This book is about diversity, about the power of bringing people together who think differently (and accurately). In a complex world with emergent properties, diverse views help arrive at better solutions, insights, and questions
Perspective blindness – we have trouble seeing the frame of reference we live in (DFW water). Diverse perspectives can help make these frames of reference more visible. When the group is too homogenous, this blindness compounds – you not only stay in your frame of reference and it’s associated blind spots, but your certainty increases
The beard and campfire anecdote – American intelligence agencies discounted the threat Bin Laden posed because they saw his dress, appearance, mannerisms, and location to be backwards. However, people more familiar with the Muslim faith and culture more clearly saw the symbolism and meaning behind all of it. Homophily feels good and is easier, but doesn’t lead to the best solution as often as having diverse groups. In addition, it’s not just that you get to better answers, it also allows you to see options you hadn’t before
You want individual competency and collective diversity
When a strict dominance hierarchy is in place, teams led by jr leaders performed better on average than when Sr managers were in charge. Those lower on the hierarchy were afraid to say anything which cost more than the knowledge brought by the senior leader. You need to try to balance hierarchy and diversity this will give you a variety of perspectives and some decisiveness. Diversity when evaluating opinions, dominance once executing
Recombination of ideas is everything. It is better to be open to ideas and sociable than the greatest of geniuses. Creativity and connections
Tyranny of averages – too often the average truly doesn’t exist and is a dangerous fallacy
When compared to great apes, the only standout mental skill we have is social learning. We can observe others and immediately absorb and mimic. This is what allows our culture to compound
In a collaborative works, givers outperform in the long term by wide margins
What I got out of it
Diversity when evaluating opinions, dominance once executing. Creativity + Connections leads to Magic
Dee Hock gets to the root of what being a Chaordic organization means
Our current forms of organization are almost universally based on compelled behavior – on tyranny, for that is what compelled behavior is, no matter how benign it may appear or how carefully disguised and exercised. The organization of the future will be the embodiment of community based on shared purpose calling to the higher aspirations of people.
There is no ultimate being. There is only becoming
Paradox and conflict are inherent characteristics of chaordic organizations
Forming a chaordic organization begins with an intensive search for Purpose, then proceeds to Principles, People, and Concept, and only then to Structure and Practice. It can’t be done well as a linear process. Each of the six elements can be thought of as a perspective, a sort of “lens” through which participants examine the circumstances giving rise to the need for a new concept of organization and what it might become. The most difficult part is to understand and get beyond the origin and nature of our current concepts of organizations; to set them aside in order to make space for new and different thoughts. Every mind is a room filled with archaic furniture. It must be moved about or cleared away before anything new can enter. This means ruthless confrontation of the many things we know that are no longer so.
Purpose – a clear, simple statement of intent that identifies and binds the community together as a worth pursuit. Should speak to people and make them think that, “If we could achieve that, my life would have meaning
Principles – behavioral aspirations of the community. A clear, concise, unambiguous statement of a fundamental belief about how the whole and all the parts intend to conduct themselves in pursuit of the purpose. A principle is a precept against which all structures, decisions, actions, and results will be judged. A principle always has high ethical and moral content. It never prescribes structure or behavior; it only describes them. Principles often fall into two categories: principles of structure and principles of practice
People – when a sound body of belief is reasonably complete and agreed upon, the group can then begin to explore the people and organizations that would need to be participants in the enterprise in order to realize the purpose in accordance with the principles. This sounds simple, but rarely is. When people set aside all consideration of existing conditions, free themselves to think in accordance with their deepest beliefs, and do not bind their thinking with structure and practices before considering meaning and values, they usually discover that the number and variety of people and entities to participate in governance, ownership, rewards, rights, and obligations are much greater than anticipated. They usually find their deepest beliefs require transcendence of existing institutional boundaries and practices. Determining the people and institutions required to realize the purpose in accordance with the principles brings realization of just how narrow and restrictive existing institutions are in relation to the exploding diversity and complexity of society and the systemic nature of seemingly intractable social and environmental problems.
Concept – a visualization of the relationships between all the people that would best enable them to pursue the purpose in accordance with their principles. An organizational concept is perception of a structure that all may trust to be equitable, just, and effective. It is a pictorial representation of eligibility, rights, and obligations of all prospective participants in the community. The feedback part of the process never ends. Developing a new concept calls into question purpose, principles, and people. Every part of the process illuminates all subsequent and preceding parts, allowing each to be constantly revised and improved.
Structure – the embodiment of purpose, principles, people, and concept in a written document capable of creating legal reality in an appropriate jurisdiction, usually in the form of a charter and constitution or a certificate of incorporation and bylaws. It is the written, structural details of the conceptual relationships – details of eligibility, ownership, voting, bodies, and methods of governance. It is the contract of rights and obligations between all participants in the community
Practice – deliberations, decisions, and acts of all the participants in the community functioning within the structure of purpose in accordance with principles. long before the structural work is finished, everyone realizes they need not worry about the practices of the community
If you can accomplish all this, profit becomes a barking dog begging to be let it
What I got out of it
Dee Hock’s most distilled thinking on his concepts of business, creation, chaordic, and more – essentially, a manual for creating value, regardless of your field
Chaord comes from the combination of two words: chaos and order. This exemplifies the behavior of any self-governing organism, organization, or system which harmoniously blends characteristics of order and chaos; patterned in a way dominated by neither chaos or order; characteristic of the fundamental organizing principles and nature
Organizations moving from command and control to community with shared purpose calling to the higher aspirations of people. In a truly chaordic organization there is no destination. There is no ultimate being. There is only becoming
Community is not about profit, but benefit. We confuse them at our peril. When we attempt to monetize all value, we methodically disconnect people and destroy community. The nonmonetary exchange of value is the most effective, constructive system ever devised. Evolution and nature have been perfecting it for thousands of millennia. It requires no currency, contracts, government, laws, courts, police, economists, lawyers, accountants. It does not require anointed or certified experts at all. It requires only ordinary people, caring. True community requires proximity; continual, direct contact and interaction between the people, place, and things of which it is composed. Throughout history, the fundamental building block, the quintessential community, has always been the family. It is there that the greatest nonmonetary exchange of value takes place. It is there that the most powerful nonmaterial values are created and exchanged. It is from that community, for better or worse, that all others are formed. The nonmonetary exchange of value is the very heart and soul of community, and community is the inescapable, essential element of civil society…Nonmonetary exchange of value implies an essential difference between receiving and getting. We receive a gift. We take possession. It is a mistake to confuse buying and selling with giving and receiving. It is a mistake to confuse money with value. It is a mistake to believe that all value can be measured. And it is a colossal mistake to attempt to monetize all value
Through the 16 years of successful failure, the sheep had continued to read avariciously – poetry, philosophy, biography, history, biology, economics, mythology – anything that satisfied his curiosity about connectedness and relationship. He mastered nothing, nor did he wish to, but new ways of seeing old things began to emerge and new patterns to reveal themselves. The preoccupation with organizations and the people who hold power within them had slowly become an obsession
Leader presumes follower. Follower presumes choice. One who is coerced to the purposes, objectives, or preferences of another is not a follower in any true sense of the word, but an object of manipulation. Nor is the relationship materially altered if both parties accept dominance and coercion. True leading and following presume perpetual liberty of both leader and follower to sever the relationship and pursue another path. A true leader cannot be bound to lead. A true follower cannot be bound to follow. The moment they are bound, they are no longer leader or follower. The terms leader and follower imply the freedom and independent judgment of both. If the behavior of either is compelled, whether by force, economic necessity, or contractual arrangement, the relationship is altered to one of superior/subordinate, management/employee, master/servant, or owner/slave. All such relationships are materially different from leader/follower. Induced behavior is the essence of leader/follower. Compelled behavior is he essence of all the others. Where behavior is compelled, there lies tyranny, however benign. Where behavior is induced, there lies leadership, however powerful. Leadership does not imply constructive, ethical, open conduct. It is entirely possible to induce destructive, malign, devious behavior and to do so by corrupt means.
