In The Chronicle of Higher Education,Tom Bartlett writes about his meeting with Nassim Taleb, the author of The Black Swan, Fooled by Randomness and his latest book, Antifragile: Things That Gain From Disorder.
Taleb is known for his gruffness. That turns off a lot of folks. Not me. I’ve always had a penchant for substance over style and I think Taleb offers substantive observations on how the world works.
I believe a key observation from his latest book is to avoid having a single point of failure. Why? Because things fail and they fail more often than not. What thing have you seen that never fails? A single point of failure is dumb.
Engineers design their electrical and mechanical systems with redundancies to try to avoid single points of failure. Electric utility companies, for example, usually have more than one way to get power to your service drop. If one path fails, they can switch to the backup path while they’re fixing the main path. That’s one reason most folks usually don’t experience more than a few hours of electrical outages in a given year.
However, for your home, your service drop is a single point of failure. If it fails, you will be out of service until you get an electrician to fix it. Unless, of course, you’ve invested in a backup generator.
But, we rarely consider single points of failure in our social systems. Central planning is a single point of failure, yet many folks tend to support moving things in that direction whether the topic is health care, education or charity.
For example, I often hear folks advocate a single, national K-12 education standard. What if that standard fails? The answer they give is easier said than done, fix it. How do we fix something that has no competing models to learn from?
Below are a couple of my favorite passages from Bartlett’s piece on Taleb.
It would be for the greater good if more of us shared Taleb’s view on economists. Bartlett describes it as such:
He saves his iciest hate for economists. Taleb has no use for the “charlatanic” field, comparing economic research to medieval medicine. Economists are, in his estimation, weak, ignorant, fearful, and generally pathetic.
This is a good observation. Entrepreneurs and innovators have generated the wealth that’s made our standard of living so much better than our ancestors, not economists.
Here’s another interesting passage:
Taleb is a professor of risk engineering at the Polytechnic Institute of New York University. Despite his wall of degrees (he has an M.B.A. from the University of Pennsylvania’s Wharton School and a doctorate from the University of Paris), he believes that universities propagate “touristification,” another term he coined, a phenomenon that occurs when what should be an exciting exploration turns into a programmatic exercise. It’s better to be an adventurer than a tourist. Education isn’t the only result of this modern sin; gym machines and “the electronic calendar” fall short as well.
About 51 minutes into this EconTalk podcast with Jonah Lehrer about creativity, the discussion turns to how we get these ages of excess geniuses, or periods where there seems to be a high number of geniuses. Lehrer says:
Well, the last part of the book, I focus on so-called Ages of Excess Genius, these periods throughout history, like ancient Athens, Renaissance Florence, Elizabethan England, where you don’t just get one genius–you get this sudden cluster or clot of geniuses. You get Shakespeare, Christopher Marlowe, John Donne, Ben Johnson, Francis Bacon. The list goes on and on. Basically all these geniuses living in the same zipcode at the same time. It is quite eerie, and befuddling.
One explanation he offers:
T. S. Elliot had this great line, when he was trying to explain it in England; his version of the story was there wasn’t somehow this sudden flourishing of talent or genius in the 1580s in London; they simply found ways to waste less genius, to waste less human capital. So, that was his explanation. I think that when you look at these Ages of Excess Genius, that does seem to be one thing they all have in common. Which is, in general, they found ways to waste less human talent. Often by improving the educational system.
Personally, I think it has more to do with what we consider genius and how their ideas get transmitted. I know many people who have demonstrated genius , but will never be known for it.
They never sought to be known for it. They didn’t write down their findings or ideas, it never occurred to them that they were all that smart. To them, it seemed like common sense.
I believe what we recognize as genius is conveniently in a form that is easy to recognize as genius. But, I think that’s just the tip of the iceberg.
1. Milton Friedman’s comment, “Capitalism is a profit and loss system. Profit encourages risk-taking. Loss encourages prudence.”
2. Nassim Taleb, author of the Black Swan and Fooled by Randomness, released the prologue of his new book on Anti-Fragility online. In it, he expounds on Friedman’s point:
Which brings us to the largest fragilizer of society, and greatest generator of crises, absence of “skin in the game.” Some become antifragile at expense to others by getting the upside (or gains) from volatility, variations and disorder and exposing others to the downside risks of losses or harm from them.
