Tim Kastelle

Category: book riffs

  • Innovation Requires a Bias Towards Action

    Innovation Requires a Bias Towards Action

    Dwight Towers wrote a post last week reminding us that a lot of people have their ideas rejected not because everyone else is stupid, but because their ideas aren’t actually very good.  He was basically taking on the commonly used Galileo’s Gambit, which goes like this:

    They made fun of Galileo, and he was right.
    They make fun of me, therefore I am right.

    This is obviously a logical fallacy.  Carl Sagan’s response to this idea was:

    But the fact that some geniuses were laughed at does not imply that all who are laughed at are geniuses. They laughed at Columbus, they laughed at Fulton, they laughed at the Wright brothers. But they also laughed at Bozo the Clown.

    It’s easiest to hold this view when your idea is just an idea – the best way to work around it is to try your idea out.  This is because the value of an idea is often only found once we try to use it.  There is often a huge lag between when we first see a new idea and when we really find out what it is good for – this is when we are working through business model innovation.  In his great book Pasteur’s Quadrant, Donald Stokes says this:

    …the notable examples from the annals of technology, detailed by Rosenberg and others, in which it took many years for a new technology to find its most important commercial uses.  The steam engine was initially seen as a device for pumping water from mines and only later as a power plant for movable ships or carriages.  The railroad was initially seen as a feeder of good for canal transport and only later as a fully articulated system of transportation in its own right. The radio was initially seen as a “wireless” substitute for the electric telegraph for communicating between two ponits that could not be connected by wire, such as ship to shore, and only later as a means of “broadcasting” communication to a mass audience.  Indeed, this is is an almost universal phenomenon in the evolution of technology.  New technological paradigms seldom spring full-blown from the minds of their inventors, and when they do, as in the case of Arthur Clarke’s vision of communications satellites, the visionary is unlikely to be the person who makes the technological dream come true.

    Stokes is arguing in the book for a reconceptualisation of research.  For quite a while now we have tended to view research as either basic – concerned with discovering new knowledge, but not with use – from applied – concerned only with use.  Stokes instead argues that a great deal of important research comes from work that considers both knowledge discovery and use – Pasteur’s Quadrant:

    pasteurs quadrant

     

    There are a couple of important points here.

    First, it’s not enough to have a great idea – you have to actually try it out to find out if it’s any good.  That is how you avoid the Galileo Gambit.

    Second, even if the idea works, we often don’t know what it’s actually good for.  To discover this, we have to put it into use.

    Consequently, the best innovation comes when we are concerned with both discovery and use.

    Put it all together, and it means that innovation requires a bias towards action.

    (I grabbed the diagram of Pasteur’s Quadrant from Michael E. Smith’s nice post applying Stokes’ ideas to archaeology)

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  • Five More Thinkers That I Admire

    Five More Thinkers That I Admire

    A couple of weeks ago I wrote about five thinkers that I admire, and today I’d like to highlight five more that have influenced how I’m thinking recently.

    Valeria Maltoni

    I’ve admired Valeria’s work on her blog Conversation Agent for a number of years now. Today, I was fortunate enough to meet her in person.  Our discussion was wide-ranging, and we touched on a number of interesting ideas.

    Valeria one of the best thinkers around on the topic of how firms actually work.  She is starting to place more focus on the importance of executing ideas, which is an area that is often an innovation problem.

    As you would expect from the name Conversation Agent, she thinks a lot about how discussion drives business, and idea that I also looked at in  talk is the technology of leadership.  In doing this, she is putting an increasing focus on listening to form genuine connections with people.  In a post on the importance of making real-life connections, she says:

    Do you have enough diversity and autonomy in your life? How well do you listen to others? Are you open to multiple cultures outside your own?

    All good reasons to stop seeking (fake) links, and start making connections.

    Valeria is a strategist, and an outstanding one at that.  If you’re not familiar with her work, you should check it out. Here is one of her short talks:

    Terri Griffith

    In one of my exec ed courses earlier this year, one idea really seemed to stick with the people in the class.  It came from Terri Griffith and her excellent book The Plugged-In Manager.  In the class we were discussing how to make their firm more innovative.  They asked what tools they should be using.  In response, I outlined Terri’s argument that it is insufficient to think only about tools – you must instead consider technology, people and proceses, and how these three systems interact.

