. Three years ago, a man cornered the manufacturing of an old anti-parasitic drug and increased its price from $13.50 per pill to $750 per pill. He was able to do it because the company he bought was the only one approved by the FDA to manufacture this drug. Two years ago, we also saw the company that makes the injector of epinephrine, known as the EpiPen, doubling its price because there were no alternative suppliers in the market. The price of the EpiPen increased by 500% over ten years. These actions are perfectly legal and economically rational. If one thinks that an activist government can avert such behaviors in the market, that would be expecting too much from what government can do. Legal or regulatory restraints to egregious market actions can only go so far; not everything that is needed for a good society can be exhaustively legislated. It is incumbent upon those who run businesses to have a sense of balance that comes from a set of values that are intrinsic to the decision makers.

Let me illustrate with an actual case recounted to me by my late father. Over half a century ago, my father was offered a partnership share in the Casino in Macau. Back then, the Casino was an unregulated monopoly and hence a license to print money. My father declined that offer. It was just not him to get into the gambling business. Had he accepted that offer, our family would have become financially richer, but because he acted on his ethical principles against his own economic interest, my family can stand tall today. I, as a son, am proud of my father for what he did not do. What value would you ascribe to the pride that a son feels for his father? There are some things that money cannot buy. Not everything that counts can be counted. Commencement exercises as our gathering here today are times when the parents express their pride for their sons and daughters. So it should be every day. We want to live our lives in a way that makes our loved ones proud of us.

Investment decision-making is a messy business. Overlaying subjective values on objective methodologies makes it even messier. But what I can tell you is that the subjective is what gives meaning to living. The objective gives you cognitive meaning; it is the subjective that gives you existential meaning. If I am to send you one good wish for your graduation today, it is that you will find meaning in your lives.

As you leave the academy today, I wish that there were a prettier world out there waiting to welcome you. Instead, we find a world where the very notions of goodness and decency are under attack. These basic values are made out to be commodities that can be traded away as part of deal-making. I can assure you that no such deals, regardless of your mastery of the art of the deal, can bring you peace with yourself.

My best wishes to you is that in the messiness of life, you will find your balance between the subjective and the objective, that you will find meaning and that you will live a life that you and your loved ones will feel proud of. Only when we all live such lives can there be the foundation for a good society. To all you graduates, congratulations.

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