anti-fragility

Disruption arises from Antifragility

Kevin Kallmes Books, Culture, Economics, Liberty , , ,

One of my favorite classics about why big businesses can’t always innovate is Clayton Christiansen’s The Innovator’s Dilemma. It is one of the most misunderstood business books, since its central concept–disruption–has been misquoted, and then popularized. Take the recent post on Investopedia that says in the second sentence that “Disruptive technology sweeps away the systems or habits it replaces because it has attributes that are recognizably superior.” This is the ‘hype’ definition used by non-innovators.

I think part of the misconception comes from thinking of disruption as major, public, technological marvels that are recognizable for their complexity or for even creating entire new industries. Disruptive innovations tend instead to be marginal, demonstrably simpler, worse on conventional scales, and start out by slowly taking over adjacent, small markets.

It recently hit me that you can identify disruption via Nassim Nicholas Taleb’s simple heuristics of recognizing when industry players are fragile. Taleb is my favorite modern philosopher, because he actually brought a new, universally applicable concept to the table, that puts into words what people have been practicing implicitly–but without a term to use. Anti-fragility is the inverse of fragile and actually helps you understand it better. Anti-fragile does not mean ‘resists breaking,’ which is more like ‘robust;’ instead, it means gains from chaos. Ford Pintos are fragile, Nokia phones are robust, but mechanical things are almost never anti-fragile. Bacteria species are anti-fragile to anti-biotics, as trying to kill them makes them stronger. Anti-fragile things are usually organic, and usually made up of fragile things–the death of one bacterium makes the species more resistant.

Taleb has a simple heuristic for finding anti-fragility. I recommend you read his book to get the full picture, but the secret to this concept is a simple thought experiment. Take any concept (or thing), and identify how it works (or fails to work). Now ask, if you subject it to chaos–by that, I mean, if you try to break it–and slowly escalate how hard you try, what happens?

  • If it gets disproportionately harmed, it is fragile. E.g., traffic: as you add cars, time-to-destination gets worse slowly at first, then all of the sudden increases rapidly, and if you do it enough, cars literally stop.
  • If it gets proportionately harmed or there is no effect, it is robust. Examples are easy, since most functional mechanical and electric systems are either fragile (such as Ford Pintos) or robust (Honda engines, Nokia phones, the Great Pyramids).
  • If it gets better, it is anti-fragile. Examples are harder here, since it is easier to destroy than build (and anti-fragility usually occurs based on fragile elements, which gets confusing); bacterial resistance to anti-biotics (or really, the function of evolution itself) is a great one.

The only real way to get anti-fragility outside of evolution is through optionality. Debt (obligation without a choice) is fragile to any extraneous shock, so a ‘free option’–choice without obligation, the opposite, is pure anti-fragility. Not just literal ‘options’ in the market; anti-fragile takes a different form in every case, and though the face is different, the structure is the same. OK, get it? Maybe you do. I recommend coming up with your own example–if you are just free riding on mine, you don’t get it.

Anyway, back to Christiansen. Taleb likes theorizing and leaves example-finding to you, while Christiansen scrupulously documented what happened to hundreds of companies and his concepts arose from his data; think about it like Christiansen is Darwin, carefully measuring beaks, and recognizing natural selection, where Taleb is Wallace, theorizing from his experience and the underlying math of reality. Except in this case, Taleb is not just talking about natural selection, he is also showing how mutation works, and giving a theory of evolution that is not restricted to just biology.

I realized that you can actually figure out whether an innovation is disruptive using this heuristic. It takes some care, because people often look at the technology and ask if it is anti-fragile–which is a mistake. Technologies are inorganic, so usually robust or fragile. Industries are organic, strategies are organic, companies are organic. Many new strategies build on companies’ competencies or existing customer bases, and though they may meet the ‘hype’ definition above, they give upside to incumbents, and are thus not fragilizing. Disruption happens when a company has an exposure to a strategy that it has little to gain from, but that could cannibalize its market if it grows, as anti-fragile things are wont to do.

