I am befuddled why “Defense Investing” is treated differently from “Investing”. As if the rules of behavioral economics don’t apply anymore when national security is at stake. You are still offering an investment product to investors. You still have to acknowledge all realities of Conviction, Cognitive Bias, and the subtle zero-sum of early-stage investing.
The Deliberate Trade
I’d like you to imagine that you’ve you’ve just wired funds into a startup seed round. A friend passes — same deck, same founder. Two smart people. Two divergent outcomes. Only one will be right. Why did she pass? Did she have a different risk tolerance? Did you think you could de-risk a certain risk better than anyone else? Did she think the terms were not adequate for the risk at hand? Does the founder of the startup laugh in disbelief about your gullibility and the ridiculous terms you accepted?
“There’s always someone on the other side of the trade. The only question is whether they are making a mistake .. or you are.” — paraphrasing Howard Marks
Conviction Narratives vs. Cognitive Traps
While markets are not strictly zero-sum, outperformance is. Relative returns mean someone’s overpaying while someone else identifies mispriced risk or conviction miscalibration. I hope you’re familiar with two behavioral economics frameworks, two sides of the same coin.
Kahneman & Tversky’s “Judgment Under Uncertainty” (1974) discusses how investors overweight recent trends, anchor on faulty priors, and exhibit confirmation bias. Kahneman can be a dry read at times, but Michael Mauboussin heads consilient research at Morgan Stanley Investment Management’s Counterpoint Global. He remarks in his lectures at Columbia Business School: “In markets, price is set at the margin. If you’re buying, the person selling believes they’re better off without it. Are you sure you know something they don’t?”
Stories are necessary to frame actions and facts. It’s worth reading David Tuckett’s work on Conviction Narrative Theory (CNT). In radical uncertainty (startups, early-stage), investors build emotional narratives to justify action. These narratives integrate facts, affective forecasts, and imagination. Conviction helps us act decisively — but also blinds us to structural errors or unexamined assumptions.
Be vigilant and don’t drink your own Kool-Aid: Your conviction might be rational … or is it just well-rehearsed? And the founder’s story might inspire, but is it built on durable truths?
The Other Side Isn’t Always Dumb Money
In early-stage venture, the “other side” may include:
- LPs not following up on a GP’s allocation.
- Angels with experience but fatigue.
- Institutional investors bound by mandates, not insight.
Counterparty judgment may be shaped by risk models, heuristics, or capacity constraints — not necessarily better information. That distinction matters. The presence of disagreement is not proof of inefficiency. It is proof of narrative asymmetry. And one of you is wrong: one of you thinks the risk is higher than it actually is; or thinks that the risk is lower than it actually is.
When Is the Market Wrong?
“Markets” have group behavioral dynamics. They run on fear, greed, aspirations. And sometimes wishful thinking. Beware of the the illusion of consensus in opaque markets (e.g., defense tech, deeptech) where echo chambers create momentum and confidence, but also .. well … mere echos of the real things. That’s why great investors often feel a bit crazy right before they’re proven right. Nothing replaces independent thinking and self-doubt.
“Most mistakes I’ve made as an investor happened when I borrowed someone else’s conviction.” — Lindsey Li, Long Journey Ventures
Trading With a Mirror
If you believe you’re right, ask: What’s the counter-narrative? What would have to be true for them to be right? And if you’re operating in venture capital — as a founder or investor — and most things venture fail: If I lose this trade, what assumption failed? And how early would I want to know?
“The biggest risk in venture isn’t missing out — it’s lying to yourself about why you’re in.” — Sarah Tavel, GP at Benchmark, early at Greylock, Pinterest