Ever swing for the fences only to strike out? Or maybe you’ve hit that rare home run that makes all the failures worth it? That’s the Babe Ruth Effect in a nutshell. I’ve lived it as a founder and now see it play out daily as an investor. Let me share why sometimes the biggest wins come from embracing your strikeouts.

The Legend Behind the Effect

Babe Ruth wasn’t just a baseball star – he was a study in contrasts. Many people don’t realize that while he hit 714 home runs (a record that stood for almost 40 years), he also struck out 1,330 times. That’s a ton of failures! But here’s what makes it interesting: Ruth wasn’t just occasionally great – he changed how baseball was played by focusing on hitting home runs when others were playing it safe.

Before Ruth came along, baseball was about small, incremental plays. Hit singles. Bunt. Steal bases. Ruth chose a different path – swing big, even if it meant missing more often. The results speak for themselves.

Understanding the Babe Ruth Effect

The Babe Ruth Effect isn’t about baseball – it’s about asymmetric outcomes. In many areas of life and business, results don’t follow a normal distribution. Instead, they follow what statisticians call a “power law” – where a tiny percentage of efforts produce the majority of results.

Think about it this way: In a normal distribution (like human height), most people cluster around the average. But in power law distributions, extreme outliers don’t just exist – they dominate the averages.

This creates a counterintuitive truth: strategies that increase your failure rate can actually be optimal if they increase your chances of hitting those rare but massive successes.

Traditional Approach	Babe Ruth Approach
Focus on consistency	Accept variability
Minimize failures	Tolerate failures for potential big wins
Incremental progress	Seek breakthrough outcomes
Lower risk	Higher risk with asymmetric upside
Linear returns	Non-linear, power law returns

The Math of Home Runs vs. Strikeouts

Let’s break down why this approach works with some simple math. Imagine two business approaches:

Approach A (Traditional): You have a 70% chance of making $10,000 and a 30% chance of losing $5,000.

• Expected value: (0.7 × $10,000) + (0.3 × -$5,000) = $7,000 – $1,500 = $5,500

Approach B (Babe Ruth): You have a 10% chance of making $100,000, a 20% chance of breaking even, and a 70% chance of losing $10,000.

• Expected value: (0.1 × $100,000) + (0.2 × $0) + (0.7 × -$10,000) = $10,000 – $7,000 = $3,000

At first glance, Approach A looks better. But here’s the missing piece: if you can take multiple swings, the math changes dramatically. After 10 attempts with Approach B, you’ve likely hit at least one home run, completely changing the equation.

This is why venture capital works despite most startups failing. It’s not about the strikeout rate – it’s about the magnitude of the wins when they happen.

First, let’s understand what makes this approach work mathematically. When outcomes follow a power law distribution (rather than a normal bell curve), a small number of results have an outsized impact on the total.

Think of it this way: If you plotted all possible outcomes on a graph, a normal distribution looks like a bell curve with most results clustered in the middle. A power law distribution looks more like a hockey stick – most results are small, but a few are so enormous they pull the average way up.

The Expected Value Calculation

Let’s revisit our two approaches with more detail:

Approach A (Traditional/Conservative):

• 70% chance of making $10,000 (modest success)
• 30% chance of losing $5,000 (modest failure)

Expected value = (0.7 × $10,000) + (0.3 × -$5,000) Expected value = $7,000 – $1,500 = $5,500

This means if you ran this approach 100 times, you’d expect to make about $550,000 total.

Approach B (Babe Ruth Approach):

• 10% chance of making $100,000 (home run)
• 20% chance of breaking even ($0)
• 70% chance of losing $10,000 (strikeout)

Expected value = (0.1 × $100,000) + (0.2 × $0) + (0.7 × -$10,000) Expected value = $10,000 + $0 – $7,000 = $3,000

At first glance, Approach A seems better ($5,500 vs $3,000). But that’s only if you take a single shot.

The Multiple Attempts Difference

Here’s where it gets interesting. Let’s say you can try 10 times:

Approach A (10 attempts): Expected total = 10 × $5,500 = $55,000

Approach B (10 attempts): The probability of hitting at least one home run in 10 attempts is: 1 – (probability of never hitting a home run) 1 – (0.9)^10 = 1 – 0.35 = 0.65 or 65%

So there’s a 65% chance you’ll hit at least one home run. If you hit exactly one, your outcome would be: 1 × $100,000 + 9 × (-$10,000) = $100,000 – $90,000 = $10,000

But that’s just the minimum case with one home run. The full expected value calculation shows: 10 × $3,000 = $30,000

Wait, that’s still less than Approach A’s $55,000. So where’s the advantage?