The questions is: is a given incumbent company fragile with respect to a given strategy? Let’s start with some examples–first Christiansen’s, then my own:

  • Were 3″ drive makers fragile with respect to using smaller drives in cars?
    • In my favorite Christiansen anecdote, a 3″ drive-making-CEO, whose company designed a smaller 1.8″ drive but couldn’t sell it to their PC or mainframe customers, complained that he did exactly what Christiansen said, and built smaller drives, and there was no market. Meanwhile, startups were selling 1.8″ drives like crazy–to car companies, for onboard computers.
    • Christiansen notes that this was a tiny market, which would be an 0.01% change on a big-company income statement, and a low-profit one at that. So, since these companies were big, they were fragile to low-margin, low-volume, fast-growing submarkets. Meanwhile, startups were unbelievably excited about selling small drives at a loss, just so that Honda would buy from them.
    • So, 3″ drive makers had everything to lose (the general drive market) and a blip to gain, where startups had everything to gain and nothing to lose. Note that disruptive technologies are not those that are hard to invent or that immediately revolutionize the industry. Big companies (as Christiansen proved) are actually better at big changes and at invention. They are worse at recognizing value of small changes and jumps between industries.
  • Were book retailers fragile with respect to online book sales?
    • Yes, Amazon is my Christiansen follow-on. Jeff Bezos, as documented in The Everything Store, gets disruption: he invented the ‘two-pizza meeting’, so he ‘gets’ smallness; he intentionally isolates his innovation teams, so he ‘gets’ the excitement of tiny gains and allows cannibalism; he started in a proof-of-concept, narrow, feasible discipline (books) with the knowledge that it would grow into the Everything Store if successful, so he ‘gets’ going from simple beginnings to large-scale, well, disruption.
    • The Everything Store reads like a manual on how to be disrupted. Barnes & Noble first said “We can do that whenever we want.” Then when Bezos got some traction, B&N said “We can try this out but we need to figure out how to do it using our existing infrastructure.” Then when Bezos started eating their lunch, B&N said “We need to get into online book sales,” but sold the way they did in stores, by telling customers what they want, not by using Bezos’ anti-fragile review system. Then B&N said “We need to start doing whatever Bezos does, and beat him by out-spending,” by which time he was past that and selling CDs and then (eventually) everything.
    • Book sellers were fragile because they had existing assets that had running costs; they were catering to customers with not just a book, but with an experience; they were in the business of selecting books for customers, not using customers for recommendations; they treasured partnerships with publishers rather than thinking of how to eliminate them.
  • Now, some rapid-fire. Think carefully, since it is easy to fall into the trap of thinking industry titans were stupid, not fragile, and it is easy to have false positives unless you use Taleb’s heuristic.
    • Car companies were fragile to electric sports cars, and Elon Musk was anti-fragile. Sure, he was up-market, which doesn’t follow Christiansen’s down-market paradigm, but he found the small market that the Nissan Leaf missed.
    • NASA was fragile to modern, cheap, off-the-shelf space solutions, and…yet again…Elon Musk was anti-fragile.
    • Taxis were fragile to app-based rides.
    • Hotels were fragile to app-based rentals.
    • Cable was fragile to sticks you put in your TV.
    • Hedge funds were fragile to index funds, currently are fragile to copy trading, and I hope to god they break.
  • Lastly, some counter-examples, since it is always better to use the via negativa, and assuming you have additive knowledge is dangerous. If you disagree, prove me wrong, found a startup, and make a bajillion dollars by disrupting the big guys who won’t be able to find a market:
    • There is nothing disruptive about 5G.
    • Solar and wind are fragile and fragilizing.
    • What was wrong with WeWork’s business model? Double fragility–fixed contracts with building owners, flexible contracts with customers.
    • On a more optimistic note, cool tech can still be sustaining (as opposed to disruptive), like RoboAdvisors or induction stoves or 3D printed shoes.
    • Artificial intelligence or blockchain any use you have heard of (but not in any that you don’t know yet).