The first and paramount responsibility of anyone who purports to manage is to manage self; one’s own integrity, character, ethics, knowledge, wisdom, temperament, words, and acts…The second responsibility is to manage those who have authority over us; the third responsibility is to manage one’s peers – those over whom we have no authority and who have no authority over us – associates, competitors, suppliers, customers – the entire environment; the fourth responsibility is to manage those over whom we have authority (if we hire good people and induce them to practice our concepts, they will take care of themselves for the most part)
Management expertise has become the creation and control of constants, uniformity, and efficiency, while the need has become the understanding and coordination of variability, complexity, and effectiveness
Healthy organizations induce behavior. Unhealthy organizations compel it
Following Nature’s Lead
All things are a seamless blend of chaos and order
Particularity and separability are infirmities of the mind, not characteristics of the universe
Desire to command and control is a death wish. Absolute control is in the coffin
A principal thing they have in common is penalty for failure to evolve. Organisms resistant to a changing physical environment are biologicall obligerated; they physically die out. Organizations resistant to a changing social environment are economically destroyed; they socially die out. In truth, organisms and organizations are not separable. Nor can the physical world be separated from the social. In the deeper, larger sense, distinctions such as “physical, biological, and social” or “organism and organizations,” however useful for the insular, limited purposes, are deceptive in the extreme. All things are irrevocably interconnected in a cosmic dance drawn on by energy in the form of light from the sun
“The Cartesian/Newtonian world view has influenced thought far beyond the physical sciences, and accounting is no exception. Double entry bookkeeping and the systems of income and wealth measurement that evolved from it since the 16th century are eminently Cartesian and Newtonian. They are predicated on ideas such as the whole being equal to the sum of the parts and effects being the result of infinitely divisible, linear causes…Quantum physicists and evolutionary biologists, among others, now believe that it is best to describe reality as a web of interconnected relationships that give rise to an ever-changing and evolving universe of objects that we perceive only partially with our limited senses. In that “Systemic” view of the world, nothing is merely the sum of the parts; parts have meaning only in reference to a greater whole in which everything is related to everything else…Why should accountants continue to believe that human organizations behave like machines if the scientists from whom they borrowed that mechanistic world view now see the universe from a very different perspective? The language of financial accounting merely asserts answers, it does not invite inquiry. In particular it leaves unchallenged the world view that underlies [the way] organizations operate. Thus, management accounting has served as a barrier to genuine organizational learning…Never again should management accounting be seen as a tool to drive people with measures. Its purpose must be to promote inquiry into the relationships, patterns, and processes that give rise to accounting measures.” – H. Thomas Johnson
Neither the institutional nor the technical thinking made sense. It had always seemed to me that one of the principal tricks of evolution was to preserve the substance of the past by clothing it in the forms of the future. We would follow
Old Monkey Mind and I had spent countless hours trying to understand information and its relevant to organizations, asking our endless questions. What is the significant of the “inform” part of information? What is the nature of that which is received from external sources and “forms us” within? What is the nature of that which forms from within us which we then feel compelled to transmit, and how does it form others when it is received? What allows formation of information, permits it to endure unaltered, yet be available at any time for transformation in infinite ways? Why and from where came the universal, perpetual urge to receive and transmit information – the incessant desire to communicate? Is it an urge at all, or is it an unavoidable necessity – an integral component essential to life? Indeed, is it the essence of life itself? Or is ti a principle beyond life itself? Could it be the fundamental, formative essence that gives shape and distinction to all things – part of an inseparably whole universe? It helps to think what information is not. Certainly, it is not just another “thing”; one more finite, physical entity. Certainly, information is far more than digits and data. They may be components of it – the shape it sometimes takes. They may be of it, but they are not it. In a rare insight, Gregory Bateson proposed that “information is a difference that makes a difference.” If something is received that cannot be differentiated or, if once differentiated, makes no differences, he asserts it is just noise…Thinking about a society based on information and one based on physicality requires radically different perspective and consciousness. However, we prefer too often to ignore the fundamental differences and carry over into the Chaordic Age of managing information, ideas and values, concepts, and assumptions that proved useful in the mechanized, Industrial Age of machine crafting, the age of managing things; concepts such as ownership, finite supply, obsolescence, loss by conveyance, containment, scarcity, separability, quantifiable measurement, statistical economics, mathematical monetarism, hierarchal structuralism, and command-and-control management…As Sir Francis Bacon put it precisely centuries ago, in admonishing those who opposed the mechanistic concepts of Newton and Descartes: “They that reverence too much the old times are but a scorn to the new.”
It seems a principle of evolution, perhaps the fundamental principle, that the greater the capacity to receive, store, utilize, transform, and transmit information, the more diverse and complex the entity. It holds true from neutrino, to nucleus, to atom, to amino acids, to proteins, to molecules, to cells, to organs, to organisms. From bacteria, to bees, to bats, to birds, to buffalo, right on through to baseball players. CRUSTTI didn’t stop there. In time, information transcended the boundaries of organisms and led to communication between them, and eventually to complex communities of organisms
I = DC^2
The capacity to receive, store, utilize, transform, and transmit information equals societal diversity times societal complexity squared
We must begin with noise. Noise, in its broadest sense, is any undifferentiated thing which assaults the senses. It is pervasive and ubiquitous, whether auditory, visual, or textural. The supply of noise is infinite. Noise becomes data when it transcends the purely sensual and has cognitive pattern; when it can be discerned and differentiated by the mind. Data, in turn, becomes information when it is assembled into a coherent whole which can be related to other information in a way that adds meaning. (Bateson’s definition of information as “a difference that makes a difference.”) Information becomes knowledge when it is integrated with other information in a form that is useful for deciding, acting, or composing new knowledge. Knowledge becomes understanding when related to other knowledge in a manner that is useful in conceiving, anticipating, evaluating, and judging matters beyond the reach of information. Understanding becomes wisdom when informed by ethical, moral, and beneficent purpose and principle, along with memory of the past, and projection into the future. The fundamental characteristics of the opposite ends of this spectrum are very different. Data, on one end of the spectrum, is separable, objective, linear, mechanistic, and abundant. On the other end of the spectrum, wisdom is holistic, subjective, spiritual, conceptual, creative and scarce.
The labyrinthine Department of Justice, like all mechanistic, Newtonian, Industrial Age organizations, was fat on data and information and starved for understanding and wisdom
When there is an explosion in the capacity to receive, store, utilize, transform, and transmit information, the external world changes at a rate enormously greater than the rate at which our internal model evolves. Nothing behaves as we think it should. Nothing makes sense. At times the world appears to be staging a madhouse. It is never a madhouse. It is merely the great tide of evolution in temporary flood, moving this way and that, piling up against that which obstructs its flow, trying to break loose and sweep away that which opposes it. At such times, we experience extreme dissonance and stress. At the heart of that dissonance and stress is paradox. The more powerful and entrenched our internal model of reality, the more difficult it is to perceive and understand the fundamental nature of the changed world we experience. Yet without such perception, it is extremely difficult to understand and change our internal model.
Competition and cooperation are not contraries. They have no opposite meaning. They are complimentary. In every aspect of life, we do both. Schools are highly cooperative endeavors within which scholars vigorously compete. The Olympic Games combine immense cooperation in structure and rules with intense competition in events. As the runners leap from the blocks, competition and cooperation are occurring in a single, indistinguishable blur. Every cell in our bodies vigorously competes for every atom of nutrient swallowed and every atom of oxygen inhaled, yet every cell can sense when the good of the whole requires they cooperate by relinquishing their demands when the need of other cells is greater. Life simply cannot exist, let alone reach its highest potential, without harmonious existence of competition and cooperation.