    This is how she describes the objectives of the book:

    Too often discussions of management practice focus exclusively on managing people and organizational issues. Rarely, however, do they incorporate a discussion about technology or address all three dimensions in a balanced way. When they do, the result is game changing. In our hypercompetitive environment, those managers who are outstanding at being plugged into their people, technology, and organizational processes simultaneously excel at coming up with effective business solutions.

    The Plugged-In Manager makes the case that being plugged-in—the ability to see choices across each of an organization’s dimensions of people, technology, and organizational processes and then to mix them together into new and powerful organizational strategies, structures, and practices—may be the most important capability a manager can develop to succeed in the 21st century.

    I think that this is absolutely correct – and my class did too.  This framework showed up in a couple of their final reports.

    Terri is at the leading edge of management thinking and research, and I love her work.

    Henry Mintzberg

    Another person at this leading edge is Henry Mintzberg.  I’ve been reading a lot of his work recently.  He is one of the leading proponents of the idea that the most important form of strategy for organisations is emergent strategy – the routines and approaches that occur as we respond to our changing environments.

    Mintzberg’s description of management is the one that really rings true with my experience as both a manager and one who studies them.  This is from his book Managing:

    Most of the work that can be programmed in an organization need not concern its managers directly; specialists can do it. That leaves the managers with much of the messy stuff—the intractable problems, the complicated connections. This is what makes the practice of managing so fundamentally “soft,” and why labels such as experience, intuition, judgment, and wisdom are so commonly needed to describe it. Put together a good deal of craft with the right touch of art alongside some use of science, and you end up with a job that is above all a practice. There is no “one best way” to manage; it depends on the situation.

    …

    I don’t want you to leave this book knowing. I want you to leave it, as I do, imagining, reflecting, questioning. Managers are only as good as their ability to work things out thoughtfully in their own way. To repeat, this is a job of paradoxes, dilemmas, and mysteries that cannot be resolved. The only guaranteed result of any formula for managing is failure (including, of course, this one).

    When you think of managing in this way, the Valeria’s point about the importance of conversation becomes more critical.  So does Terri’s discussion of the interactions between technologies, people and processes.

    Mintzberg’s work is well worth checking out.

    Rosalind Franklin

    This is the scan that led researchers to the discovery of the structure of DNA:

    dna structure

    Since everyone knows that Watson and Crick discovered DNA, then this scan must be theirs, right?  Wrong.

    This scan was done by Rosalind Franklin.  I was reminded of her story while reading Nonsense on Stilts by Massimo Pigliucci, where he credits the discovery of DNA’s structure to “Watson, Crick and Franklin.”  This attribution is rarely made, but it’s actually correct.

    Franklin was a brilliant scientist (see this biography for more information) until her career was cut unnaturally short by cancer.  Her DNA research was creative, while her approach to science was determined.  We could use more like her.

    Rita Gunther McGrath

    The lifespan of the average competitive advantage continues to shrink.  This means that traditional approaches to strategy are becoming decreasingly useful.  This is an issue where Rita McGrath is doing important work.

    She has already demonstrated the importance of making staged investments in innovation, rather than big bets.  Here is how she frames it:

     In highly uncertain environments, it’s nearly impossible to predict with any accuracy which innovations are likely to succeed and which are not. It makes sense, therefore, to test out a number of different approaches on a small scale, proceeding forward only when you’ve validated enough assumptions to move ahead with confidence. The logic of real options supports this approach: essentially encouraging companies to take out a couple of different projects aimed at a promising market or technology, without huge risks. “Big bet” ventures in our experience seldom work out.

    As Paul Hobcraft pointed out to me recently, she is expanding on this issue in her forthcoming book The End of Competitive Advantage.  Here is how she introduces the key ideas in the book:

    Strategy is stuck.  If you dropped into a boardroom discussion or an executive team meeting, chances are you’d hear a lot of strategic thinking based on ideas and frameworks designed in, and for, a different era.  the biggies – such as Michael Porter’s five forces analysis, BCG’s growth-share matrix for analyzing corporate portfolios, and Hamel and Prahalad’s core competence of the firm – are all tremendously important ideas.  Many strategies today are still informed by them.  But virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage.  This idea is strategy’s most fundamental concept.  It’s every company’s holy grail.  And it’s no longer relevant for more and more companies.

