Arnold Kling on EconTalk talks innovation in bureaucracies

In this EconTalk appearance, Kling explains why he thinks it’s rational for bureaucracies of large companies to poo-poo new ideas:

“…if you’re in middle management and you propose some very potentially spectacular project for your company, you’re going to have to sit in meetings. And, they are going to be 10 people in the room, and if one of them says, ‘This won’t fly,’ that’s it. You’re done. And, that’s actually rational from the corporation’s point of view, because as a middle manager, you have very little skin in the game. Suppose your project is going to cost $20 million; the upside is $500 million or a billion dollars worth of value. You’re not going to get very much of that upside.

On the other hand, if the corporation loses the $20 million, you’re going to lose zero of the downside.

So, you don’t have much skin in the game when you’re playing with the corporation’s money. And so, a corporation that doesn’t set up a bureaucracy that’s skeptical of ideas that come from middle management is just going to end up throwing money at lots of projects that it can’t–that don’t turn out well, and it just squanders its money.”

I’ve worked in large companies for some decades, in a variety of innovation cultures and I don’t find this explanation compelling.

In my view, Kling makes the same mistake as companies with large bureaucracies, he thinks too big. In his example, he assumes the only way to try an idea is with a big investment.

Bureaucratic cultures make this mistake because they presume success based on how an idea sounds to leadership, build to scale and optimize, before they even know if it is something customers want.

I’ve also worked in more productive innovation cultures. They use a simple way to avoid blowing $20 million on a new idea: They spend much less to try out ideas on small scales to see if there’s something to it, like how start-ups do. They call these proof of concepts and pilots. They creatively find ways to try new ideas for sometimes as little as a few hundred dollars to get an initial read on whether the idea has merit.

Kling makes a fair point about skin-in-the-game, but I think there is room for creativity there, too. I once accidentally improved an innovation productivity around promotions by asking field managers if they would want to prove out their promotion ideas on their own budgets.

I say “accidentally,” because that was not my intention. My intention was to slow down an overflow of ideas from them that our bureaucratic culture couldn’t handle and were mostly ideas that had already been tried and failed.

I figured when I asked managers to prove their ideas on their own budget, that might make them put their money where their mouth was. It worked and cut that idea flow by 90%, because they now had the incentive to do the breakeven math to see how much more business their idea would need to bring in to cover the costs of the promotion. Most could see right away that they would be lucky to recoup a fraction of the cost.

But, it also had the unintended consequence of giving them a path around the organization’s red tape and try some new ideas at low costs. So, while fewer ideas were flowing, more ideas were being tried on small scales and some turned out to be big winners that were scaled to the full business. Those ideas would have never been tried if it were up to the bureaucracy to approve and sadly, after I left, it was never understood how and where those ideas came from and the culture went back to the way it was before.

In this case, managers still didn’t have much direct financial skin in the game, but it put enough reputational and job risk in their court to change the way they viewed this activity.

Rather than believing bureaucracies serve a purpose to prevent the organization from taking big risks, I just see bureaucracies as what will likely cause the demise of the business when they do not allow innovation to occur at a rate to keep up with competitors and substitutes.


Key marker of an innovative culture

How easy is it to try a new idea?

In innovative cultures, it’s really easy.

In not-so-innovative cultures, it’s not. These cultures have a lot reasons not to try new things. These reasons come from cultural problems that would need to be addressed for the company to become more innovative.

When I worked in innovative cultures, trying new ideas was natural. New ideas were encouraged and rewarded. The first question when a new idea was brought up was usually, “How can we prove that out?” It wasn’t even thought to dismiss the idea until it was tried out.

Often, when we explored ideas, we ended up learning even more that led to more ideas. Think of these as pivots. Pivots often had better odds because they were based on real world feedback gained from the initial exploratory missions.

This is why I call this the discovery culture.

In one example, we went into a project aiming to improve price transparency.

Through our exploration we discovered it was about 5x more powerful to remind customers what was included in the fee. We discovered this by accident. We had extra white space on the marketing materials and in one trial we filled it with a bullet point list of what was included in the fee as a throw-away.

But, we unexpectedly learned there were 2-3 items on the list that customers did not know were included, did not expect them to be included and knowing they were included changed their value perception for the better.