Visa is not about credit at all, but of exchange of monetary value
Realization that money is now about data / information was instrumental in restructuring his thinking about money, banks, and credit cards
[Convincing Bank of America to join] – The bank should be the leader of a movement, not the commander of a structure
Can an organization be patterned on biological concepts and methods? The question seemed to contain its own answer. Such an organization would have to evolve, in effect, to organize and invent itself.
It should be equitably owned by all participants
Participants should have equitable rights and obligations
It should be open to all qualified participants
Power, function, and resources should be distributive to the maximum degree
Authority should be equitable and distributive within each governing entity
No existing participant should be left in a lesser position by any new concept of the organization
To the maximum degree possible, everything should be voluntary
It should be nonassessable
It should induce, not compel, change
It should be infinitely malleable yet extremely durable
For decades, Visa has been in the background, invisible to most people. The results of the best organizations is transparent, but the structure, leadership, and process are transparent.
The core of Visa was an enabling organization that existed for the sole purpose of assisting owner-members to do what they wished with greater capacity, more effectively, and at less cost
We reduced our thoughts to the simplest possible expression: the will to succeed, the grace to compromise
Although Visa arose from thinking about organizations as living, biological systems, I missed completely the need for an institutional immune system to thwart the viruses of old ways.
The concepts used did not belong to me. They belonged to evolution – to all people
The most abundant, least expensive, most underutilized and constantly abused resource in the world is human ingenuity
Mr. Carlson never promotes anyone. He “borrows” them for new assignments so that they can withdraw without feeling a failure if the new situation is unsuitable. If it proves productive, titles and rewards will follow
Understanding requires mastery of four ways of looking at things – as they were, as they are, as they might become, and as they ought to be. Mastering all four perspectives and synthesizing them into a compelling concept of a constructive, peaceful future is the true work of the genius that lies buried in everyone, struggling to get out. And the world is crying out for it. In our frantic attempt to know everything through use of the rational mind alone, we have fractured knowledge into hundreds of incestuous specialties and fragmented those specialties into thousands of isolated, insular trades and disciplines. The world is filling iwth people who know more and more about less and less. Within each specialty, we dismiss as largely irrelevant all things, events, and ways of understanding outside the ever narrower boundaries of our discipline. We can ignore all relationships not essential to our ever narrowing perspective. We can ignore all consequences not immediately affecting or affected by our ever more constricted pursuit. We can abdicate responsibility for even thinking about them. We can each decide and act with our ever smaller intellectual prisons and narrower mental cells, and defend our acts with logical, efficient, methodical rationality. Never mind that the sum of the whole is social, commercial, and biological madness.
Perspective is the Achilles heel of the mind, distorting everything we think, know, believe, or imagine…Our internal model of reality is how we make sense of the world. And it can be a badly built place indeed. Even if it is magnificently constructed, it may have become archaic. Everything that gave rise to it may have changed. Society and the natural world are never stagnant. They are constantly becoming. When it becomes necessary to develop a new perspective on things, a new internal model of reality, the problem is never to get new ideas in, the problem is tog et the old ideas out. Every mind is filled with old furniture. It’s familiar, it’s comfortable. We hate to throw it out. The old maxim is so often applied to the physical world, “nature abhors a vacuum,” is much more applicable to the mental world. Clear any room in your mind of old perspectives, and new perceptions will rush in. Yet, there is nothing we fear more. Weareour ideas, concepts, and perceptions. Giving up any part of our internal model of reality is worse than losing a finger or an eye. Part of us no longer exists. However, unlike most organs of the physical body, our internal model of reality can be regenerated but never as it was. And it’s a frightening, painful process. It is our individual perspective, the view from our internal temple of reality, that often so discolors and distorts perception that we can neither anticipate what might occur nor conceive what ought to be.
True power is never used. If you use power, you never really have it
The inevitable tendency of wealth is to acquire power. The inevitable tendency of power is to protect wealth. The tendency of wealth and power combined is to acquire ever more wealth and power. The use of commercial corporate form for the purpose of social good has become incidental.
A bit of carbon in iron makes powerful meta; a bit of truth in a lie makes powerful deceit
It is enough that error by corrected. It is excessive to insist it be admitted
Mistakes are toothless little things if you recognize and correct them. If you ignore or defend them, they grow fangs and bite
Businesses, as well as races, tribes, and nations, do not disappear when they are conquered or repressed, but when they become despondent and lose excitement about the future. When institutions reach that stage, people withdraw relevance from them and from those who purport to manage them. THey turn away. They stop listening.
What I got out of it
A simply superb book, one of the deepest most interconnected books I’ve read in some time
Why, he wondered, couldn’t a human organization work like a rain forest? Why couldn’t it be patterned on biological concepts and methods? What if we quit arguing about the structure of a new institution and tried to think of it as having some sort of genetic code? Visa’s genetic code eventually became its “purpose and principles” and its core governance processes, the details of which are spelled out in the following pages. But none of this would have come into being without the basic shift in thinking – to abandon the “old perspective and mechanistic model of reality” and embrace principles of living systems as a basis for organizing
The anthropologist Gregory Bateson said, “The source of all our problems today comes from the gap between how we think and now nature works.”
Educe – a marvelous word seldom used or practiced, meaning, “to bring or draw forth something already present in a latent, or undeveloped form.” It can be contrasted with induce, too often used and practiced, meaning, “to prevail upon; move by persuasion or influence – to impel, incite, or urge.”
Lead yourself, lead your superiors, lead your peers, employ good people, and free them to do the same. All else is trivia
Throughout the years, the Sheep continued to read avariciously, including much organizational theory, economics, science and philosophy. The preoccupation with organizations and the people who hold power within them became an obsession, which brings us to the heart of our subject this morning. Why, the Sheep asked time and time again, are organizations, whether governmental, commercial, educational or social, increasingly unable to manage their affairs? Why are individuals increasingly alienated from the organizations of which they are part? Why are commerce and society increasingly in disarray? Today, it doesn’t take much intelligence to realize we are in the midst of a global epidemic of institutional failure. Schools that can’t teach, welfare systems in which no one fares well, police that can’t enforce the law, judicial systems without justice, economies that can’t economize, corporations that can’t compete and governments that can’t govern. Even then, thirty years ago, the signs were everywhere if one cared to look. The answer to the Sheep’s questions has much to do with compression of time and events. Some of you may recall the days when a check took a couple of weeks to find its way through the banking system. It was called “float” and many used it to advantage. Today, we are all aware of the incredible speed and volatility with which money moves and the profound effect it has on commerce. However, we ignore vastly more important reductions of float, such as the disappearance of information float. As the futurist, James Burke, pointed out, it took centuries for information about the smelting of ore to cross a single continent and bring about the Iron Age. During the time of sailing ships, it took years for that which was known to become that which was shared. When man stepped onto the moon, it was known and seen in every corner of the globe 1.4 seconds later, and that is hopelessly slow by today’s standards. No less important is the disappearance of scientific float, the time between the invention of a new technology and its universal application. It took centuries for the wheel to gain universal acceptance–decades for the steam engine, electric light, and automobile–years for radio and television. Today, countless devices utilizing microchips sweep around the earth like the light of the sun into instant, universal use. This endless compression of float, whether of money, information, technology or anything else, can be combined and described as the disappearance of “change” float. The time between what was and what is to be; between past and future. Only a few generations ago, the present stretched unaltered, from a distant past into a dim future. Today, the past is ever less predictive, the future ever less predictable and the present scarcely exists at all. Everything is change, with one incredibly important exception. There has been no loss of institutional float. Although their size and power have vastly increased, there has been no new idea of organization since the concepts of corporation, nation-state and university emerged a few centuries ago.