In the housing crisis, losses were spread to other parties — investors in mortgages and ultimately to taxpayers — while the upside was retained by the bankers. This caused the bankers to exercise less prudence. How many lottery tickets would you buy if someone else was paying? Likely many more than you would buy on your own.
Then Taleb makes an even more important point:
And such antifragility-at-the-cost-of-fragility-of-others is hidden — given the blindness to antifragility by the Soviet-Harvard intellectual circles, this asymmetry is rarely identified and never taught.
Very few people see this. They even blame the problems on capitalism, never realizing that spreading losses across taxpayers is not capitalism.
3. A blog post from the Wall Street Journal: Half of U.S. Lives in Household Getting [Federal Government] Benefits. And, we’re not talking about benefits like driving on Federally-funded roads or sending a child to a public school that receives some Federal funds. No. We’re talking about getting a direct benefit from the government.
I’m guessing that Friedman and Taleb would suggest that this doesn’t end well.
Friedman might say that we are removing losses and therefore, removing prudence. Taleb might say that we are letting people gamble without having “skin in the game”.
Ultimately, this leads to folks taking risks they wouldn’t take if they had to pay the loss. This is dangerous itself. But, it also leads to something else that is even more dangerous. The loss of resilience, hardiness, grit and adaptability.
In the video, Taleb explains why he supports Ron Paul. The key point is at the 6:40 mark when the host asks Taleb what kind of chances does he give Ron Paul? Taleb responds:
I don’t think in terms of chances. I’m supporting him, regardless of the chances. Whether he has 1% or 99%, I’m supporting him, because we have no other solution…it’s my duty as a citizen, as a person who lives here, as a taxpayer who doesn’t want to be hoodwinked….in the long run, by bureaucrats.
In the commercial below, Domino’s Pizza CEO, Patrick Doyle demonstrates a value destructive bias held by many big company execs when he starts the commercial off saying:
In a big company, good ideas don’t usually come from the local store level…
In this case they didn’t let that bias get in the way, because the commercial features a good idea that came from a Domino’s store owner in Findlay, Ohio, Brian Edler: Parmesan Pizza Bites.
Doyle is right in his follow-up sentence:
…but, a great idea can come from anywhere.
Just look at the beginning of Domino’s Pizza, or most successful companies. Very few were designed in a boardroom at a corporate headquarters. Two brothers founded Domino’s Pizza when they bought a single shop for $900 in 1960.
Subway Sandwich Shops and Subway’s $5 foot-long are other good examples. The founder of Subway borrowed $1,000 to open his first store (again not designed in a boardroom).
And Subway’s $5 foot-long promotion was discovered by a franchisee in Miami. Executives at HQ were not fans of the promotion, but other franchisees began adopting it on their own, because it produced results for them. Eventually these franchisee results convinced corporate.
I’ve seen this attitude at many companies. I’ve seen quite a few failures resulting from business models designed by bureaucrats and consultants in HQ.
Good ideas can come from anywhere, sometimes even competitors (Blockbuster?). I would advise companies to cast their idea net as wide as possible and be as open-minded as possible.
Here I wrote about McDonald’s approach to innovation. They have a test kitchen and they let their franchisees experiment.
Occasionally I run into someone who trots out this smart-sounding post hoc ergo propter hoc fallacy that many b-school student learn about.
A post hoc ergo propter hoc fallacy is a fallacy of false cause. Someone sees a business that started something become successful, while competitors seem to languish, and they attribute this to some fanciful idea of a “first mover advantage”.
Recently someone brought this up to me while discussing a new product trial. This product trial is in a highly untested space. Many people think there’s a huge potential with this product since nobody is in this space “yet”. (Though there may be good reasons for that, which they don’t seem to consider.)
They rattle off that this product will get a huge “first mover advantage”.
I ask, do you think there’s anything to that? Like how Microsoft was the first to word processors, spreadsheets and graphical user interfaces? Or Netscape was first to web browsing? Or Google was first to online search? Or Facebook was first to social networking? Or how Apple was first to the portable digital audio market? Or better yet, like the 8 out 10 new businesses and products that fail trying to get a first mover advantage?
I don’t think it’s being the first. I think success has a lot to do with offering products and services that customers want, for whatever reason (and sometimes those reasons are mighty elusive). First movers can and do win, but it’s not because of the illusory first mover advantage. It’s because they have good products.
As said by Bill Gates. He might be right.
Thanks to Arnold Kling on EconLog for posting a link to this excellent TED video:
Here are some of my thoughts.
