Jeff Bezos
Amazon and Jeff Bezos, pictured, have risk-taking down
to a science.

Getty

In his 2016
shareholder letter
, Amazon CEO Jeff Bezos distinguished
between
Type 1 and Type 2 decisions
.

Type 1 decisions are irreversible and should be made with
caution. Type 2 decisions are reversible, like “two-way doors,”
and should be made quickly.

Amazon’s willingness and ability to make Type 2 decisions has
been a major factor in its success.

That’s according to Scott Galloway, a clinical professor of
marketing at New York University’s Stern School of Business and
the founder of the digital intelligence firm L2.

In his new book, “The
Four: Or, How to Build a Trillion-Dollar Company
,” Galloway
explains how Bezos’ risk-taking mentality has helped Amazon
become one of the most powerful companies in the world.

Galloway mentions a few reasons why Amazon’s fearlessness when it
comes to Type 2 investments — like a
floating warehouse
— have paid off.

1. Amazon isn’t shy about swiftly killing the investments that
aren’t panning out — think Fire Phone — meaning it frees up
capital to invest elsewhere.

2. Some of those crazy investments have become huge wins — think
Amazon Prime and Amazon Web Services.

Galloway says Amazon is incredibly careful not to go
full-steam-ahead on any projects until it knows those
projects will work. For example, Amazon has built a relatively
small number of brick-and-mortar stores because hasn’t
found an appropriately scalable format.

Amazon is different from many other organizations in this
respect, Galloway says. He writes:

“My experience in traditional firms is that anything new is seen
as innovative, and the people assigned to it, like any parent,
become irrationally passionate about the project and refuse to
acknowledge just how stupid and ugly your little project has
become. As a result, traditional companies not only have less
capital to invest, but fewer swings at the plate.”

What’s more, Galloway says, most CEOs “won’t even take risks that
have less than a 50 percent chance of success — no matter how big
the potential payoff.” In contrast,
Bezos said
in 1997, “Given a 10% chance of a hundred times
payout, you should take that bet every time.”

When he visited the Business Insider office in October, Galloway
said Amazon’s current success is unparalleled: “Amazon can now
borrow money for less than the cost of what China can borrow
money [for]. As a result, they’re able to throw up more stuff
against the wall than any other firm.”

So if a project doesn’t work out, “it’s a speed bump for them,
whereas other companies would either probably be put out of
business or see their stock cut in half.”

Amazon’s access to cheaper capital has enabled it to do
things like
spend about $4.5 billion
on TV programming and video,
Galloway said. “Amazon can go into non-core categories and show
up and be dominant in record time because they have access to
cheaper capital. Effectively, this company is playing unfair and
winning.”