Sunday, June 19th, 2011

Replay: 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.

This post originally ran on April 30, 2009.

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

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