Trust thyself; every heart vibrates to that iron string! – Ralph Waldo Emerson
Heaven is purpose, principle, and people. Purgatory is paper and procedure. Hell is rule and regulation
No part knew the whole, the whole did not know all the parts, and none had any need to. The entirety, like millions of other chaordic organizations, including those we call body, brain, forest, ocean, and biosphere, was self-regulating
If you have built castles in the air your work need not be lost; that is where they should be. Now put the foundation under them. – Henry David Thoreau
When our internal model of reality is in conflict with rapidly changing external realities, there are three ways to respond: First, we can cling to our old internal model and attempt to impose it on external conditions in a futile attempt to make them conform to our expectations. That is what our present mechanistic societal institutions compel us to attempt, and what we continually dissipate our ingenuity and ability trying to achieve. Attempting to impose an archaic internal model on a changed external world is futile. Second, we can engage in denial. We can refuse to accept the new external reality. We can pretend that external changes are not as profound as they really are. We can deny that we have an internal model, or that it bears examination. When the world about us appears to be irrational, erratic and irresponsible, it is all too easy to blame others for the unpleasant, destructive things we experience. It is equally easy to abandon meaning, engage in fantasy, and engage in erratic behavior. Such denial is also futile. Third, we can attempt to understand and change our internal model of reality. That is the least common alternative, and for good reason. Changing an internal model of reality is extremely difficult, terrifying, and complex. It requires a meticulous, painful examination of beliefs. It requires a fundamental understanding of consciousness and how it must change. It destroys our sense of time and place. It calls into question our very identity. We can never be sure of our place, or our value, in a new order of things. We may lose sight of who and what we are. Changing our internal model of reality requires an enormous act of faith, for it requires time to develop, and we require time to grow into it. Yet it is the only workable answer.
Members of the board brought to the table all the old assumptions about good management. The success of the organization created considerable tolerance of new and different management techniques.On the whole,however,each new approach was on sufferance. Each failure brought pressure to conform to the old ways. Since the board was deliberately structured so that management could not control its composition and to ensure 10 or 15 percent annual turnover, there were always new directors with a full load of old management baggage. They had little or no idea of the concepts that had led to the success the organization now enjoyed. No matter how much success we had, they were convinced it could be much greater if done in the manner to which they were accustomed. No matter what the failure,they were persuaded it could have been prevented, had it been handled in the traditional way. Occasionally, there was some truth in what they said. Always, there was no way to refute it. At the time, I did not understand the depth of the hold that mechanistic, dominator concepts had on the minds and hearts of people, including my own, nor how tenaciously and powerfully they would reassert themselves.It was not then apparent how difficult it was for people to understand and sustain the concepts; how long it would take for them to sink to the bone and become habitual conduct.The pressure to revert and conform, both from within and without the organization, was intense and unceasing. On the whole,we had poor methods and techniques and far too little of them to bring about the individual cultural change that a chaordic organization requires, nor did we have a leader who was fully alert to the need for it. Although Visa arose from thinking about organizations as living, biological systems, I missed completely the need for an institutional immune system to thwart the viruses of old ways.
If something was trying to happen and wanted to use me, I could say yes or no.That’s what free will is all about. If “no,” life would be pleasant, comfortable, at times, idyllic. If “yes,” it would mean day and night labor filled with stress, criticism, disappointment,and virtually no chance of success.But,if I held back would I be in denial of my becoming? A life worth living can’t be made of denial. It must be made of affirmation. In time, the essential question emerged. Is this what my life is all about? There it was,as simple and plain as that.There was no conceivable answer to the question. But, there was insatiable desire to find out. It was time to move on, wherever it led, whoever my companions, whatever the results, for as long as I could endure.
This book’s aim is simple. To help you understand what networks are, how they form, what they look like, and how they evolve. This is a new framework, a web-based and interconnected view, for understanding the world and how to navigate it. Networks are present everywhere, we just need an eye to spot them
Amazingly simple and far reaching natural laws govern the structure and evolution of all the complex systems around us. This book will help us understand what those are and why networks from cells to the internet evolve similarly
Complexity doesn’t allow for us to understand how the parts make the whole. Reductionism breaks down with complexity
Everything is linked to everything else. We are only beginning to understand the role of complexity in nature and our lives. Networks will come to dominate our understanding of the world and how to navigate it
The construction and structure of graphs (networks) are key to understanding the complex world around us. Small changes in the nodes or links open up new possibilities to emerge. Links (bridges, relationships, etc.) connect nodes. Although the networks all represent different realities, they are all composed of nodes and links. When you randomly add enough links and nodes, something special emerges. Such discipline has a different name for it, phase transition or community, but the network changes so that clusters of nodes connect everyone. 1 link per node is the critical threshold. Anything more than that and you get an interconnected web that communicates. Anything less, and you have a disparate network that doesn’t. As the number of links increases, the number of nodes left out decreases exponentially. Nature does not take risks. By staying close to the threshold. She builds in a large margin of safety
The power of the web is in the links. Geographic distance is no longer the barrier it once was
Clustering and small world networks are extremely important characteristics. These characteristics help show that week links such as acquaintances help make the network more robust more efficient and more interconnected with fewer links. Take advantage of this in your life by maintaining many weak ties which can expose you to new groups and new information. These dense clusters are considered hubs “connectors” and destroy the random world theory. They are so well connected that they shorten the distance on average between nodes
The appearance of power laws (such as those exhibited by phase transitions) indicate a transition from disorder to order
Networks always display growth which means the static random hypothesis no longer holds true and nodes are always being added
In real life, linking is never random. Popularity leads to more popularity which leads to certain nodes being exponentially larger and more connected than others. Think Google, Amazon, Facebook and a fat tail of everyone else. This is also known as preferential attachment
Most networks are not a winner take all. the rich get richer scenario. Instead, they are a fitness driven function that allows for the superior product to displace the incumbent
In a networked economy, the hubs continuously get larger. This leads to M&A, making the large even larger. Understanding network effects is the key to surviving in a rapidly adopting, interconnected world
Too much control and organization slows things down today where power lies in links and ideas. This shifts organization from hierarchical to web-based. From top-down and linear to decentralized, flexible, and robust
In markets, you aim to drive the hardest possible bargain. But, in networks, you aim for win/win, relationships, reliance and indebtedness over the long haul.
What I got out of it
A great overview on networks and how prevalent they are in our every day lives. Understanding and honoring them will be valuable regardless of context, industry, or situation
Latticework: success in investing based on a working knowledge of a variety of disciplines
Latticework is itself a metaphor. And on the surface, quite a simple one at that. Everyone knows what latticework is, and most people have some degree of firsthand experience with it. There is probably not a do-it-yourselfer in America who hasn’t made good use of a four-by-eight sheet of latticework at some point. We use it to decorate fences, to create shade over patios, and to support climbing plants. It is but a very small stretch to envision a metaphorical lattice as the support structure for organizing a set of mental concepts
Physics – Equilibrium
Physics is the science that investigates matter, energy, and the interaction between them – the study, in other words, of how our universe works. It encompasses all the forces that control motion, sound, light, heat, electricity, and magnetism, and their occurrence in all forms, from the smallest subatomic particles to entire solar systems. It is the intellectual foundation of many well-recognized principles such as gravitation and such mind-boggling concepts as quantum mechanics and relativity.
Equilibrium is defined as a state of balance between opposing forces, powers, or influences. An equilibrium model typically identifies a system that is at rest; this is called “static equilibrium.”