    In this book, I take on the idea of sustainable competitive advantage and argue that executives need to stop basing their strategies on it.  In its place, I offer a perspective on strategy that is based on the idea of transient competitive advantage: that to win in volatile and uncertain environments, executives need to learn how to exploit short-lived opportunities with speed and decisiveness.  I argue that the deeply ingrained structures and systems that executives rely on to extract maximum value from a competitive advantage are liabilities – outdated and even dangerous – in a fastmoving competitive environment.

    This is important work.  I’m looking forward to the book.

    These are five thinkers that have influenced me recently.  Who is influencing you?

    Related articles

     

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  • Talk is the Technology of Leadership

    Blinded by the Light?

    “It’s raining at night, and a car coming the other way has their brights on – they’re blinding you.  What do you do?”

    I had already passed my practical driving test after we moved to New Zealand, and now I just had to answer this question, and I’d have my new Driver’s License.

    “Slow down until it’s safe.”

    “Ok, but what actions would you take?”

    Now I had to think about it – what would I do step-by-step?  I didn’t know!  Now what?

    I took a deep breath, then closed my eyes and visualised the situation.  I put left foot on an imaginary clutch, my right on the imaginary gas, and grabbed the imaginary steering wheel.  Then I talked through each action.

    “Well, I’d let my foot off the gas to start slowing down, then I’d look down to the left to find either the white line or the edge of the road.  If was safe, I’d pull over, otherwise I would navigate by the line until the car was past.”

    That satisfied him.  Now I had my new license.

    How my eyes were seeing things...dia cientos cincuenta

    The Things We Don’t Know We Know

    When we drive, there are hundreds of things that we do every minute that we don’t consciously think about.  Over time, we get so good at making these constant adjustments to speed and direction, gas and brakes, that we forget just how hard it is to actually drive a car.  If we’re not careful, our concentration will slip and that can lead to trouble.

    The things that we don’t know we know are like that – they allow us to do incredibly complex tasks without thinking about them, but the unconscious nature of the action can also get us in trouble.

    Managing is a lot like driving.  When you’ve done it long enough, parts of it become automatic.  I don’t get to manage much in my current position, so when I get a chance to exercise my management muscles and I can see all these actions coming back, I’m much more aware of them than I was when I was a full-time manager.

    Management is all about influencing from a distance.  The whole job is nudges and levers, questions and suggestions.  Little adjustments to keep on course, or speed up, or slow down.  That’s the art of managing.

    The academic term for the things we “know” but can’t articulate is tacit knowledge.  It includes mostly things that we learn from doing.  Think about riding a bicycle – can you explain step-by-step how to balance while you’re moving forward?  It’s actually pretty close to impossible – that’s why we need training wheels.

    We actually need training wheels as managers too.  Here is how Henry Mintzberg puts it in his superb book Managing:

    Little of management practice has been reliably codified, let alone certified as to its effectiveness. That is why Hill found that people “had to act as managers before they understood what the role was”

    It should be emphasized that, unlike other workers, the manager does not leave the telephone, the meeting, or the e-mail to get back to work. These contacts are the work. The ordinary work of the unit or organization—producing a product, selling it, even conducting a study or writing a report—is not usually undertaken by its manager. The manager’s productive output has to be gauged largely in terms of the information he or she transmits orally or by e-mail. As Jeanne Liedtka of the Darden School has put it (in a talk I attended): “Talk is the technology of leadership.”

    Talk is the Technology of Leadership

    I love that quote from Jeanne Liedtka – talk is the technology of leadership.  When was the last time you thought about how you use words?  That’s something we learned to do ages ago.  So long ago that we don’t even know what we know about speaking, or listening.

    And yet, these are the core technologies of leading.  Speaking, and listening.

    If you’re leading, or managing, it pays to think about these technologies a little more deeply.

    Tom Peters addresses listening in a great document that he posted over the weekend called Presentation Excellence (link to .pdf).  The main document is about presentation skills, and it’s useful.  For me though, the goldmine is the appendix on listening.

    He starts this by saying “Interviewing/asking questions is a critical—and under-studied and under-practiced—skill. Few have treated it as a skill to be mastered akin to learning to play the piano.”  He then goes on to give 59 thoughts on becoming a better listener.  This is an invaluable resource – check it out.

    In terms of speaking, I’ve also run across an excellent resource recently.  It’s a book called The Power of Framing: Creating the Language of Leadership by Gail Fairhurst.  Like the piece by Peters, this book contains a wealth of practical examples and tips for using language more effectively.