The Real-World Twist: Non-Linear Outcomes

Here’s what the simple math misses: in many real-world scenarios, home runs aren’t just 10× bigger than base hits—they can be 100× or 1000× bigger.

Let’s adjust Approach B to reflect reality better:

• 10% chance of making $1,000,000 (more realistic home run)
• 20% chance of breaking even ($0)
• 70% chance of losing $10,000 (same strikeout cost)

Now the expected value = (0.1 × $1,000,000) + (0.2 × $0) + (0.7 × -$10,000) = $100,000 – $7,000 = $93,000 per attempt

Over 10 attempts: 10 × $93,000 = $930,000

Now Approach B dramatically outperforms Approach A’s $55,000.

The Portfolio Effect

This is why venture capitalists can lose money on 80-90% of their investments yet still generate excellent returns. One investment returning 100× can make up for dozens of complete losses.

For example, if you invested $100,000 across 10 startups ($10,000 each):

• 9 fail completely (-$90,000)
• 1 returns 100× (+$1,000,000)
• Net result: $910,000 profit

This is a 9.1× return despite a 90% failure rate!

Real-World Business Examples

The business world is full of Babe Ruth Effect examples:

Amazon: Jeff Bezos explicitly embraced this approach. In his 2018 letter to shareholders, he wrote: “Given a 10% chance of a 100-times payoff, you should take that bet every time.” Amazon’s early investments in AWS, Kindle, and Prime all looked like potential strikeouts but turned into massive home runs.

Apple: The iPhone wasn’t Apple’s first swing at a new device category. Remember the Newton? The hockey puck mouse? Apple’s willingness to strike out enabled them to eventually hit the biggest home run in corporate history.

SpaceX: Elon Musk’s rocket company blew up plenty of prototypes before nailing reusable rockets. Each failure cost millions, but the eventual success changed the economics of space travel forever.

I’ve seen this in my own portfolio too. My best investment returned 75x, which made up for 12 companies that went nowhere. One founder I backed failed twice before creating a billion-dollar company on his third try.

How to Apply It to Your Business

So how do you put the Babe Ruth Effect to work? Here are some practical steps:

1. Create a portfolio approach Don’t bet everything on one idea. Instead, create a portfolio of opportunities with different risk levels. Even within a single business, you can allocate resources across several potential breakthrough initiatives.

2. Rethink how you measure success If you’re punishing all failures equally, you’ll never swing for the fences. Create separate metrics for your “home run” initiatives versus your “singles” business.

3. Budget for strikeouts Explicitly set aside resources for high-risk, high-reward projects. I recommend the 70/20/10 approach: 70% on improving the core business, 20% on related extensions, and 10% on wild ideas that could change everything.

4. Celebrate instructive failures Not all strikeouts are equal. Some teach you nothing, while others provide insights that lead to the next home run. Make sure your team knows the difference.

5. Look for asymmetric opportunities The best Babe Ruth opportunities have limited downside but nearly unlimited upside. This asymmetry is the key to making the approach work.

Common Mistakes to Avoid

The Babe Ruth Effect is powerful but easily misapplied. Watch out for these pitfalls:

Mistaking recklessness for bold thinking Swinging for the fences doesn’t mean closing your eyes and hoping for the best. Babe Ruth studied pitchers meticulously. Your big swings should be calculated risks, not blind gambles.

Not cutting losses quickly enough Even the best batters know when to abandon a bad approach. Set clear criteria for when to stop an experiment and move on.

Ignoring base hits entirely Even Babe Ruth didn’t always swing for the fence. A balanced approach includes reliable smaller wins alongside your big swings.

Applying it where it doesn’t fit Some domains reward consistency over home runs. Heart surgeons, for example, should prioritize reliability over occasional brilliance.

Is This Approach Right for You?

The Babe Ruth Effect works best in certain conditions:

1. When the cost of failure is manageable If striking out means game over, this isn’t your strategy.
2. In winner-take-most markets Where being #1 delivers exponentially more value than being #2.
3. In rapidly changing environments Where playing it safe actually becomes the riskier option.
4. Where you can take multiple swings The math only works if you can afford several attempts.
5. When you have the emotional resilience Frequent failure is psychologically taxing. Not everyone can handle it.

