Now, first, many thanks and an enormous hat tip to Jordan Ellenberg, @JSEllenberg
to his essential book, How Not to Be Wrong
. It’s an intellectually involving book, yet written so well, portraying such a mastery of the subject, that posing is not necessary at all, that it’s a page turner.
I’ll be returning to the wellspring in the future. At the moment, what seemed especially was the treatment of the assumption of linearity and regression towards mean. Still reading this? Great. Bear with me, these things have an important relation to real things in real life, decision making and, yes, managing businesses.
The assumption of linearity means that for some reason, because we are humans and like our models served simple, we seen to assume that things progress in a linear fashion. Like so:
Prof. Ellenberg uses a perhaps more interesting reference to swedishness and prosperity, but we’ll stick to business related things. What people seem to think is that as time goes by, and companies toil away at their thing, profits accumulate, from starting up to eventual billionaireship. Otherwise, someone has failed to manage things well, or is something of a loser, or indeed a villain. This comes up at times in large organisations that think a new idea can just be launched and hey presto! It’ll start earning from day one.
What is still a very flawed model of the real world and its frequent discontinuities and disruptions, looks more like this:
This acknowledges a couple of things. That, at first, you need resources. They might not be as much money as it used to be, as the cost of things has gone down, SaaS, and all that, but it represents time, opportunity cost, resources and such things. First, something needs to be committed. Different ideas, innovations, and businesses obviously have differently shaped curves, failed ideas never emerge from negative territory, but the basic idea remains.
So far, so obvious. Let’s go a little deeper.
Look at the slices of time. In both the trajectory looks linear. The lesson is that if you choose a short enough time scale, everything looks linear. That’s, in a way, calculus, but read the book and you’ll understand. What this means to business is that if you want to look at things strategically, do not assume the current developments are permanent. The difficulty is in trying to gain insight into what the shape of your curve is, and where you are on it. That’s complex and difficult, but no less important for that. Nor is it impossible – and, note, exactitude is rarely needed here.
I cannot resist a little dig towards economists here. Look at any of their predictions, and they are mostly extrapolations of the current state of things, where even the small variations in the known unknowns, (the things we are aware of but cannot predict) can throw the model way off kilter. Always, we have entered either into an age of permanently slower growth; yes, now -but yes, also in the early nineties, and the early noughties – or, we have finally conquered the economic cycle and are smoothly headed towards ever greater prosperity; hard to believe, but this was the claim in later noughties. Very, very rarely have I seen a relevant prediction of a shift in the trend. Now, economists may be able to afford this, but businesses go out of business that way. Disruptions
do that to enormous companies
all the time.
So, to not be wrong, or to borrow another great author, Nassim Nicholas Taleb
, to not be a turkey, try to look beyond the short term linearity. Srategically, if you like. The world almost never is linear, and thinking so might prove expensive.