Thursday, April 30th, 2009

Resolving the Paradox of Success

In a previous posting on innovation, I talked about how coming up with innovative new ideas is surprisingly easy. It is actually trying to do them that is hard. I pointed out many of the structural barriers to this, most of which lie in the realm of organizational dynamics.

One of the problems is what I call the “paradox of success”. That is, it is harder for someone, be it an individual or company, to do something new and different to the extent that what they are currently doing is already successful. This actually seems, like the Prisoner’s Dilemma, prima facie rational. The investment and level of risk one takes on by giving up something that is already working is much higher than giving up on something that’s failing. The probability weighted R might be the same, but the I is much different between those situations in an ROI calculation.

It comes as no surprise to me to hear entrepreneurs talk about starting a business after losing a job or going bankrupt. That lowers the risk threshold to the new dramatically. If you have to quit a six figure job to launch an uncertain new business, that’s a much more high stakes move. Similarly, I’m not surprised to hear people who found religion to say that they turned to Jesus after they “hit rock bottom”.

However, there is an underlying assumption about this analysis, namely that the future will more or less resemble the present and past. If that assumption is wrong, then the whole thing can break down. The subprime mortgage business seemed like a good one until it hit a wall. If you were in the vulnerable sub-sector of the housing industry, it might have made more sense to actually get out early and establish yourself in something new before you and everyone found yourself on the street. But I see little evidence much of this happened, whether that be in traders or real estate agents.

This assumption that the future resembles the past or that we can extrapolate trends seems to be buried deep in the human psyche. I noted before how this was one of the classic errors Dietrich Dörner identified in how people fail at complex problems. It’s always dicey to talk evolution. You can always gin up a plausible sounding evolutionary rationale for a behavior. But it does strike me that biologically there might in fact be good reason to favor having this assumption genetically embedded. The primitive world was in fact a fairly static, slowly changing system. Which animals are dangerous or not, what foods are safe or poisonous, the danger of fire and ice, etc. – all of these things it is good to learn fast and learn once. We heated our house with a wood stove growing up. One time as I kid a touched it burned my hand good. After that, I was much more careful around it. Why would I assume that somehow a hot stove wouldn’t burn me next time? Indeed, behaviors like this seem to get so ingrained in us that even when they stop giving us the results we want, we keep on trying them anyway.

David Hume famously refuted the idea that there is any logic at all in the concept of the future resembling the past. We believe it reflexively, but there is actually no logical reason to even believe the laws of nature are constant. But this appears to be unquestioned. This general notion is programmed into us a priori. I believe it is literally bred into the species.

The problem is that the modern economy is not a stable, slow changing system and it is becoming increasingly less so with time. It is a different class of phenomena than those with which the human species evolved. In this environment, the logic of risk is different. In a rapidly changing environment, the safe course can actually be the more dangerous one. A company that is too laser focused on its market could miss a fundamental shift that leaves it high and dry. The skills that command a premium today might be obsolete tomorrow, or suddenly tradeable in the global market leaving you competing for a job with someone in India making a fraction of the onshore wage.

We’ve seen many business models begin to falter. Industries as diverse as newspapers, land line telephones, and IT services have been radically upended in just the last few years. Creative destruction is operating at a speed heretofore unknown. In this environment it is most likely a matter of when, not if, the way things you are doing them today will be not just not as successful as they used to be, but completely unsuccessful. If you aren’t prepared, this could be catastrophic.

That’s why innovation and change aren’t just empty buzzwords. They are an imperative. We have to use our brains and intellectually realize that the safe course isn’t as safe as it might appear, overcome our inborn predisposition to assume a static world, and look at the risk situation rationally. We have to overcome our instincts.

Frankly, this world isn’t going to be pleasant for most of us, myself included. I don’t like uncertainty about the future any more than the next person. But that is the world that we are going to be in. The one thing we can be certain of is that things are very likely to change significantly in the future. We don’t now how much, when, or to what, but we have to be ready for it.

I think this means a few things. One, overly focused solutions, while en vogue in some B-school theory, is heavily vulnerable to niche exhaustion. Overspecialization leads to death. So unless your plan is to get in and get out, it’s risky. You at least need to be constantly examining when the likely end date is. Two, that means to increase your chances of having long term staying power, you should be placing some bets on the new, and probably some diverse bets, spreading some money around the table instead of piling on the chips on Red 14. I have a friend who owns a software company. The keep building small software as a service applications and seeing whether they get take-up. They idea is to try a lot of different things and see which one hits rather than putting too much investment in one big thing. Given the low cost of entry for web applications today, this is a smart move. And three, from and individual perspective, we should be wary of overspecializing even if that is what the market demands. At least to some extent, we should remain broad as well as deep. This is the famous “T shaped” person model. Someone with deep expertise today, but a base in many things. Today’s hot skill isn’t going to stay that way forever.