When I’ve worked in less innovative cultures, new ideas were met with resistance. Instead of asking how we can prove it out, people reflexively tell you why they think it won’t work, which was usually based on their own opinions. It wasn’t even thought that we should try the idea before dismissing it.

The result was that few new ideas were tried.

Not only do these cultures give up the gains from these ideas, but they miss out on discovering the pivots, too, like when we discovered that simply reminding customers what was included in their fee was valuable.

When investing in individual companies, I look for clues to how easy it is to try new ideas there.

A key reason I think it’s hard to beat index funds is that it spreads your bets on new ideas across many more companies and the companies that make it into the indexes are above average in trying new things.

Thoughts on some recent podcasts: Quitting, Education, Inflation and Whiskey-making

On EconTalk and People I Mostly Admire, Annie Duke makes the case that we make too much of quitting and tend to reward grit to much. I agree. But I wonder if some of the baggage against quitting is a Chesterton’s fence. Maybe some good things we get are a results of some folks sticking it out or being pushed into the corner to come up with something.

Host of People I Mostly Admire has a good story about helping his son quit soccer, which is quite different than what I typically see in the soccer community where kids are encouraged to stick with it for so many reasons other than whether the kid likes it or not.

In this EconTalk episode, Roland Fryer talks education reform. I loved hearing about his inventiveness on conducting studies for low costs, like buying pizzas for kids who read. He found that incentives parents of studious kids give to their kids actually work. He tried to put that to work in schools and was disappointed that he couldn’t get adoption.

I wondered, if it works so well, why not try to get parents, rather than school districts, to adopt these policies. It might not be universal adoption, but I think he could get adoption that could make a difference because I think there are a lot of parents that could benefit from learning about these policies.

I also liked the example he gave that when he paid kids more to study one subject, he saw their grades in other subjects suffer. Demand transfer. A kid only has so much time, after all.

On this EconTalk podcast, Devon Zuegel talks inflation in Argentina and makes it interesting. We think we have it bad. But, they adjust. I mentioned it to my Argentinean neighbor and he said, “I talked to my Dad on the phone yesterday [who still lives in Argentina]. I told him inflation is bad here at 8 and 9%. He said, ‘that’s nothing, it’s 100% here.’ Then he seemed more concerned about the weather. LOL”

As Zuegal explained, inflation isn’t so bad when you expect it. But I thought it was eye-opening that folks buy pallets of bricks to hold it value or real estate. I might be more inclined to buy a vacation cabin somewhere, if it was a not only a good place to visit, but a 10x better store of value than money.

In this EconTalk episode, Sonat Birnecker talks about moving from academia to whiskey-making. In one part she explains how tough it was to get bars to carry her products. Her competitors offered perks and money to get bars to feature their products.

At that point, I probably would have quit. They kept at it, stuck to their guns and eventually found people willing to work with them. I found that inspiring.

She also told a good story of how hard it was to get a distributor and even when she had one. I do think many new businesses greatly underestimate the value of good distribution. I believe lots of great products fail simply because they don’t do this.

Chat GPT vacation plans

Can ChatGPT plan my vacations for me? Maybe I should use a travel agent. I haven’t. But, I hate booking stuff. I’m usually fairly flexible, easy going and I do have some fairly easily programmable preferences, but I always get tripped up on comparing options that in the end don’t matter too much.

It would be nice to say, “I’d like to go to California for 4 to 8 days sometime in the late late Spring to visit Yosemite and Napa for some hiking and biking. I like these types of hotels and cars.”

Maybe I can already do this?

I feel like making the plans is the biggest barrier.

Re: Twitter reveal — It was well written

One thing that struck me about Twitter’s reveal over the weekend was how it was written.

It got to and revealed the points quickly and clearly.

So much ‘journalistic’ writing these days follows this pattern:

Click bait headline

Repeat click bait headline with a few more words as a subtitle

Popup asking for an email or subscription to a site I’ve never heard of and have only read 13 words of, so far

Setting a landscape to build back to the point of the headline, laden with biased terms and sketchy reasoning. Which gets me thinking that I’m going to have to buy into their stretches to believe the original point.

Getting back to the point of the headline, but with more words and squishier premise than the headline led you to believe.

Followed by list of ads for strange things that presumably pay the bills for the folks writing this gunk.

Another common pattern is:

Click bait headline

Click here to listen to my hour and 3 minute long podcast

How about tell me in a few sentences?