    It’s time for us to consciously think about the things we do automatically.  If talk is the technology of leadership, than it makes sense to build our skills in this area.  As we do this, we should pay attention to one last quote from Mintzberg’s book:

    “It’s not [the manager’s] job to supervise or to motivate, but to liberate and enable” (Max DePree of Herman Miller, 1990).

    (photo from flickr/fragglerawker_03 under a Creative Commons License)

     

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  • Reframing Failure

    In 20 Things Good Managers Know About Innovation, number 18 is “Failing is good – try to fail as small as possible, and make sure you learn from it.”

    One of the responses to that post said “Have never believed failing is good [see item 18]. Try telling that to the families of trainee pilots!!”

    I get this a lot, and it is extremely dangerous thinking.  Some people just seem to shut down as soon as they see the word “fail” – the critical parts of this idea are the last two – fail small, and learn.

    Here is how Hugh MacLeod put it in his daily newsletter:

    Nassim Nicholas Taleb addresses the fail small idea in his latest book Antifragile.  He says antifragile systems gain from things that people try to avoid:

    What is that something? Simply, membership in the extended disorder family. The Extended Disorder Family (or Cluster): (i) uncertainty, (ii) variability, (iii) imperfect, incomplete knowledge, (iv) chance, (v) chaos, (vi) volatility, (vii) disorder, (viii) entropy, (ix) time, (x) the unknown, (xi) randomness, (xii) turmoil, (xiii) stressor, (xiv) error, (xv) dispersion of outcomes, (xvi) unknowledge. It happens that uncertainty, disorder, and the unknown are completely equivalent in their effect: antifragile systems benefit (to some degree) from, and the fragile is penalized by, almost all of them—even

    …

    Or look at errors. On the left, in the fragile category, the mistakes are rare and large when they occur, hence irreversible; to the right the mistakes are small and benign, even reversible and quickly overcome. They are also rich in information. So a certain system of tinkering and trial and error would have the attributes of antifragility. If you want to become antifragile, put yourself in the situation “loves mistakes”—to the right of “hates mistakes”—by making these numerous and small in harm. We will call this process and approach the “barbell” strategy

    The implication of the second quote is that in fragile systems, when we try to suppress failure (“we can always celebrate success!”), we actually increase the chances of a big catastrophic failure down the road.  Antifragile systems avoid catastrophic failures because they have a series of small mistakes that lead to learning.

    Learning is the second issue.  The latest issue of Smith Journal has a great interview with Zach Klein, who has been involved with founding Vimeo, College Humor, Boxee and the Founder Collective venture capital fund.

    There are a lot of investors who invest solely in the entrepreneur, because that relationship is really important,” he explains.  “They want to be supportive of their bad ideas so that when they do have a good idea, they have  front row seat to participate in the investment.  I don’t perform any science to evaluate what our success of failure ratio should be.  You need to invest in enough companies to be resistant to failure so that if one company fails, your entire portfolio isn’t spoiled.”

    Failure, he says, is just fuel….

    “Entrepreneurs and ideas are constantly mutating,” he says.  There’s never been a moment when someone just failed and that’s the end of it.  Usually what happens is that someone has a theory about how something should work or should be built, and they pitch that logic to me, and I trust them.  I invest money and I hope that they will faithfully execute on their plan.  When it doesn’t work, it’s just as much my failure as it is theirs, and we take that experience and we hopefully convert it into another opportunity; What do we know now?  What do we know better? I’ve never really dwelled on failure because it’s a critical component of succeeding  You have to experiment.  You have to take a risk.”

    This is what Stefan Lindegaard calls SmartFailing.  He’s trying to address the same issue:

    A few years ago, I argued that we needed to become better at learning through failure, but that the word failure itself is so negatively loaded. How could we create a new concept and vocabulary on the intersection of failure and learning?

