Why Business Is So Difficult and Unpredictable

Today’s essay is a long one as well, so in case you’re pressed for time, I’ll give you the TLDR here.

If you want to read the essay just skip this section.

TLDR: Science relies in large part on replicability. Business does not. Copying is a zero-sum game and all participating players will compete profits away until they reach a Nash-equilibrium, where a further lowering of price and thus margins is unsustainable. Innovation is always new and therefore never formulaic. There are certain guidelines successful businesses seem to use but in the end, you’ll still have to go with your gut and make a judgment call according to your own ethical values.

Arguably, replicating findings is one of the best tools we have in our scientific arsenal in order to test the validity of a conclusion.

Which is why the psychology community was not amused when the methodological crisis now known as the Replication crisis started, where it was discovered that many studies weren’t replicable (Nosek et al., 2015).

Even some of the most cited and well-known studies such as the study that power posing makes you act bolder (Carney, Cuddy & Yap, 2010).

Which, incidentally, is why it’s so important to not just reference research (instead of parroting some YouTube influencer or blogger) but to also carefully analyze the literature and its limitations yourself.*

This doesn’t guarantee perfection, but it does decrease obvious and preventable mistakes.

JP Ioannidis pointed out serious problems with published research in ‘’Why most published research findings are false.’’

‘’ Simulations show that for most study designs and settings, it is more likely for a research claim to be false than true. Moreover, for many current scientific fields, claimed research findings may often be simply accurate measures of the prevailing bias.’’ (Ioannidis, 2005).

Methodological issues aside, replication matters.

Well, that’s all fine and dandy weren’t it for the pesky fact that our field relies on innovation.

Even if you extract all the knowledge from the brains of Kevin Systrom and Mike Krieger and build Instagram, you’d get the completely opposite result because Instagram already exists.

Even Kevin and Mike can’t replicate it because the variables have changed.

The entire environment and current social climate (regarding privacy, advertising, users as the product and social media addiction) are different, and even if it weren’t, no user is gonna switch to an IG clone when IG already exists.

So what makes business so complex is that it’s both art and science.

There are some guidelines that most successful companies seem to follow, however, you can’t formulate a step-by-step plan for the reasons laid out above.

Peter Thiel was one of the first to point out this distinction between companies that go from 0 to 1, innovation, and companies that go from 1 to n (copying), in his book Zero to One.

Companies that do copy and thus employ a formula they copied from another company open themselves up to fierce competition.

As more players participate in this zero-sum game, the fixed pie of users and profits will get competed away because there are too many mouths to feed with finite resources.

If you copy each other with no (or no meaningful) distinctions than price will be the only thing you can compete on, which is exactly what we see in commodity markets.

Player B will lower prices in order to steal market share from Player A. Player A lowers them still. Player C lowers it below both of them. Player D goes too low and goes bankrupt.

Over time, price will collapse into a Nash-equilibrium (no player can do better by unilaterally changing her strategy).

A point where no player can go below the current price point without going out of business, or above the current price point without attracting too few customers and going out of business as well.

(Unless one player, usually a new one, sufficiently innovates and thus creates a whole new business model. In effect, changing the game.)

This problem is further exacerbated by the fact that we go through traditional education by default.

A system that’s not designed to teach independent thinking but rather to reward obedience and implementing rules.

If you think that’s my opinion vs. facts then watch this to get a better understanding of how our modern education system was formed:

from Hacker News https://ift.tt/32GuwoN