So, to summarize, if a company is fragile to a new strategy, the best it can do is try to robustify itself, since it has little upside. Many innovations give upside to incumbents at the marginal cost of R&D, and thus sustain them; disruption happens when the incumbents have little to gain from adopting a strategy, but startups have a high exposure to positive impact from possible adoption of a strategy due to the potential growth from small-market, incremental/simplifying opportunities, which is definitionally anti-fragility to the strategy.

Now, I hope you have a tool for judging whether industrial incumbents are fragile. Rather than trying to predict success or failure of any, you should just use Taleb’s heuristic–that will help you sort things into ‘hyped as disruptive’ vs. ‘actually probably disruptive.’ A last thought: if you found this wildly confusing, just remember, disruptive innovations tend to steal the jobs of incumbents. So, if an incumbent (say, a Goldman Sachs/Morgan Stanley veteran writing the definition of “disruptive” for Investopedia) is talking about a banking or trading technology, it is almost certainly not disruptive, since he would hardly tell you how to render him extraneous. You will find out what is disruptive when he makes an apology video while wearing a nice watch and French cuffs.

Necessity constrains even the gods

Kevin Kallmes Liberty , , , , , ,

I was recently talking to my cofounder about the concept of “fuck-you” money. “Fuck-you” money is the point at which you no longer need to care what other people think, you can fund what you want without worrying about ending up broke–so long as you recognize the power of necessity.

It reminded me of three things I have read before. One is from the brilliant economist and historian Thomas Sowell, who wrote in The Conflict of Visions that ideological divides often crop on the disagreement between “constrained” and “unconstrained” visions of the world and humanity. Effectively, the world contains some who recognize that humans have flaws that culture has helped us work through, but that we should be grateful for the virtues handed to us and understand that utopianism is dangerous self-deception. But it contains many others who see all human failings stemming from social injustices, since in nature, humans have no social problems. Those who line up behind Hobbes fight those who believe, still, the noble savage and Rousseau’s perfect state of nature. To me, this divide encapsulates the question of, did necessity emerge before human society? And if so, does it still rule us?

I know what the wisdom of antiquity says. The earliest cosmogonies–origin stories of the gods–identify Ananke (Necessity) as springing forth from the Earth herself, before the gods, and restricting even them. This story was passed on to Greek thinkers like Plato (Republic) and playwrites like Euripides (Alcestis), who found human government and the fate of heroes to also be within the tragic world of necessity first, all else second.

Lastly, this reminds me of Nassim Nicholas Taleb’s Anti-Fragile. He points out that the first virtue is survival, and that optionality is pure gain. Until you address necessity, your optionality–your choices and your chances–are fundamentally limited. As an entrepreneur who literally lives the risk of not surviving, I do not need to be convinced. Necessity rules even the gods, and it certainly rules those with “fuck-you” money. But it rules me even more. I am ruled by the fear that I may fail my family, myself, and my company at the Maslow’s level of survival. Those with “fuck-you” money at least have moved to the level where they have chances to fail society. And the lesson from history, from mythology, and from surviving in the modern economy, is not that one should just be resigned to reaching one’s limits. It is to strive to reach the level where you are pushing them, and the whole time to recognize the power of Necessity.

Why snipers have spotters

Kevin Kallmes Liberty , , , , , ,

Imagine two highly skilled snipers choosing and eliminating targets in tandem. Now imagine I take away one of their rifles, but leave him his scope. How much do you expect their abilities to be decreased?

Surprisingly, there is a strong case that this will actually increase their combined sniping competence. As an economist would point out, this stems from specialization: the sniper sacrifices total situational awareness to improve accurate intervention, and the spotter sacrifices ability to intervene to improve awareness and planning. We can push out beyond the production possibilities curve.

It is also a result of communication. Two independent snipers pick their own shots, and may over-kill a target or miss a pressing threat. By explicitly designating roles, the sniper can depend on the spotter for guidance, and the two-person system means that both parties actually have more information than their cumulative, but separate knowledge without spotting.