The concept of equilibrium is so deeply embedded in our theory of economics and the stock market, it is difficult to imagine any other idea of how these systems could possible work…One place where the question is being raised is the Santa Fe Institute, where scientists from several disciplines are studying complex adaptive systems – those systems with many interacting parts that are continually changing their behavior in response to changes in the environment…If a CAS is, by definition, continuously adapting, it is impossible for any such system, including the stock market, ever to reach a state of perfect equilibrium. What does that mean for the stock market? It throws the classic theories of economic equilibrium into serious question. The standard equilibrium theory is rational, mechanistic, and efficient. It assumes that identical individual investors share rational expectations about stock prices and then efficiently discount that information into the market. It further assumes there are no profitable strategies available that are not already priced into the market. The counterview from SFI suggests the opposite: a market that is not rational, is organic rather than mechanistic, and is imperfectly efficient.
The SFI pointed out 4 distinct features they observed about the economy: dispersed interaction, no global controller, continual adaptation, out of equilibrium dynamics.
Biology – Evolution
What we are learning is that studying economic and financial systems is very similar to studying biological systems. The central concept for both is the notion of change, what biologists call evolution. The models we use to explain the evolution of financial strategies are mathematically similar to the equations biologists use to study populations of predator-prey systems, competing systems, or symbiotic systems.
Complex systems must be studied as a whole, not in individual parts, because the behavior of the system is greater than the sum of the parts. The old science was concerned with understanding the laws of being. The new science is concerned with the laws of becoming
Social Sciences – Complexity, Complex Adaptive Systems, Self-Organized Criticality
Although Johnson’s maze is a simple problem-solving computer simulation, it does demonstrate emergent behavior. It also leads us to better understand the essential characteristic a self-organizing system must contain in order to produce emergent behavior. That characteristic is diversity. The collective solution, Johnson explains, is robust if the individual contributions to the solution represent a broad diversity of experience in the problem at hand. Interestingly, Johnson discovered that the collective solution is actually degraded if the system is limited to only high-performing people. It appears that the diverse collective is better at adapting to unexpected changes in structure.
Folly to think you can eliminate every waste, every performer who doesn’t meet the highest bar, and excel and survive. Can shift the entire bell curve to the right, but you still need the full spectrum
Notes: We have observed anecdotal evidence of emergent behavior, perhaps without realizing what we were seeing. The recent bestseller,Blind Man’s Bluff: The Untold Story of american Submarine Espionage, presents a very compelling example of emergence. Early in the book, the authors relate the story of the 1966 crash of a B-52 bomber carrying four atomic bombs. Three of the four bombs were soon recovered, but a fourth remained missing, with the Soviets quickly closing in. A naval engineer named John Craven was given the task of locating the missing bomb. He constructed several different scenarios of what possibly could have happened to the fourth bomb and asked the members of the salvage team to wager a bet on where they thought the bomb could be. He then ran each possible location through a computer formula and – without ever going to sea! – was able to pinpoint the exact location of the bomb based on a collective solution
It is when the agents in the system do not have similar concepts about the possible choices that the system is in danger of becoming unstable. And that is clearly the case in the stock market…The value of this way of looking at complex systems is that if we know why they become unstable, then we have a clear path to a solution, to finding ways to reduce overall instability. One implication, Richards says, is that we should be considering the belief structures underlying the various mental concepts, and not the specifics of the choices. Another is to acknowledge that if mutual knowledge fails, the problem may center on how knowledge is transferred in the system.
Psychology – Mr. Market, Complexity, Information
Another aspect of behavioral finance is what some psychologists refer to as mental accounting – our tendency to think of money in different categories, putting our funds into separate “mental accounts,” depending on circumstances. Mental accounting is the reason we are far more willing to gamble with our year-end bonus than our monthly salary, especially if it is higher than anticipated. It is also one further reason why we stubbornly hold onto stocks that are doing badly; the loss doesn’t feel like a loss until we sell
Philosophy – Pragmatism
Strictly for organizational simplicity, we can separate the study of philosophy into 3 broad categories. First, critical thinking as it applies to the general nature of the world is called “metaphysics”…Metaphysics means “beyond physics.” When philosophers discuss metaphysical questions, they are describing ideas that exist independently from our own space and time. Examples include the concepts of God and the afterlife. These are not tangible events like tables and chairs but rather abstract ideas that metaphysical questions readily concede the existence of the world that surrounds us but disagree about the essential nature and meaning of the world. The second body of philosophical inquiry is the investigation of 3 related areas: aesthetics, ethics, and politics. Aesthetics is the theory of beauty. Philosophers who engage in aesthetic discussions are trying to ascertain what it is that people find beautiful, whether it be in the objects they observe or in the state of mind they achieve. This study of the beautiful should not be thought of as a superficial inquiry, because how we conceive beauty can affect our judgments of what is right and wrong, what is the correct political order, and how people should live. Ethics is the philosophical branch that studies the issues of right and wrong. It asks what is moral and what is immoral, what behavior is appropriate and inappropriate. Ethics makes inquiries into the activities people undertake, the judgments they make, the values they hold, and the character they aspire to achieve. Closely connected to the idea of ethics is the philosophy of politics. Whereas ethics investigates what is good or right at the individual level, politics investigates what is good or right at the societal level. Political philosophy is a debate over how societies should be organized, what laws should be passed, and what connections people should have to these societal organizations. Epistemology, the third body of inquiry, is the branch of philosophy that seeks to understand the limits and nature of knowledge. The term itself comes from two Greek words: episteme, meaning “knowledge,” and logos, which literally means “discourse” and more broadly refers to any kind of study or intellectual investigation. Epistemology, then, is the study of the theory of knowledge. To put it simply, when we make an epistemological inquiry, we are thinking about thinking. When philosophers think about knowledge, they are trying to discover what kinds of things are knowable, what constitutes knowledge (as opposed to beliefs), how it is acquired (innately or empirically, through experience), and how we can say that we know a thing.
For pragmatism, anyone who seeks to determine the true definition of a belief should look not at the belief itself but at the actions that result from it. He called the proposition “pragmatism,” a term, he pointed out, with the same root as practice or practical, thus cementing his view that the meaning of an idea is the same as its practical results. “Our idea of anything, Peirce explained, “is our idea of its sensible effects.” In his classic 1878 paper, “How to Make Our Ideas Clear,” Peirce continued: “The whole function of thought is to produce habits of action. To develop its meaning, we have, therefore, simply to determine what habits it produces, for what a thing means is simply what habits it involves.”
A belief is true, James said, because holding it puts a person into more useful relations with the world…People should ask what practical effects come from holding one philosophical view over another
If truth ad value are determined by their practical applications in the world, then it follows that truth will change as circumstances change and as new discoveries about the world are made. Our understanding of truth evolves. Darwin smiles.
So we can say that pragmatism is a process that allows people to navigate an uncertain world without becoming stranded on the desert island of absolutes. Pragmatism has no prejudices, dogmas, or rigid canons. It will entertain any hypothesis and consider any evidence. If you need facts, take the facts. If you need religion, take religion. If you need to experiment, go experiment. “In short, pragmatism widens the field of search for God,” says James. “Her only test of probable truth is what works best in the way of leading us.”
Pragmatism, in summary, is not a philosophy as much as it is a way of doing philosophy. It thrives on open minds, and gleefully invites experimentation. It rejects rigidity and dogma; it welcomes new ideas. It insists that all possibilities should be considered, without prejudice, for important new insights often come disguised as frivolous, even silly notions. it seeks new understanding by redefining old problems.