I’ve found that early-stage startups almost always benefit from this mindset, while more mature businesses need to balance it carefully with consistency.

Implementing a Babe Ruth Strategy

Ready to put this into practice? Here’s a framework I use with companies I advise:

Step 1: Identify your potential home runs What opportunities in your business have massive upside but higher risk? These are your potential home runs. List them all.

Step 2: Assess the asymmetry For each opportunity, ask: “What’s the worst that could happen? What’s the best?” The best Babe Ruth plays have limited downside but enormous upside.

Step 3: Design fast, cheap experiments Before swinging big, run small tests to improve your odds. What’s the fastest way to learn if you’re on the right track?

Step 4: Create a failure budget Decide in advance how many resources you’ll dedicate to high-risk projects and stick to it. This prevents emotion from driving decisions after a strikeout.

Step 5: Build a learning system Create a structured process to extract lessons from each failure. This turns strikeouts into valuable data rather than just losses.

I watched one founder implement this by dedicating every Friday afternoon to working on what he called “longshot projects.” Within six months, one of those projects had grown into the company’s second product line and eventually surpassed their original business.

TL;DR Summary

The Babe Ruth Effect teaches us that in domains with asymmetric outcomes, a strategy that leads to more failures can actually produce better results if it increases your chances of extreme success.

Just as Babe Ruth’s home runs more than made up for his strikeouts, businesses can thrive by pursuing high-risk, high-reward opportunities alongside more consistent approaches. The key is understanding where this principle applies, creating a portfolio of bets, and building systems to learn from inevitable failures.

Q&A Section

Q: Isn’t this just encouraging risky behavior? A: No – it’s about calculated risks where the potential upside far outweighs the downside. It’s the opposite of recklessness when applied correctly.

Q: How do I know if my industry follows power law dynamics? A: Look at the distribution of outcomes. In power law industries, the top players capture disproportionate value. Software, entertainment, and venture capital clearly show these patterns.

Q: Can established companies use this approach? A: Absolutely! Google’s “20% time” and Amazon’s willingness to enter entirely new markets are examples of established companies applying the Babe Ruth Effect.

Q: How do I convince my team or investors to embrace this mindset? A: Start small with contained experiments. Track both the failures and successes, then show the math on expected values. Let the results build the case.

Q: What’s the biggest challenge in applying this approach? A: Psychological resilience. Humans hate failing more than we love winning. Building a culture that truly separates instructive failure from poor execution is difficult but essential.

Quiz: Is Your Business Using the Babe Ruth Effect?

Answer yes or no to each question:

1. Do you have resources specifically allocated for high-risk, high-reward projects?
   • YES: You’re creating space for potential home runs.
   • NO: You may be overly focused on consistency at the expense of breakthroughs.
2. When a risky project fails, do you analyze what you learned rather than just cutting it?
   • YES: You’re extracting value from necessary failures.
   • NO: You might be creating a culture that discourages big swings.
3. Can your team name at least three potential “home run” opportunities you’re pursuing?
   • YES: Your organization is thinking about asymmetric opportunities.
   • NO: You may be too focused on incremental improvements.
4. Do you celebrate informative failures alongside successes?
   • YES: You’re building the psychological safety needed for innovation.
   • NO: Your culture might punish the very risks that could lead to breakthrough success.
5. Have you identified which parts of your business benefit from consistency versus home run swings?
   • YES: You’re applying the Babe Ruth Effect strategically.
   • NO: You may be applying the wrong approach to different business areas.

Scoring:

• 0-1 YES: Your business is playing it safe. This might be appropriate in certain industries, but you’re likely leaving breakthrough opportunities unexplored.
• 2-3 YES: You’re starting to incorporate Babe Ruth thinking but haven’t fully embraced it. Look for ways to systematize this approach.
• 4-5 YES: Congratulations! Your organization understands how to balance consistent performance with swing-for-the-fences opportunities.

Remember, the goal isn’t to maximize your strikeout rate – it’s to ensure that when you do swing big, the potential reward makes the risk worthwhile.

Looking back at my own entrepreneurial journey, my biggest regrets aren’t the failures – they’re the big swings I was too afraid to take. As both founder and investor, I’ve learned that in business, as in baseball, sometimes you have to strike out a lot to hit those game-changing home runs.