    I agree with Stefan, we need to reframe failure.  There are a few ways we can do this:

    • Dont’ Fail Fast, Learn Fast: that’s what Braden Kelley says.  And he is right.  We need to test ideas as early as possible, and we need to set the test up as an experiment so that we are sure that we learn.  When Hindustan Unilever launched their Shakti program, they started with a very small experiment.    They were trying to set up a rural sales force of entrepreneurial women so that they could reach the 40% of people in India that lived in villages too small to have a store.  They didn’t roll out the new program across the whole country.  First, they trained 17 women and tried to answer two questions: could these women run their own business, and was there demand for HUL products in these villages?  If the answer to both questions was yes, then they would expand the program.  If the answer to either was no, then they learned something and could adjust their plans accordingly.  That’s how to set up an experiment.
    • Ask “Is the knowledge that we’ll gain worth having?”  If you set up an experiment so that you learn something no matter how it turns out, then you are investing in knowledge, not failing.  There’s no point in experimenting if you don’t learn.  If you don’t learn, then that really is a failure, and we do need to avoid that.  If you learn, then you are building an antifragile organisation.
    • Scale up your investment over time.  If the first Shakti experiment had yielded negative results, the cost was low.  As they continued with further experiments in years 2-5, the cost gradually increased.  First they expanded the geographic ranges and went up to trialling the program with 60 women.  Then they tested the supply chain, and finally they tested potential profitability.  This minimizes the cost of failure.

    Rita Gunther McGrath has done great research on how to make this work.  In an article in Harvard Business Review, she says that you can do this by:

    1. Define what success and failure look like before you start.
    2. Experiment to turn assumptions into knowledge.
    3. Iterate through this process quickly.
    4. Do it cheaply – ask how much you can afford to lose to gain the knowledge.
    5. Contain uncertainty by testing one thing at a time.
    6. Build a culture that celebrates experiments that lead to learning.
    7. Make explicit what you learn, and share it.

    The fact of the matter is that trainee pilots fail all of the time.  They do it in simulators, and in trial runs on the ground.  The repeated small failures make it much less likely that they will fail once they’re actually up in the air.

    We should follow the same principles in our innovation work.

  • Five Thinkers That I Admire

    I was talking with one of my PhD students last week and he saw that I was reading Lean In by Sheryl Sandberg.  He asked me what I thought of it, and if I had read anything else that was good recently.  I wasn’t very far into the book at that point, but now that I’ve finished it I’m ready to say that it’s great.  And you should read it too.

    I ended up reflecting on some other excellent books that I’ve read recently, and I thought I’d share some thoughts on five thinkers that I admire.

    Sheryl Sandberg

    Since Lean In triggered this line of thought, I’ll start with Sheryl Sandberg.  The book is terrific.  It’s not a comfortable read, because it confronts the fact that we still face serious gender issues in both our work and personal lives.  While there are important institutional factors that contribute to this, Sandberg focuses on steps that we can take as individuals to address these issues.

    Her TED talk summarises some of the key points from the book:

    Here is what I really like about Sandberg’s approach here: she has an almost perfect mix of stories and data.  The book is highly data-driven, which is something that I always look for (and too often fail to find).  But for every statistic, Sandberg has a story that illustrates.  It’s a killer combination.

    Yes, there are arguable points in the book, but it raises enormously important issues, which we need to be talking about. From an innovation standpoint, I think we’ll all be better off if we’re getting great ideas executed by everyone, regardless of gender, race, or country of origin.

    Nilofer Merchant

    Second on my list is Nilofer Merchant.  Yes, I’m biased, but I think she’s doing consistently excellent work.  I had a session on innovation with nine small-business CEO’s on Friday.  When I asked them what problems they faced, several of them had issues with embedding a culture of innovation throughout their firm.  They were describing an air sandwich.

    That’s an idea from Nilofer’s first book The New How – that strategy fails because there is a gap between top-level managers, who have the vision of where they want to go, and the front-line people who understand where the real problems and opportunities lie.  The New How talks about how to bridge that gap so that there is a shared purpose within firms.  It’s a really important issue, and an under-rated book.

    Nilofer is doing excellent work, with important applications.

    Brene Brown

    Nilofer tipped me onto the work of thinker number three – Brene Brown.  Her book Daring Greatly is one of my recent favourites.  One of the quotes in Sandberg’s book is “what would you do if you weren’t afraid?”  Brown’s research addresses precisely this point – that when we’re afraid, we prevent ourselves from accomplishing what we’re capable of.

    Her solution is that we need to be vulnerable to reach our goals.  I believe that we do need to be vulnerable to innovate.