One of the secret to Bill Miller’s success is his desire to take a Rubik’s Cube approach to investing. He enthusiastically examines every issue from every possible angle, from every possible discipline, to get the best possible description – or redescription – of what is going on. Only then does he feel in a position to explain. To his investigation he brings insights from many fields…He continually studies physics, biology, and social science research, searching for ideas that will help him become a better investor…In an environment of rapid change, the flexible mind will always prevail over the rigid and absolute…Because you recognize patterns, you are less afraid of sudden changes. With a perpetually open mind that relishes new ideas and knows what to do with them, you are set firmly on the right path.
Literature – self-education of a Latticework through books, Adler’s Active Reading
We must educate ourselves and the vehicle for doing so is a book supplemented with all other media both traditional and modern…So we are talking about learning to become discriminating readers: to analyze what you read, to evaluate its worth in the larger picture, and to either reject it or incorporate it into your own latticework of mental models…We can all acquire new insights through reading if we perfect the skill of reading thoughtfully. The benefits are profound: not only will you substantially add to your working knowledge of various fields, you will at the same time sharpen your skill at critical thinking.
The central purpose of reading a book, Adler believes, is to gain understanding…This is not the same as reading for information.
Reading that makes you stop and think is the path to greater understanding – not solely because of what you are reading but also because of the process of reflection in which you are engaged. You are learning from your own thinking as well as from the author’s ideas. You are making new connections. Adler describes as the difference between learning by instruction and learning by discovery. It’s evident of in the satisfaction we feel when we figure out something on our own, instead of being told the answer. Receiving the answer might solve the immediate problem, but discovering the answer by your own investigation has a much more powerful effect on your overall understanding.
Adler proposes that all active readers need to keep 4 fundamental questions in mind: what is the book about as a whole, what is being said in detail, is the book true, in whole or in part, what of it? The heart of Adler’s process involves 4 levels of reading: elementary, inspectional, analytical, and syntopical. Each level is a necessary foundation for the next, and the entire process is cumulative.
Elementary reading is the most basic level, the one we achieve in elementary education
In inspectional reading, the second level, the emphasis is on time and the goal is to determine, as quickly as possible, what the book is about. It has two levels: prereading and superficial reading. Prereading is a fast review to determine whether a book deserves a more careful reading. Look at the table of contents, index, how much can you learn about the main themes through this overview. Next, Adler recommends systematic skimming. Read a few paragraphs here and there, read the author’s conclusion. These two activities should take between 30-60 minutes and help you determine if it is worth your time to read the book
Analytical reading is the most thorough and complete way to absorb a book. Through analytical reading you will answer what is the book about as a whole and in detail and provide you the most complete answer to if the book is true. It has goals: develop a detailed sense of what the book contains, interpret the contents by examining the author’s own particular point of view on the subject; and to analyze the author’s success in presenting that point of view convincingly. Take notes, make an outline, write in your own words what you think the book is about, write the author’s main arguments
The fourth and highest level is what Adler calls syntopical reading, or comparative reading. In this level of reading, we are interested in learning about a certain subject, and to do so we compare and contrast the works of several authors rather than focusing on just one work by one another. Adler considers this the most demanding and most complex level of reading. It involves two challenges: first, searching for possible books on the subject; and then deciding, after finding them, which books should be read
The challenge for us as readers is to receive that knowledge and integrate it into our latticework of mental models. How well we are able to do so is a function of two very separate considerations: the author’s ability to explain, and our skills as careful, thoughtful readers. We have little control over the first, other than to discard one particular book in favor of another, but the second is completely within our control
I believe in…mastering the best that other people have figured out, [rather than] sitting down and trying to dream it up yourself…You won’t find it that hard if you go at it Darwinlike, step by step with curious persistence. You’ll be amazed at how good you can get…It’s a huge mistake not to absorb elementary worldly wisdom…Your life will be enriched – not only financially but in a host of other ways – if you do. – Charlie Munger, Poor Charlie’s Almanack
Decision Making – Continuously add more building blocks to your knowledge base in order to build more robust mental models
Failures to explain are caused by our failures to describe
Our institutions of higher learning may separate knowledge into categories, but wisdom is what unites them.
What I got out of it
A beautiful book on how to approach being a multidisciplinary thinker as it applies to investing.
Over the last three decades, the Santa Fe Institute and its network of researchers have been pursuing a revolution in science. This volume collects essays from the past thirty years of research, in which contributors explain in clear and accessible language many of the deepest challenges and insights of complexity science.
Things can be hidden in space, and they can be hidden in time…But the way in which complex phenomena are hidden, beyond masking space and time, is through non-linearity, randomness, collective dynamics, hierarchy, and emergence – a deck of attributes that have proved ill suited to our intuitive and augmented abilities to grasp and to comprehend.
Linearity should not be an issue. Economic systems are obviously nonlinear, as are many, if not most, systems of current interest in physics. A more controversial question concerns the direction of feedback. Whereas a strictly linear system can have only negative feedback if divergence is to be avoided, positive feedback can occur in nonlinear systems of a saturation mechanism operates. Such systems tend to have multiple equilibria or resting points and great sensitivity to initial conditions. Traditionalists find it hard to relinquish uniqueness and global stability, but physicists are easily convinced and find positive feedback natural.
In 1966, Robert Paine introduced the concept of “keystone species,” top predators such as starfish and sea otters, whose removal can lead to cascading effects in system properties. Since then, the concept has been extended to species other than top predators. Some, for instance, consider the distemper virus that kills lions in Africa to be a keystone species. Levin cites “a quarter century of research on keystone species – predators, competitors, mutualists, pathogens, among others – demonstrates a diversity of situations in which individual species play critical roles, at least in determining community structure.
The authors wish to thank our co-organizer, Jennifer Dunne, for reminding us that the laws of life are hierarchical and must look upward to ecology as well as downward to physics and chemistry.
Ludwig Boltzmann, in about 1884, coined the term ergodic for situations with identical time averages and ensemble averages. Not every situation is like this, however; there exist “nonergodic” situations as well, and these are often as counterintuitive as the ergodic situations seem trivial. So, do we have to be more careful when we talk about expected returns and average performances? There are two averages, not one – two ways of characterizing an investment, two quantities with different meanings…Herein lies the danger: if we don’t actually play many identical games at once, then such an average only has practical relevance if it is identical to the quantity we’re interested in, often the time average. There may be many possible paths from here into the future, but only one will be realized. In our game, you are risking your entire wealth, which obviously cannot be done many times simultaneously, so the ensemble average is not really the relevant quantity. Technically, it stems from a thought experiment involving other universes
What is good for groups is not always good for the individuals comprising them. For example, both multicellular organisms and social insect colonies are functionally specialized and hierarchically organized collectives that are highly successful in maintaining and transmitting accumulated knowledge, in the form of genetic instructions, to the next generation; but they also have little regard for the fates of most cells or insects. This same pattern is apparent, in an attenuated way, in human societies. For example, economist George Steckel and anthropologist Jerome Rose (2002) examined health indicators for Prehispanic New World societies and found that the median health of individuals declined as societies grew more complex. This suggests social complexity emerges from mechanisms that promote coordinated behavior even if it is not in the best interest of each individual. In the case of multi-celled organisms and insect colonies, the solution was to make the coordinating individuals (cells, insects) genetics clones or siblings. That way, genes that promote cooperation could spread even if the most cooperative individuals left no offspring.
Instead of assuming agents were perfectly rational, we allowed there were limits to how smart they were. Instead of assuming the economy displayed diminishing returns (negative feedback), we allowed that it might contain increasing returns (positive feedback). Instead of assuming the economy was a mechanistic system operating at equilibrium, we saw it as an ecology – of actions, strategies, and beliefs competing for survival – perpetually changing as new behaviors were discovered.