I’m glad to hear school teachers are trying to figure out how to use and integrate the Khan Academy videos into their programs. I expected them to see Khan’s work as competition and try to use government to limit access to the site.
At the very least, I thought we’d hear criticism from the establishment that this guy is not a trained and credentialed educator or that he’s not an educational expert or that his videos don’t really work. So far, I haven’t heard any of that. It’s tough to argue with his results.
This is a black swan.
At about the 8th minute, Khan describes the traditional classroom:
…homework-lecture-homework-lecture-homework-snapshot exam. And then whether you get a 70%, 80%, 90% or 95%, the class moves onto the next topic.
Even the 95% student, what’s that 5% that he missed?
That’s analogous to learning to ride a bicycle where I give you a lecture, give a bike to you for a couple weeks and then come back and evaluate you. You can’t quite stop, you can’t make left turns. You’re an 80% bicyclist. I put a “C” stamp on your forehead and then I give you a unicycle.
You fast forward and you see smart students start to struggle because they have these Swiss cheese gaps that kept building.
That reminded me of my own experience. I was a reasonably good math student. When I entered college I signed up to tutor algebra. The rigor of the tutor training made me realize that I had Swiss cheese gaps in my skills, like Khan mentioned. But, that training filled in those gaps and helped me considerably in other courses. I remember thanking that rigorous tutor training out loud while taking a few exams in the weed-out physics courses.
Our model is learn math the way you learn anything. The way you learn to ride a bicycle. Stay on that bicycle. Fall off that bicycle. Do it as long as necessary until you have mastery.
Next, Khan articulates amazingly well a problem I have recognized with our education model, but have struggled to explain it:
The traditional model penalizes you for experimentation and failure, but does not expect mastery [e.g. time to move onto next subject even if you only mastered 90% of the last one].
We encourage you to experiment. We encourage you to fail. But we do expect mastery.
That is excellent.
About 14 minutes in, Khan talks about the progress students make in his model vs. the traditional model.
When you go five days into it [learning a new subject], there are a group of kids who have raced ahead and a group of kids who are a little bit slower.
In the traditional model, you do the snapshot assessment. You say these are the gifted kids and these are the slow kids. You say things like maybe we should put them in different classes.
But, when you let every student work at their own pace, we see it over and over and over again, you see students who took a little bit extra time on one concept or the other, but once they get through that concept they just race ahead.
So the same kids you thought were slow six weeks ago, you now would think are gifted.
It makes you wonder if a lot of the labels that maybe many of us have benefited from were really just due to a coincidence of time.
I watched The Social Network this past weekend. It exceeded my expectations. I saw a few things that made me think about topics I post about here frequently.
1 – Black Swan – Zuckerberg’s Face Mash and Facebook were black swans (Taleb not Portman). Both resulted from a random series of events and ended up popping with users.
2 – The Rational Optimist – In this book, the author Ridley likens ideas to evolution and new ideas come from the mating of different ideas. Facebook was a good example of this. Zuckerberg mated several basic ideas that he got from others and his own observations and experience to create something that many people now find value in. Many of those people wouldn’t have predicted that they would find value in it.
Many who do use Facebook, still are not sure why. They poke fun at it like it’s a kids game they happen to enjoy. This behavior is a great example of a revealed preference not matching their stated preference.
3- Value prop – Zuckerberg had an innate understanding of the value prop he could provide with Facebook. He evolved and experimented the website keeping a couple key questions in mind. First, will this change make it useful to the people using it? Second, will it be as natural as our physical social network? Compare that to other sites like MySpace, which diverged from providing users a value-prop to trying to provide advertisers the value-prop.
Zuckerberg’s key value prop insight seemed to be that he understood how folks interacted, even though the movie depicts him as not being able to do it well himself. This reminded me of the insights Adam Smith had about how humans interacted with each other in Theory of Moral Sentiments. Smith was somewhat of a social outsider, which may have helped him see what others took for granted. Maybe Zuckerberg benefited from a similar perspective.
4 – I enjoyed the backdrop of conflict throughout the movie between talent and conventional privilege. Zuckerberg wasn’t courted for elite clubs at Harvard. His friend and CFO, Eduardo was. Eduardo played the game of delighting the few that held the keys to the club of privilege and prestige. For many this turns out to be a lucrative path. Zuckerber played the game of delighting users. Talent won this round.
Another Seth (Godin) posts on his blog:
Wait, I was confused. There’s a sure-fire recipe for delicious chocolate chip cookies. There is in fact a magic formula.
