Can I buy your finger?

And do I get a discount when I buy ten of them?

Once upon a time there was an investor who tried to explain the difference between paper wealth and actual wealth. This was just before the dotcom bubble burst, and people were driving each other crazy with weird valuations for unproven business models. His analogy was this: imagine someone offering a million for one of your fingers. Now, normal people start thinking whether that’s worth it, and what they would be able to do with a million, or how it would impact their piano playing skills (more money for tutoring, but less fingers to work with).

If you’re an entrepreneur, you would of course feel like this is a proposition with potential for growth. You see potential. Maybe even a scalable business. So you calculate the weight of a finger (about 50 grams), divide that by your weight (about 80 kilos, so 1600) and multiply that by a million, which brings you to a totally defendable but pretty amazing conclusion: your net-worth is now 1.6 billion.

The problem just before the dotcom bubble burst (and Tulip Mania in February 1637, and pretty much every financial crisis ever since) was that you can’t extrapolate stuff that easily: if you happen to find one rich-but-disturbed-individual who’s willing to buy one finger from you, that doesn’t mean they are also interested in the rest of your body. And it also doesn’t mean there’s a whole lot more rich-but-disturbed-individuals buying up body parts left and right.

In fact, you havent sold your finger yet, you’ve only had a discussion with one rich-but-disturbed-individual who mentioned a million for a finger. You might even have a memorandum of understanding, but unless the money is in the bank, you’d be ill advised to start spending your million.

Yet, that’s a mistake repeated many times over by people smarter than you and me throughout history and all over the world. People fund startups, or sell companies, or get loans, or crash financial markets, because they love to extrapolate, and any spreadsheet will help them prove they’re right.

I personally experienced an example of this when I sold my first company, and found myself sitting on 660.000 shares that were selling for $20 a piece when I received them (that’s a net worth of 13.2 fingers). Unfortunately my shares were held in escrow and there was nothing I could do except watch them decline in value day by day. By the time my lockup expired, they were down to 50 cents per share (0.33 fingers, so roughly one phalanx on the capitalist finger scale).

The dotcom bubble had burst and I wanted to cash out, so I called my banker, and took only some delight in finally being able to shout into my telephone: “sell them all!”

I don’t think banker saw the humor in that, or he hid it well because he knew he had some bad news. His reply: “to whom?”

Turns out the volume of shares sold and bought every day for my company was somewhere between 10.000 and 15.000 shares. Over the course of a year, every time I tried to sell a few thousand of them, it would lower the share price for the whole company.

Now, I’m not in the habit of defending billionaires, and I’m very much in favor of tax reform, but I also cringe when I see people talk about rich people and how easy it would be to distribute their wealth.

The GOAT version of this is this tweet by Mekita Rivas, posted on march 3, 2020:

Bloomberg spent $500 million on ads. The U.S. population is 327 million. He could have given each American $1 million and still have money left over. I feel like a $1 million check would be life-changing for most people. Yet he wasted it all on ads and STILL LOST.

Just in case you’re wondering how wrong the math is: the result would not be $1 million per person but rather $1.53. She was only off by a factor of 650.000. And if you feel like I’m stating the obvious, maybe watch how the seemingly not-too-dumb people at MSNBC covered it:

Now, Mekita Rivas knows how to do math and didn’t really believe that 500 million divided by 327 million equaled 1 million per person. Her tweet was just a casual tweet, and the math amounted to not much more than a typo. Unfortunately, the concept seems persuasive and resilient. I still meet startups who defend outrageous valuations simply because they extrapolated a variable that probably isn’t really extrapolatable. This tendency to confuse a single datapoint for a scalable reality reminds me of a joke I heard as a kid.

A man pulls up to a gas station and walks over to the attendant. “Hey,” he says, “could I get just a few drops of gasoline? I need them for my lighter.”

The attendant raises an eyebrow. “A few drops? Sure.”

“How much do I owe you for that?” the man asks.

“Oh, nothing,” the attendant says. “I don’t charge for drops.”

The man nods slowly, glances back at his car, then opens the fuel cap. “Well then…” he says, stepping aside. “Start dripping — I’ll take a full tank.”

I’ll be the first to admit that this isn’t a knee-slapper of a joke. It stuck with me not because it was funny, but because as a kid it taught me a lesson about scalability and its limits.

It’s capitalism in a nutshell: a seemingly clever request, an exploitable loophole in logic, the belief that if something’s free once, it must scale indefinitely.

So, who’s in the market for a finger or two?