Thermodynamics is the study of the macroscopic behavior of systems exchanging work and heat with connected systems or their environment. The four laws of thermodynamics all operate on average quantities defined at equilibrium – temperature, pressure, entropy, volume, and energy. These macroscopic variables exist in fundamental relationships with each other, as expressed, for example, in the ideal gas law. Thermodynamics is an extremely powerful framework as it provides experimentalists with explicit, principle recommendations about what variables should be measured and how they are expected to change relative to each other, but it is not a dynamical theory and offers no explanations for the mechanistic origins of the macroscopic variables it privileges.
This introduces two important concepts: first, the idea of scaling, which refers to how measurable properties of a system change with its size; second, the concept of economies of scale. The latter means that, as cities grow, they need less of something per person: roads, sewers, or gas stations, for example
The study of complex systems, like all of science, is a search for order. Traditionally, science seeks order by understanding the simplest parts of a system. How does a single gas particle behave given a certain temperature? Which gene in our DNA determines eye color? Scientists then try to develop theories that explain more general observations based on their detailed understanding of the individual parts.
We know from the application of the scientific method – that is, from observation, then explanation, then prediction, and finally verification – that gravity causes the apple to move toward the ground at a specific and constant rate of acceleration
What I got out of it
A series of articles on complexity that helps give a broad overview of the field and how far it has come in the last several decades. The physical book also has some fun and interesting ways to help categorize and organize the chapters and knowledge
The tendencies of basic biological, social and technological evolutions can be explained in scientific, physical terms. Directionality seems to be imputed and the author argues that Non-Zero Sum games has been the driving force for biological life. The core of biological and human history can be traced back to more numerous, larger, more elaborate, more interdependent forms of NZS games being played. “Non-Zero Sumness” can be thought of as the tendency which gives time its directionality, helping explain how NZS was likely to lead to complex life forms and technology which further enriched how these life forms interacted
Game theory was developed by von Neumann. Zero sum games are games in which one person’s win means another person’s loss (sports) whereas Non-Zero sum games aren’t necessarily negative for one party. The authors argue that NZS games are a driving force for the world has been shaped. NZS games can be win/win, win/lose, lose/win, or lose/lose
Human history has shown that technological advancements allow for richer and more widespread NZS thinking and actions to occur, and social structures evolve from these interactions to more fully capitalize on these positive sum interactions, increasing social complexity and depth. NZS is not always win/win, but it trends in that direction and this causes people to become more embedded in webs of mutual interdependence.
Hunting large prey requires coordination which spurs altruism, reciprocity, social complexity, and positive sum games. “The best place to store your excess food is somebody else’s stomach.”
The author argues that population density is the overriding factor in predicting technological evolution and social complexity in a group of people
A quick summary of NZS would be the extent to which outcomes are shared, also known as skin in the game
Writing builds trust in a society (lenders don’t have to worry about debtors cheating them and vice versa, etc.) which helps streamline much of life and leads to positive sum outcomes
Increasing NZS leads to a more interconnected and codependent world where you not only care about your local neighbors but also the global community as trade commerce and ideas seamlessly transfer from one area to another
Increasing seamlessness in travel, commerce, communication, mostly driven by improvements in technology lead to new areas and opportunities for NZS, and how open and willing countries are to adopt the new technology and drive it’s future success and ability to capitalize on these positive sum games.
Technology, freedom, and increasing wealth seem to be inherently and intimately intertwined
NZS is responsible for reciprocal altruism love has evolution selected for those who could cooperate with each other and survive and this helped in hard times when others with chip in to pay back your favor
Time’s arrow does not necessarily point towards complexity but competition, survival, and natural selection push species to become more adapted and more complex in their thinking and behavior just in order to survive. If there was no competition and no threat of being eaten, animals don’t naturally just become more complex. Positive feedback at play
Natural selection beautifully fills in open inches
Truly valuable traits evolve independently. For example eyesight and reciprocal altruism evolved in multiple times and species. These are prime behaviors that have helped species survive for eons and are traits that we can bank on
What I got out of it
Really interesting idea that non-zero games, technological advancement, win/win have spurred evolution towards complexity in behavior
The idea of increasing returns has come up every few decades but Brian Arthur’s precise and fully-modeled papers caused us to clearly understand what kinds of models have what kinds of implications. One outstanding characteristic of Arthur’s viewpoint is emphatically dynamic in nature. Learning by using or doing plays an essential role, as opposed to static examples of returns to scale (those based on volume-area relations). The object of study is a history. Another distinctive feature of most of the work is its stochastic character. This permits emphasis on the importance of random deviations for long-run tendencies. Other tendencies include the multiplicity of possible long-run states, depending on initial conditions and on random fluctuations over time, and the specialization (in terms of process or geographical location) in an outcome achieved. Increasing returns may also serve as a reinforcement for early leading positions and so act in a manner parallel to more standard forms of increasing returns. A similar phenomenon occurs even in individual learning, where again successes reinforce some courses of action and inhibit others, thereby causing the first to be used more intensively, and so forth. There are in all of these models opposing tendencies, some toward achieving an optimum, some toward locking in on inefficient forms of behavior.
The papers here reflect two convictions I have held since I started work in this area. The first is that increasing returns problems tend to show common properties and raise similar difficulties and issues wherever they occur in economics. The second is that the key obstacle to an increasing returns economics has been the “selection problem” – determining how an equilibrium comes to be selected over time when there are multiple equilibria to choose from. Thus the papers here explore these common properties – common themes – of increasing returns in depth. And several of them develop methods, mostly probabilistic, to solve the crucial problem of equilibrium selection.
Arthur studied electrical engineering so was vaguely familiar with positive feedback already and became more intrigued when he read about the history of the discovery of the structure of DNA and read whatever he could about molecular biology and enzyme reactions and followed these threads back to the domain of physics. In this work, outcomes were not predictable, problems might have more than one solution, and chance events might determine the future rather than be average away. The key to this work, I realized, lay not in the domain of the science it was dealing with, whether laser theory, or thermodynamics, or enzyme kinetics. It lay in the fact that these were processes driven by some form of self-reinforcement, or positive feedback, or cumulative causation – processes, in economics terms that were driven by nonconvexities. Here was a framework that could handle increasing returns.
Great discoveries tend to come from outside the field
Polya Process – path-dependent process in probability theory
In looking back on the difficulties in publishing these papers, I realize that I was naive in expecting that they would be welcomed immediately in the journals. The field of economics is notoriously slow to open itself to ideas that are different. The problem, I believe is not that journal editors are hostile to new ideas. The lack of openness stems instead from a belief embedded deep within our profession that economics consists of rigorous deductions based on a fixed set of foundational assumptions about human behavior and economic institutions. If the assumptions that mirror reality are indeed etched in marble somewhere, and apply uniformly to all economics problems, and we know what they are, there is of course no need to explore the consequences of others. But this is not the case. The assumptions economists need to use vary with the context of the problem and cannot be reduced to a standard set. Yet, at any time in the profession, a standard set seems to dominate. I am sure this state of affairs is unhealthy. It deters many economists, especially younger ones, from attempting approaches or problems that are different. It encourages use of the standard assumptions in applications where they are not appropriate. And it leaves us open to the charge that economics is rigorous deduction based upon faulty assumptions. At this stage of its development economics does not need orthodoxy and narrowness; it needs openness and courage.