There are also long-term positive impacts that likely escape an economist’s models from switching off in each role, or from an apprenticeship model. Eye fatigue that limits accuracy, and mental fatigue that may result from constant awareness, can be eliminated by taking turns. Also, if a skilled sniper has a novice spotter, the spotter observes the sniper’s tactics and can assimilate best practices–and the sniper, by previously working as a spotter, can be more productively empathetic. The system naturally encourages learning and improvement.

I love the sniper-spotter archetype, because it clarifies the advantages of:

  • Going from zero to one: Between two independent snipers, there zero effective lines of communication. Between a sniper and a spotter, there is one. This interaction unlocks potential held in both.
  • More from less: Many innovate by adding new things; however, anti-fragile innovations are more likely to come from removing unnecessary things than by adding new ones.
  • Not the number of people, the number of interactions: Interactions have advantages (specialization, coordination) and disadvantages (communication friction, lack of individual decision-making responsibilities). Scrutinize what interactions you want on your teams and which to avoid.
  • Isolation: Being connected to everyone promotes noise over signal. It also promotes focusing on competitors over opportunities and barriers over permissionless innovation.
  • Separate competencies, shared goals and results: To make working together worth it, define explicit roles that match each individual’s competencies. Then, so long as you have vision alignment, all team members know what they are seeking and how they will be depended upon to succeed.
  • Iterative learning and feedback: Systems that promote self-improvement of their parts outperform systems that do not. Also, at the end of the day, education comes from experimentation and observation of new phenomena, balance on the edge between known and unknown practices.
  • Establish ‘common knowledge’: Communication failures and frictions often occur because independent people assume others have the same assumed set of ‘common knowledge’. If you make communication the root of success, so long as the group is small enough to actual have–and know it has–the same set of ‘common knowledge’, they can act confidently on these shared assumptions.
  • Delegation as productivity: Recognize that doing more does not mean more gets done. Without encouraging slacking off, explicitly rewarding individuals for choosing the right things to delegate and executing effectively will get more from less.
  • Cheating Goodhart: Goodhart’s Law states that the metric of success becomes the goal. If you make the metric of success joint, rather than individual, and shape its incentives to match your vision, your metrics will create an atmosphere bent on achieving your actual goals.
  • Leadership is empowerment: Good leaders don’t tell people what to do, they inform, support, listen, and match people’s abilities and passions to larger purpose.
  • Smallness: Small is reactive, flexible, cohesive, connected, fast-moving, accurate, stealthy, experimental, permissionless, and, counterintuitively, scalable.

My most recent encounter with “sniper and spotter” is in my sister’s Montessori classroom (ages 3-6). She is an innovative educator who noticed that her public school position was rife with top-down management, politics, and perverse incentives, and was not finding systems to promote curiosity or engagement. She has applied the “sniper and the spotter” after noticing that children thrive best in either one-on-one, responsive guidance, where the instructor is totally dedicated to the student, or when left to their own devices in a materials-rich environment, engaging in discovery (or working with other children, or even teaching what they have already learned to newcomers). However, believe it or not, three-year-olds can often cause disruptions or even physical threats if left totally without supervision.

She therefore promotes a teaching model where there are two teachers, one who watches for children’s safety and minimizes disruptiveness. This frees the other teacher to rove student-to-student and give either individual or very-small-group attention. The two teachers communicate to plan next steps, and to ‘spot’ children who most need intervention. This renders ‘class size’ a stupid metric: what matters is how much one-on-one guidance plus permissionless discovery a child engages in. It is also a “barbell” strategy: instead of wallowing in the mediocrity of “group learning”, children get the most of the two extremes–total attention and just-enough-attention-to-remain-safe.

PS: On Smallness, Jeff Bezos has promised $1 billion to support education innovation. So far, despite starting before my sister, he has so far opened as many classrooms: one. As the innovator in the ‘two-pizza meeting’, I wish Bezos would start with many, small experiments in education rather than big public dedications, so he could nurture innovation and select strategies for success.

