Robert Oppenheimer gets the credit for developing the atom bomb: “I am become death, the destroyer of worlds!” But Oppenheimer was no politician. He didn’t know how to raise the funds. He simply organized the scientists.
It was the will of American President Franklin Roosevelt that got the bomb developed.
The race for the atom bomb started when Einstein wrote a letter to Roosevelt
In 1939, Einstein wrote a letter stating that fission chain reactions using uranium made it probable to release large amounts of power. He warned that Germany was actively researching this field to try and build extremely powerful bombs.
Reading that letter, Roosevelt created the Uranium committee to research the feasibility of building a uranium bomb. He allocated a grand total of $6000 to the project.
At the same time, Hitler had allocated close to a million dollars towards similar research.
It took 20 months for Roosevelt to switch gears.
For 20 months, Roosevelt took a cautious approach, keeping the committee’s funding limited. But in 1941, things changed – when the British MAUD Report confirmed that building a bomb was not only feasible but potentially decisive in the war.
Roosevelt transformed the Uranium Committee into the Manhattan Project and dramatically increased funding to $2 billion. This decision allowed Oppenheimer to gather 6,000 scientists at Los Alamos and involve 130,000 personnel across the United States.
Without Roosevelt’s funding, no amount of Oppenheimer’s genius could have produced the bomb.
Ironically, in the same year that Roosevelt increased his bet, Hitler reduced funding for uranium research and shifted focus to other projects like rocket research.
It was Roosevelt’s acumen of knowing when to bet and allocate resources that won the allies the world war! Roosevelt was a rare genius. Because most people simply don’t know how to allocate resources for success. Even when shown the future, most people can’t plan well.
When a crystal ball isn’t enough
Victory Haghani and his firm Elm Wealth created a trading game: the crystal ball challenge. 118 people from the field of finance were recruited to play the game. The players were given $50 that they had to invest in stocks and bonds.
Here is the twist: they were shown 15 issues of the front page of Wall Street Journal from 2008 to 2022. But a day in advance. For eg: participants were shown stock prices as on 24 April, but would be given the newspaper from 25 April.
With perfect foresight, they had to invest their $50 and see how much they could grow it by.
Would you be surprised to know that 50% of the participants lost money? The average gain was just $1.62!
In contrast, when Elm recruited the best 5 macro traders in the world to play the game, the results were dramatically different. The average gain for them was $65 – or about 130%!
These macro traders weren’t extremely accurate. While the amateur finance participants were right just 51% of the time, these 5 experts were right 63% of the time. Not a huge difference especially when you know the news one day in advance. But the way they made their bets made all the difference.
The most surprising thing was that these experts didn’t bet at all on 1/3rd of the opportunities!
If they didn’t have high conviction, they didn’t invest – even when shown the news one day in advance. But when they had high conviction, they dramatically increased their bet sizes.
Which is exactly what Roosevelt did as well, isn’t it? Minimal bets when there is lack of clarity and confidence. But increasing bet size dramatically when things cleared a bit.
Bet sizing = probability of success x impact of success
You’ve got to break down betting into two distinct parts.
- When to bet?
- And how much to bet?
The when to bet part is easy. Bet when you have clarity and have a high signal to noise ratio. Bet when you are confident and have conviction in the outcome. Don’t bet when unsure – don’t let greed or fomo pull you in.
The how much to bet is what differentiates the amateurs from the experts.
How much should you bet?
- Scale your bets on momentum.
Only when things start moving in your direction should you increase your bet sizing. Only when Roosevelt received confirmation from other sources and felt that research momentum was on the rise did he increase his bet. - Bet more based on the impact of success.
Even in 1941, there was doubt about whether the atom bomb would succeed. But Roosevelt wasn’t deterred by the small chance of success because the impact of success was outsized. That’s why he bet 600 times more than Hitler on the atom bomb. - Bet higher when you find a risk / reward asymmetry.
This occurs when there is a gap between your confidence and others’ consensus. If everyone is equally confident, the returns won’t be as good. It’s when you are confident and others are not that you can gain an edge.
Roosevelt didn’t let the German’s reduction of research funding affect his thinking. In fact, he increased the funding because he felt the momentum was on his side, and the impact of success was outsized.
It wasn’t the only instance of shrewd betting by Roosevelt during the war.
Even during the D-Day invasion, his planning with General Eisenhower showcased his mastery of resource allocation.
During the invasion of Normandy, Roosevelt allocated resources for landing on 5 beaches. But not all 5 beaches received an equal number of soldiers. The number of soldiers allocated was based on the probability of success and the impact of success.
Beyond this, he deployed 13000 paratroopers beyond enemy lines. A high-risk, high-reward move. The enemy didn’t expect such a daring mission, creating a unique risk/reward asymmetry.
Finally, he didn’t go all in on the initial attack. He kept reserves ready and scaled the help on the beaches according to the situation and momentum on the day.
The invasion of Normandy turned the tides and allowed the allies to free France. And eventually win world war 2.
Action Summary:
- Bet sizing is more important than bet accuracy. You can be right and still fail if you size your bets poorly, or wrong and still win if you bet wisely.
- You don’t have to bet all the time. Be selective. Only swing when the ball is in your zone.
- Don’t let other consensus confuse you. The best opportunities arise when you are confident and others are not.
- Increase your bets based on momentum and based on the impact of success.