I did not set out with an intended direction but if I have had a constant purpose it is to show that transformation, change, and messiness are natural in the economy. The increasing-returns world in economics is a world where dynamics, not statics, are natural; a world of evolution rather than equilibrium; a world or probability and chance events. Above all, it is a world of process and pattern change
Positive Feedbacks in the Economy
Diminishing returns, what conventional economic theory is built around, imply a single economic equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one. Furthermore, once random economic events select a particular path, the choice may become locked-in regardless of the advantages of the alternatives
Increasing returns do not apply across the board – agriculture and mining (resource-based portions) – are subject to diminishing returns caused by limited amounts of fertile land or high quality deposits. However, areas of the economy which are knowledge-based are largely subject to increasing returns. Even the production of aircraft is subject to increasing returns – it takes a large initial investment but each plane after that is only a fraction of the initial cost. In addition, producing more units means gaining more experience in the manufacturing process and achieving greater understanding of how to produce additional units even more cheaply. Moreover, experience gained with one product or technology can make it easier to produce new products incorporating similar or related technologies. Not only do the costs of producing high-technology products fall as a company makes more of them, but the benefits of using them increase. Many items such as computers or telecommunications equipment work in networks that require compatibility; when one brand gains a significant market share, people have a strong incentive to buy more of the same product so as to be able to exchange information with those using it already.
Timing is important too in the sense that getting into an industry that is close to being locked in makes little sense. However, early superiority does not correlate with long term fitness
Like punctuated equilibrium, most of the time the perturbations are averaged away but once in a while they become all important in tilting parts of the economy into new structures and patterns that are then preserved and built on in a fresh layer of development
Competing technologies, increasing returns, and lock-in by historical events
There is an indeterminacy of outcome, nonergodicity (path dependence where small events cumulate to cause the systems to gravitate towards that outcome rather than others). There may be potential inefficiency and nonpredictability. Although individual choices are rational, there is no guarantee that the side selected is, from any long term viewpoint, the better of the two. The dynamics thus take on an evolutionary flavor with a “founder effect” mechanism akin to that in genetics
Path dependent processes and the emergence of macrostructure
Many situations dominated by increasing returns are most usefully modeled as dynamic processes with random events and natural positive feedbacks or nonlinearities. We call these nonlinear Polya processes and show that they can model a wide variety of increasing returns and positive feedback problems. In the presence of increasing returns or self reinforcement, a nonlinear Polya process typically displays a multiplicity if possible asymptotic outcomes. Early random fluctuations cumulate and are magnified or attenuated by the inherent nonlinearities of the process. By studying how these build up as the dynamics of the process unfold over time, we can observe how an asymptotic outcomes becomes “selected” over time
Very often individual technologies show increasing returns to adoption – the more they are adopted the more is learned about them; in then the more they are improved, and the more attractive they become. Very often, too, there are several technologies that compete for shares of a “market” of potential adopters
Industry location patterns and the importance of history
This study indeed shows that it is possible to put a theoretical basis under the historical-accident-plus-agglomeration argument (mostly arbitrary location for determining where a city is established but then more people flock to it, it receives more investment, more buildings come up, etc. which leads to agglomeration and increasing returns).
When a prospective buyer is making purchasing decisions among several available technically-based products, choosing among different computer workstations, say, they often augment whatever publicly available information they can find by asking previous purchasers about their experiences – which product they chose, and how it is working for them. This is a natural and reasonable procedure; it adds information that is hard to come by otherwise. But it also introduces an “information feedback” into the process whereby products compete for market share. The products new purchasers learn about depend on which products the previous purchasers “polled” or sampled and decided to buy. They are therefore likely to learn more about a commonly purchased product than one with few previous users. Hence, where buyers are risk-averse and tend to favor products they know more about, products that by chance win market share early on gain an information-feedback advantage. Under certain circumstances a product may come to dominate by this advantage alone. This is the information contagion phenomenon
Self-Reinforcing Mechanisms in Economics
Dynamical systems of the self-reinforcing or autocatalytic type – systems with local positive feedbacks – in physics, chemical kinetics, and theoretical biology tend to possess a multiplicity of asymptotic states or possible “emergent structures”. The initial starting state combined with early random events or fluctuations acts to push the dynamics into the domain of one of these asymptotic states and thus to “select” the structure that the system eventually “locks into”.
Self-reinforcing mechanisms are variants of or derive from four generic sources:
Large set up or fixed costs (which give the advantage of falling unit costs to increased output)
Learning effects (which act to improve products or lower their cost as their prevalence increases)
Coordination effects (which confer advantages to “going along” with other economic agents taking similar action)
Self-reinforcing expectations (where increased prevalence on the market enhances beliefs of further prevalence)
Besides these 4 properties, we might note other analogies with physical and biological systems. The market starts out even symmetric, yet it ends up asymmetric: there is “symmetry breaking.” An “order” or pattern in market shares “emerges” through initial market “fluctuations.” The two technologies compete to occupy one “niche” and the one that gets ahead exercises “competitive exclusion” on its rival. And if one technology is inherently superior and appeals to a larger proportion of purchasers, it is more likely to persist: it possesses “selectional advantage.”
Some more characteristics: multiple equilibria (multiple “solutions” are possible but the outcome is indeterminate, not unique and predictable); possible inefficiency, lock-in, path dependence
We can say that the particular equilibrium is locked in to a degree measurable by the minimum cost to effect changeover to an alternative equilibrium. In many economic systems, lock-in happens dynamically, as sequential decisions “groove” out an advantage that the system finds it hard to escape from. Exiting lock-in is difficult and depends on the degree to which the advantages accrued by the inferior “equilibrium” are reversible or transferable to an alternative one. It is difficult when learning effects and specialized fixed costs are the source of reinforcement. Where coordination effects are the source of lock-in, often advantages are transferable. As long as each user has certainty that the others also prefer the alternative, each will decide independently to “switch”. Inertia must be overcome though because few individuals dare change in case others do not follow
Path Dependence, Self-Reinforcement, and Human Learning
There is a strong connection between increasing returns mechanisms and learning problems. Learning can be viewed as competition among beliefs or actions, with some reinforced and others weakened as fresh evidence and data are obtained. But as such, the learning process may then lock-in to actions that are not necessarily optimal nor predictable, by the influence of small events
What makes this iterated-choice problem interesting is the tension between exploitation of knowledge gained and exploration of poorly understood actions. At the beginning many actions will be explored or tried out in an attempt to gain information on their consequences. But in the desire to gain payoff, the agent will begin to emphasize or exploit the “better” ones as they come to the fore. This reinforcement of “good” actions is both natural and economically realistic in this iterated-choice context; and any reasonable algorithm will be forced to take account of it.
Strategic Pricing in Markets and Increasing Returns
Overall, we find that producers’ discount rates are crucial in determining whether the market structure is stable or unstable. High discount rates damp the effect of self-reinforcement and lead to a balanced market, while low discount rates enhance it and destabilize the market. Under high discount rates, firms that achieve a large market share quickly lose it again by pricing high to exploit their position for near-term profit. And so, in this case the market stabilizes. Under low discount rates, firms price aggressively as they struggle to lock in a future dominant position; and when the market is close to balanced shares, each drops its price heavily in the hope of reaping future monopoly rents. The result is a strong effort by each firm to “tilt” the market in its favor, and to hold it in an asymmetric position if successful. And so, in this case strategic pricing destabilizes the market
The simple dynamics and stochastic model of market competition analyzed in this paper reveals striking properties. First, positive feedback or self-reinforcement to market share may result in bistable stationary distributions with higher probabilities assigned to asymmetric market shares. The stronger the positive feedback, the lower the probability of passing from the region of relative prevalence of one product to that of the other. Second, when producers can influence purchase probabilities by prices, in the presence of positive feedback, optimal pricing is highly state-dependent. The producers struggle for market shares by lowering prices, especially near pivot states with balanced shares.
What I got out of it
Influential read discussing self-reinforcement, lock-in, increasing returns in knowledge-based economies/industries, path dependence, and more. Extremely applicable for business, investing, economics, learning, and more. A great mental model to have in your toolbox