What does this mean for cities? Firstly, cities themselves have to eat the dog food. You can’t target being an innovation hub for business if your civic strategy is the status quo or rooted in totally traditional thinking. Cities too need to be spreading some bets around the table, trying new things, etc. This is extremely difficult to do in a political environment, which is why good leadership in a community is so important. You need leaders to make the case for change. By the way, this applies as much to cities that are succeeding today as it does to those who are struggling. Even more so perhaps, since struggling cities probably at some level know they need to try something different while successful cities can delude themselves that they have it all figured out. Secondly, cities need to look at how they can create a culture of innovation that permeates the people and businesses that locate there. Rather than targeting a few sectors that appear to be hot for innovation, the real answer is how to infuse innovation and a forward thinking view into everything we do.

By the way, this does not mean pitching what we do today away wholesale. But it does mean a willingness to try new things, and a willingness to see some of them fail, which is inevitable. That’s a tall order. But if you can get there, I’m convinced it will pay big rewards down the road.

8 Comments
Topics: Economic Development, Public Policy, Strategic Planning, Technology

8 Responses to “Resolving the Paradox of Success”

  1. Alon Levy says:

    This sort of innovation can only come from cities that literally have nothing to lose. Communities are more risk-averse than individuals. Even Detroit still clings to the fantasy of an auto industry renaissance, boosted by populists and romantics who think that there is no other way to promote the middle class.

    The key here is Cultural Theory of risk, as explained in Risk and Culture by Mary Douglas and Aaron Wildavsky. Douglas and Wildavsky’s hypothesis is that risk perception is influenced not so much by demographic variables like income and race as by a cultural attitudes. There are four attitudes, determined by two attributes, group and grid, each of which can be high or low. Group measures the amount of group solidarity required; grid measures restrictions on an individual’s ability to exit, such as legal rules or reduced wealth.

    When you have low grid and low group, it’s a free for all; this is called individualism, and looks like the idealized free market. This mode is the least risk-averse, because individuals differ in their levels of cautiousness, and at any rate can hedge their bets; to the individualist, the greatest risks are those that disrupt the market’s operation, like war and economic collapse.

    The key insights of Cultural Theory are about the high-group modes, egalitarianism and hierarchy. Egalitarianism is far more risk-averse and far more resistant to change than hierarchy. Douglas and Wildavsky explain that absent any barriers to exit, the only way for the group to maintain solidarity is to have a religious or religious-like adherence to its way of life, buttressed by warnings of disaster if anything changes, and with change only by unanimous consent; radical environmentalism is a good example. Hierarchy can be cautious as well, but when its leaders want change, change happens.

    What this means for American cities is that change is necessarily going to be glacial. Their governance mechanisms are egalitarian with some hierarchy thrown in – there are elected officials and power brokers, but things rarely move unless all relevant interest groups are happy. This is not the only way of running cities, but it’s the only responsive way, and usually cities that try hierarchy, such as Shanghai, eventually find that fighting the people and local communities isn’t worth the effort.

  2. Ironwood says:

    Urb:

    Another thought-provoker. You keep punchin’ ‘em out.

    When it comes to innovation, especially when you capitalize the “I,” the risk/reward equation for the public servant is skewed toward preserving the status quo even more than for his/her counterpart in the private sector. In local government there is virtually no monetary reward for risky behavior that results in success, and there is almost certain punishment for risky behavior that results in failure.

    Thus, there is a very limited constituency for change, at least when you capitalize the “C.” Unfortunately, the resistance to Change and New Ideas gets worse as a public servant becomes more senior: you don’t want to do anything that will endanger that pension. (I say this not critically, but resignedly.)

    The best solution I’ve run across so far? The venerable pilot program. The pilot program is like a hamster for kids who want a pet but whose parents won’t let them have a dog.

    In my experience, pilot programs are the Trojan horses of innovation in local government. They can have world-shaking concepts behind them, and huge implications, but that’s the last thing the proposer wants anyone to know. If you have a good idea, explain it small, design it small, sell it small and run it small. And structure it so you’re prepared to take the hit if it fails, and your boss gets the credit if it succeeds.

    And pilots don’t even have to be designated as such. Some of the best have been conducted un-self-consciously and informally. Formal or informal, pilots are cheap, flexible, controllable, hands-on and generally low-visibility, so if there’s an f–up, adjustments can be made. They’re like basement experiments that can be tinkered with by patient dads using left-over parts from old radios and lamps. Or, I guess, to put it in more contemporary terms, cool hacks to your TIVO, to be shared with just a few geeky buds.

    This is pushing an analogy, but pilot programs are kind of like the basic mechanism of organic evolution, which occurs through tiny genetic mutations at the molecular/cellular level. The power of the analogy, in terms of innovation, is in changing the focus from “decision-making” (usually done at a very high, conscious, visible level) to “discovery” — discovery of small, often incremental, sometimes revolutionary, experiments going on every day in thousands of local governments.

    If, as I believe, there’s more worthwhile urban tinkering and experimenting going on than gets reported, then maybe what is needed is a better way to ferret out and report on them?

    This isn’t the whole answer, of course, to urban innovation, but it’s a big enough part of it, I’d argue, to be pursued with more energy and resources.