For businesses, not so much. There isn’t one secret, one process, one solution. Instead, there are a thousand or maybe a million.
It’s not a jigsaw puzzle, it’s a strand of DNA, easily rearranged and sometimes it even works. For a while.
First, recipes for delicious chocolate chip cookies are maybe as numerous as recipes for successful businesses.
Second, I agree with the strand of DNA analogy. But, I like to think of it as a trial-and-error experiment. That’s what different configurations of DNA are as well – trial and error experiments.
Every new product, every new business, nearly every decision made in the running of the business is a trial-and-error experiment with an uncertain outcome.
The business experiment tests whether customers find enough value in whatever is being sold to trade what’s needed to encourage the producers to make more. Some experiments work out and many others don’t. There’s no sure fire way to tell if you’re on to something without trying it.
While I agree with Godin that there is no sure-fire recipe business success, I do believe there’s a way to improve chances of finding successful businesses with good experimentation.
For existing businesses the lesson is to try many new things on small and inexpensive scales. Many businesses flip-flop this. They try a limited number of expensive experiments.
Mature companies forget they were founded as a result of a trial-and-error experiment. Some never even realize it.
Managers appoint themselves as the judge of what will work and what won’t and they filter out many ideas based on their own preferences, never realizing that their preferences aren’t worth a heck of a lot.
Mature companies become old and clunky because they reduce experimentation, sometimes without realizing it. Even after choking off conscious experimentation, most companies have natural experimentation happening within their business and they tend to ignore the results or kill them if the new process or product deviates too far from their comfort zone.
I remember sitting in a meeting discussing a new experiment at one company. The 20 people in the room from different parts of the business were each interested in getting their stamp on the experiment so they could appear to be adding value and have something to plug in their next performance appraisal. None of them had been a part of any previous successful experiment. The experiment was a Homer (as in the car designed by Homer Simpson). It had a little something for everyone and worked for no one.
Folks from this company will tell you that they experiment. They just don’t realize that they experiment poorly. They don’t conduct enough experiments, don’t have the right people working on them and the experiments they do conduct are subject to too many political stakes.
Here are my suggestions for companies who are interested in tapping into the power of experimentation:
- Increase the number of experiments.
- Make the experiments as cheap as possible.
- Measure success on actual customer response and feedback.
- If you need a statistician to tell you if the experiment worked, it didn’t work or it didn’t work well enough. You want experiments that work really well.
- Keep an eye out for natural experiments. These may take the shape of an accident that has a good result or someone in a remote location doing something a little different that’s generating good results.
- Associate successful experiments with people. Don’t expect anyone to bat a 1,000, but notice and reward that some people have a talent for hitting on successful experiments. You want to keep these people around and let them have some runway and reward them when they do hit on something.
- Resist temptation to impose arbitrary preferences on experiments. I’ve seen leaders kill any hopes of a successful experiment by imposing their own preferences into it (e.g. “it must use our brand name” or “it can’t cannibalize our existing business”).
- Kill failed experiments. I’ve seen failed experiments carry on far too long because the experiment happened to be the pet project of someone with political power in the organization…
- …but don’t be afraid to evolve experiments. Sometimes an experiment needs to evolve a little before it hits.
- Start small and expand slowly. Another crazy thing big companies do is roll something out big that has little or no experience, battle testing and evolution. These are either ego-driven projects, hail mary acts of desperation or just bad business management. These types of projects may have been the origin of the phrase epic fail. Management tends to over react to gain a first-mover advantage, but that’s a myth. The eventual winner tends to be the product that is most battle tested and evolved to best suit the needs and preferences of the customers (e.g. Google vs. Yahoo!, MySpace vs. Facebook, Lotus 1-2-3 vs. Excel).
- Use an entrepreneurial model with small project teams and get those teams away from HQ so they won’t be influenced by office politics.
Show me a company that is lagging, let me speak to a few people there and I can likely tell you how they are snuffing out the power of experiments. Show me a successful company and I can find out how they came upon the successful experiments and see if there’s trouble in the future due to a bad experimentation model.
To use a band analogy, some companies end up being one-hit wonders while others endure. And for the very same reasons. One hit wonders may make enough money and decide they no longer need to experiment with new music. Enduring bands never seem to lose that experimental motivation. They continue to experiment with music and continue to hit upon new hit songs.
To sum up, the secret to good business is good experimentation.