Chefs, Actors and Leverage

What’s the difference between bus drivers, chefs and surgeons on the one hand, and football players, actors and Web site operators on the other?

The answer is leverage, or what Nassim Nicholas Taleb refers to in The Black Swan as scalability. Whether, and how much, to leverage is one of the biggest decisions to face in choosing a career.

A bus driver can only drive one bus at a time; similarly a surgeon can only operate on one patient at a time. The income of both, and countless others engaged in many non-leveraged professions is proportionate to the time and effort devoted to their work. Of course there are variations within a particular trade, the more skilled the surgeon (or accountant, plumber, gardener…) the higher the unit fee that can be expected. But in all cases, once they stop doing it they stop getting paid.

In contrast, consider the case of most actors. When they’re not waiting tables or driving taxis they might be playing to a few dozen in a community hall. But a few actors get to star in movies, and for the same amount of acting get to be seen by 100s of millions, not to mention DVD sales etc. That’s the power of leverage.

Millions of people have Web sites of one form or another (many many more since the days of social networks and blogging). Of that vast number, a small percentage actually make money from their sites, but of this second group but a tiny fraction enter the financial stratosphere.

The ever-growing influence of the Internet and globalization are skewing the leveraged playing field even further. The so-called network effect describes systems that increase in value the more people that use them. If you want to run an online search engine (or bookstore, auction site, social network, video sharing facility…..) then unless you’ve got a paradigm-shifting twist, tough luck, ‘coz someone’s already monopolized it. Of course there are probably still numerous niche themes to be developed that could earn a living for the right owner, but they are probably more labors of love than golden geese.

So, which to choose? In The Black Swan, Taleb describes the suggestion that he follow a scalable profession as bad advice. Though he made a fortune from trading and writing (both highly scalable) he modestly attributes his success to luck and urges readers to stick to the non-scalable.

Personality and circumstances play a large part in your choice. If you’re a cautious soul and/or have responsibilities to meet then you’ll sleep easier by avoiding leverage. If you’re up for taking a chance, have confidence in your abilities, and aren’t surviving hand to mouth, then consider giving it a go.

It is possible (sensible?) to leverage by degree. For example, if you’re a chef and your first restaurant is doing quite well, you might consider opening a second. Of course you can only be in one kitchen at once, so you’ll need to hire staff you can trust to apply your methods. And if that works you can open a third, and so on. The bigger you get the more time you’ll spend behind a desk and the less with pots and pans, but that’s the price of leverage.

Another way to leverage by degree is by taking a non-scalable job just to keep food on the table and a roof overhead while devoting the rest of your time to developing a scalable alternative. This is what would-be actors are doing waiting tables. The Internet makes it possible for the little guy to try a whole range of scalable business ideas for minimal entry costs. If/when your scalable venture overtakes the day job you can switch your attention entirely to the former.