I’ve been working my way through Thinking and Deciding over the past few weeks. It’s a methodical, dry book that’s testing the limits of my concentration. But it’s reinforced an improvement I’ve been working on in my thinking, which is to rely more on a numerical approach to problem solving.
In the context of product development, this essay by Dan McKinley makes the case for a numerical approach excellently. Humans have a need to find coherent narratives — even when they don’t exist. We think we know something (via intuition, empathy, etc), but these feelings are often plain wrong. Mathematical methods provide a check on our biases.
The world isn’t divided neatly into situations where we have ample, accurate data that allows us to be “logical” and situations where we have no data at all and must fall back on nothing but gut-feeling. Data-rich decisions will still tug at our emotions and very personal decisions can still incorporate numerical reasoning. A black and white view of reason and emotion is once again the enemy.
The Unreasonable Effectiveness of Mathematics in Planning “The kind of thinking I’m describing works like this: ‘ok that’s a thing measured in thousands multiplied by a thing measured in tens of thousands, and then filtered through a rate of a few percent, are we even close?’. When permitted to skip this check on deficient intuition, most humans will sense their way to the wrong answers.”
The story trap “There is no better illustration of the pitfalls of a good story than economics. The shortcomings of this discipline as a predictive or even explanatory science have been well advertised, but one rarely acknowledged reason for those failures is the penchant of analysts to mistake narrative for causal understanding. How often do we see charts of fluctuations in, say, share prices or economic indices decorated with arrows indicating the political or financial events that ‘caused’ them? Even when these are not transparently spurious, with spikes that are evidently mere noise commandeered to serve a story, the narrative is often an empty posture of omniscience.”
But speaking of narratives, I’ve been tempering my own exuberance about tech-powered progress. From the ability of new entrants to compete with entrenched companies, to the trouble with IPOs and “private” IPOs, to the difficulty of capturing value as the internet reorganizes the entire idea of transaction costs, to the recurring problem of trying to manage people, there are multiple perspectives that shed light on how difficult it is build and grow a business that provides long-term value.
Maturing markets = higher stakes, closing doors “Though it’s easier to start a company than ever before, it’s harder to compete. […] I fear we are in an increasingly big-company-tilted world.”
Why every aspect of your business is about to change “After all, why do companies exist? The English economist Ronald Coase won a Nobel Prize in economics for answering that question. In the theoretical world, the global economy spins like a top based on price signals between individual operators, with no apparent need for big companies. But in the real world, as Coase pointed out, ‘there are negotiations to be undertaken, contracts have to be drawn up, inspections have to be made, arrangements have to be made to settle disputes, and so on.’ That is, there are transaction costs — friction — and consolidating transactions inside companies is the most efficient way of handling them. Now, as technology shrinks those costs, many companies are unbundling themselves, outsourcing functions to others, crowdsourcing R&D, and exchanging employees for contractors. A continual Hollywood model, in which people and resources come together to achieve a goal and then disperse to other projects, may become common across the economy. It’s happening already.”
The Future of Firms. Is There an App for That? “The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we still have it. […] If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today, the form and logic of economic entities necessarily need to change! Coase’s insight turned around is the number one driver of change today! The traditional firm is the more expensive alternative almost by default. This is something that he did not see coming.”
The Gamble Of The Private IPO “When entrepreneurs pursue a Private IPO as the ultimate round before they go public, they make an implicit bet about the growth rate of their businesses: company revenues will more than double before a public IPO. If the bet doesn’t pan out, then the IPO is a down round — a fund raise at a lower share price than the last private round. This phenomenon isn’t uncommon. In fact, 25% of 2014 IPOs were down rounds, according to an analysis by Ben Narasin and Jeremy Abelson.”
How Can We Solve The Employee Disengagement Problem? “When so much management advice seems to come down to ‘treat employees like adult human beings’ you have to wonder. Why do people need to be told that? If they’re not doing that, what are they doing? The fact that managers even need that advice and advice-givers seem to think it’s necessary to give may provide us with some additional insight into the origins of disengagement.”