  3. The Urbanophile says:

    Thanks for the pointer to the book, Alon.

    Ironwood, thanks! Interesting, and sadly, accurate commentary on risk-reward in the public sector. It’s obviously a difficult challenge. It takes incredible leadership to overcome. The pilots idea is a good practical suggestion.

  4. Alon Levy says:

    Ironwood: local pilot programs are good from a lot of perspective, not least of which is that they encourage more participation. However, I fear they’re better at reducing the problems of city hierarchy, such as patronage and rewards for politically connected developers, than they are at reducing risk-aversion, which is a problem of egalitarianism.

    Generally, more local communities are more egalitarian than larger-scale ones. Neighborhoods are often the most conservative about issues like permits, new construction, and what to do with newcomers. In New York, the only areas that welcome new development are those that are already rich and successful. Cities are less conservative, states even less, and the federal government the most innovative.

    This is something predicted by Cultural Theory – the smaller the community is, the easier it is to leave it, increasing grid, and the more the main activists know one another personally, increasing group. The richer neighborhoods, which are least afraid of change, have low group because their social networks are based on where you work or where you went to college rather than where you live; this is why they welcome change more. (In addition, non-cultural theories of risk show that the upper class is less concerned about risk in general than all other social classes).

  5. CARR says:

    Urb,

    Very interesting. Reading your post tonight reminds me of Apple. Apple is a pretty good case study of a company that routinely kills off very popular products or functions to replace them with something else.

    How many companies would ditch the hugely successful and popular macworld? Apple was the first company to go all USB when USB really wasn’t that popular. I could go on and on, but I wont. I think you guys get the point. Most companies would milk the iMac, ipod, macworld etc, until their wasn’t anything left. Apple seems quite content to kill off their own stuff and see what new coo, stuff they can replace it with.

    I don’t see cities being able to do that unless they have a very strong mayor who is very popular. I think a strategy that most cities could undertake is wait for a group of citizens to form a organization and then fund them with grants.

    An example would be a group of local filmmakers and film buffs start a film society. Once the city finds out they can see if they “qualify” for grants. This way a city with a weaker administration can get a film commission extra lite without having to spend any political capital. Then if the venture looks really promising the city can either fully fund it or bring it in.

    This way will take a long time and there is no guarantee that anything like this will happen, but for some cities this might be the only way.

  6. Jeffrey Cufaude says:

    While I acknowledge I’m not representative of the norm, I actually take solace in being certain that the future will be more uncertain and perhaps have more ambiguity. If we can accept that we will increasingly be dealing with uncertain and turbulent conditions as a fact of life, then we can begin to organize our thinking, processes, and infrastructure to thrive in just that type of environment.

    Too few organizations and cities are building their capacity for rapid prototyping, something that will be essential if pilot projects are going to be a worthwhile part of our innovation efforts.

    Rosabeth Moss Kantor has a very basic innovation pyramid that mirrors a typical annual fund giving model: lots of incremental improvements as the base, a healthy center of major improvements for existing initiatives and starting lower risk new initiatives, and capped off by a few big strategic bets. When I use it with clients it often provokes interesting discussion as they see the distribution of their own innovation efforts.

  7. Jarrett says:

    Urb

    Thanks for the superb and provocative post.

    Your post and commenters seem to assume a unitary model of the city, in which some process within the city, whether egalitarian or hierarchic, is capable of deciding and acting. It sounds very much like the Platonic city-state.

    The reality is so much more complex, with many layers of partly-sovereign government tripping or enabling each other, while, in another dimension, ideas and technologies compete in a range of more-or-less-free markets. If your model of a successful decision is really some sort of clear, authoritative act — as you imply here — well, this is very hard to imagine in anything short of fascism.

    I guess this is why my own work as an urbanist is about building resilience. We can’t create a society that embraces change and risk — that might even be an oxymoron — but we can design systems that do. A power grid that draws from a range of sources, each subject to different risks and therefore unlikely to all fail at once, is a reasonable metaphor for the kinds of cities that will function in a faster-changing world. Peter Newman et al’s new book Resilient Cities is a reasonable overview of this angle.

    Resilience is a crucial idea because it’s ONE idea. Even if you have a unitary city-state of your thought experiment (rather than our real tangle many layers of government) you can never get a polity to commit to more than one idea at a time. Decisiveness in politics is inseparable from a singular focus, one idea, no matter how complex and multiple the reality may be, which is why decisiveness is so often married to stupidity. So we’re only going to get there by hiding the (real) multiplicity inside a (rhetorical, conceptual) singularity, and that, I think, is what the notion of resilience does.

    All I think we can ask of government is to focus intently on building resilience into all of our systems. Then, in parallel, we need to motivate the private sector to be more like Apple and less like Microsoft, eager to make a wide range of long-shot bets knowing that only a few of these will end up suiting the world as it turns out to be in the future.

    Can we really hope for more than that?

  8. The Urbanophile says:

    Jarrett, thanks for the kind words. I agree completely with you about the need to build distributed, resilient systems in our cities. I’d definitely like to hear more from you going forward on how to make that a reality.

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