Power Law Capability Assessment
Before adopting concentration strategies to avoid destroying value by concentrating without genuine skill at outlier identification.
Framework for honestly assessing whether an organization possesses the rare capabilities required to successfully execute power law concentration strategies, accounting for survivorship bias.
When to Use Power Law Capability Assessment
Before adopting concentration strategies to avoid destroying value by concentrating without genuine skill at outlier identification.
How to Apply
Evaluate Outlier Identification Track Record
Assess whether you have demonstrated ability to predict winners above random chance through repeated success across multiple independent trials.
Questions to Ask
- Do you have repeated success across multiple independent trials?
- Has success occurred in varied conditions, not just favorable ones?
- Can you articulate clear causal mechanisms linking actions to outcomes?
- Do you outperform benchmarks controlling for risk and luck?
Outputs
- Skill evidence assessment
- Warning signs of luck misattributed as skill
Assess Capital Structure and Time Horizon
Determine whether organizational structure allows patience required for power law strategies where outliers take time to materialize.
Questions to Ask
- Can you hold positions through multi-year underperformance?
- Do you face redemptions, quarterly pressures, or short executive tenures?
- Are budgets protected from short-term cutting?
Outputs
- Patient capital assessment
- Time horizon classification
Determine Failure Tolerance
Evaluate organizational capacity to survive high failure rates inherent in power law environments where 70-90% of attempts fail.
Questions to Ask
- Can your organization financially survive most attempts failing?
- Does culture punish or celebrate intelligent failures?
- Is psychological safety sufficient for risk-taking?
Outputs
- Failure tolerance assessment
- Cultural readiness evaluation
Select Appropriate Strategy
Based on capability assessment, select appropriate approach from concentration to diversification.
Questions to Ask
- High skill + patient capital + high risk tolerance?
- Moderate across dimensions?
- Unproven skill or short horizons?
Outputs
- Strategy recommendation: Concentrate (70-80% to top 10%), Moderate (50-60% to top 20%), Diversify broadly, or Index/partner