I would love to see more examples of “sniper and spotter” approaches in the comments…but no sniping please 🙂

The Blind Entrepreneur

Kevin Kallmes Books, Culture, Economics, History, Liberty , , , , , , ,

Entrepreneurs usually make decisions with incomplete information, in disciplines where we lack expertise, and where time is vital. How, then, can we be expected to make decisions that lead to our success, and how can other people judge our startups on our potential value? And even if there are heuristics for startup value, how can they cross fields?

The answer, to me, comes from a generalizable system for improvement and growth that has proven itself– the blind watchmaker of evolution. In this, the crucial method by which genes promulgate themselves is not by predicting their environments, but by promiscuity and opportunism in a random, dog-eat-dog-world. By this, I mean that successful genes free-ride on or resonate with other genes that promote reproductive success (promiscuity) and select winning strategies by experimenting in the environment and letting reality be the determinant of what gene-pairings to try more often (opportunism). Strategies that are either robust or anti-fragile usually outperform fragile and deleterious strategies, and strategies that exist within an evolutionary framework that enables rapid testing, learning, mixing, and sharing (such as sexual reproduction or lateral gene transfer paired with fast generations) outperform those that do not (such as cloning), as shown by the Red Queen hypothesis.

OK, so startups are survival/reproductive vehicles and startup traits/methods are genes (or memes, in the Selfish Gene paradigm). With analogies, we should throw out what is different and keep what is useful, so what do we need from evolution?

First, one quick note: we can’t borrow the payout calculator exactly. Reproductive success is where a gene makes more of itself, but startups dont make more of themselves. For startups the best metric is probably money. Other than that, what adaptations are best to adopt? Or, in the evolutionary frame, what memes should we imbue in our survival vehicles?

Traits to borrow:

  • Short lives: long generations mean the time between trial and error is too long. Short projects, short-term goals, and concrete exits.
  • Laziness: energy efficiency is far more important than #5 on your priority list.
  • Optionality: when all things are equal, more choices = more chances at success.
  • Evolutionarily Stable Strategies: also called “don’t be a sucker.”
  • React, don’t plan: prediction is difficult or even impossible, but being quick to jump into the breach has the same outcome. Could also be called “prepare, but don’t predict.”
  • Small and many: big investments take a lot of energy and effectively become walking targets. Make small and many bets on try-outs and then feed those that get traction. Note– this is also how to run a military!
  • Auftragstaktik: should be obvious, central planning never works. Entrepreneurs should probably not make any more decisions than they have to.
  • Resonance: I used to call this “endogenous positive feedback loops,” but that doesn’t roll off the tongue. In short, pick traits that make your other traits more powerful–and even better if all of your central traits magnify your other actions.
  • Taking is better than inventing: Its not a better startup if its all yours. Its a better startup if you ruthlessly pick the best idea.
  • Pareto distributions (or really, power laws): Most things don’t really matter. Things that matter, matter a lot.
  • Finite downside, infinite upside: Taleb calls this “convexity”. Whenever presented with a choice that has one finite and one infinite potential, forget about predicting what will happen– focus on the impact’s upper bound in both directions. It goes without saying– avoid infinite downsides!
  • Don’t fall behind (debt): The economy is a Red Queen, anyone carrying anything heavy will continually fall behind. Debt is also the most likely way companies die.
  • Pay it forward to your future self: squirrels bury nuts; you should build generic resources as well.
  • Don’t change things: Intervening takes energy and hurts diversity.
  • Survive: You can’t win if you’re not in the game. More important than being successful is being not-dead.

When following these guidelines, there are two other differences between entrepreneurs and genes: One, genes largely exist in an amoral state, whereas your business is vital to your own life, and if you picked a worthwhile idea, society. Two, unlike evolution, you actually have goals and are trying to achieve something beyond replication, beyond even money. Therefore, you do not need to take your values from evolution. However, if you ignore its lessons, you close your eyes to reality and are truly blind.

Our “blind” entrepreneur, then, can still pick goals and construct what she sees as her utility. But to achieve the highest utility, once defined, she will create unknowable and unpredictable risk of her idea’s demise if she does not learn to grow the way that the blind watchmaker does.