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Thinking Through: Understeer
Jan. 18, 2021

In the first post on this blog, I explored a way of generating potentially valuable domain names. Out of the top few hundred results, I registered only a few. And a couple of those have sold for a reasonable profit. With the benefit of hindsight, I believe I made a mistake: instead of buying only the top few, I should have bought them all. I probably would have made more money.

In the early days of the web, all kinds of now-valuable domain names were unregistered. Every few years since then, sparked mostly by looking for domain names for my own projects, I've had to adjust (downward) my expectation for what quality of names will be available. And yet, every time that happens, part of me thinks that process is, in some sense, finally played out to its natural end. As in: ah, now all the reasonably good names are taken, and what's left isn't valuable to speculators. Seeing this pattern in myself was the reason I made the bet in that first blog post ten years ago. But it seems that when you realize you underestimated something, it is likely you are still underestimating it.

In complex domains, the cognitive default is understeer. With investments, this plays out as the feeling of having “missed the boat” when you realize something has appreciated more than you expected. I think the mechanism for this is relatively simple. You realize you were underestimating something when new evidence is uncovered. Well, there is probably even more evidence that has still not been uncovered.

This is related to the German tank problem, which asks you to estimate the size of a pool based on a limited sample. But even that is relatively simple.

It's also related to binary search, which suggests a countermeasure. If the timescale for feedback and outcome line up, you can try to find an upper bound after you've achieved a lower bound.

So, if you're going to go a new direction, you should probably go even further in that direction than you think. I think this is fun advice to explore and it has worked out well for me a few times. Obviously, you should know something about the shape of the landscape you're operating in. You don't want to experience an upper bound on how close you can get to a cliff's edge. But buying domain names isn't like that: the price of a marginal domain is bounded and linear –– the potential upside has more dynamic range. 

I'd like to find more precision about when this heuristic applies. It certainly includes exponential growth, but not only that. And it might be something that evolves as you get older: maybe kids overcorrect, but then at some point your memory of the past outweighs the evidence of change.