    While I enjoy Brown’s work, and it resonates with me, I admire the work because it is based on some of the most careful research that I’ve run across.  It’s case-based, and the number of people that she interviewed is staggering – many quantitative studies have far fewer data points than her work does.  That in itself is great, but the other reason that I admire Brown’s work is that she changed her mind.

    That’s what great scientists do when they run across data that doesn’t fit with their original hypotheses – they change their mind.  Sadly, this doesn’t always happen.  Brown is a great scientist.

    Edith Penrose

    I was talking about Edith Penrose with a couple of colleagues recently, and discovered that all of us regularly re-read her classic book The Theory of the Growth of the Firm.  Penrose has been one of my intellectual heroes from the early days of my research career.

    edith

    Here is what I said about her for the first Ada Lovelace Day:

    Here is what she set out to do in the book:

    So far as I know, no economist has as yet attempted a general theory of the growth of firms. This seems to me so very strange that I am sure anyone attempting it should indeed watch his (or her) step, for naturally there is always a good reason for what economists do or do not do. Perhaps such a theory is impossible to construct, unnecessary, trivial, or outside the ale of economics proper. I do not know, but I offer this study in the hope that all four possibilities will be rejected.

    Penrose succeeds admirably in rejecting those four possibilities. It is a beautifully constructed study, and a wonderful book to read. It’s been cited over 10,000 times, although her ideas are often mangled so sometimes I wonder how many times it’s actually been read. In any case, her key thoughts have formed an important part of the development of evolutionary economic thought. She builds on many of Schumpeter’s ideas, and in turn, her ideas contributed to great subsequent work like A Behavioral Theory of the Firm by Cyert and March and An Evolutionary Theory of Economic Change by Nelson and Winter.

    Here is a brief statement that encapsulates the key points in her approach:

    One of the primary assumptions of the theory of the growth of firms is that ‘history matters’; growth is essentially an evolutionary process and based on the cumulative growth of collective knowledge, in the context of a purposive firm.

    Those are some of the key ideas that have driven evolutionary economics ever since. Edith Penrose conducted beautiful research. She developed important ideas based on deep observation and understanding of firms. Even though she’s been widely cited, I still think she’s a bit under-appreciated. If you have any interest in how firms grow, you owe it to yourself to read her book. The idea that firms grow through the growth of knowledge is a strong argument for experimenting, data gathering and innovation as key functions within organisations.

    Rebecca Stott

    The fifth thinker that has posed interesting questions for me is Rebecca Stott.  She writes both non-fiction and fiction, all with a strong focus on science.  I recently finished her novel Ghostwalk.

    The book is a gripping mystery set in Cambridge, and bouncing back and forth between the present and the time when Isaac Newton was there.  Here is a quote that sums up the main issue that Stott is tackling:

    Look. You forget. As a neuroscientist I’m up against the edge of what’s known all the time. Every new thing we map or understand brings a whole new set of unknowns with it. Science is really unsettling. Take quantum mechanics. The theory was so weird that Schrödinger, one of the founders, famously said, “I don’t like it and I’m sorry I had anything to do with it.” In the quantum world particles can be in two places at once, they disappear for no reason, and even act differently depending on whether we’re watching them or not.’

    Yep, it’s a novel exploring quantum entanglement.  That might not do much for you, but I absolutely loved it!  It’s one of the most thought-provoking novels that I’ve read recently, and another in the recent string of great books.

    One of the key drivers of innovation is connecting ideas in novel ways.  To get really good ideas it’s useful to explore widely.  Encountering great thinkers is one great way to spur this process.

    I think you should check out these five, and if you have thinkers that you admire, please let me know – I’m always looking for more!

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  • A Brief Introduction to Uncertainty in Business

    A Brief Introduction to Uncertainty in Business

    Risk versus Uncertainty

    What are the odds that your new idea will succeed?  If it does, what will the return to you be?

    One of the problems that we have in business (and life!) is that we often can’t know the answer to questions like this in advance.  And this drives us nuts.  Consequently, a lot of people invest a great deal of effort into reducing uncertainty.  There are two problems with this approach.  The first is that we often don’t understand uncertainty very well, and the second is that profitably opportunities only exist where outcomes are genuinely uncertain.

    Frank Knight wrote about this in 1921 in a great book called Risk, Uncertainty and Profit (which you can read here).  He distinguished between two types of uncertainty.  The first type is when we know the potential outcomes in advance, and we may even know the odds of these outcomes in advance.  Knight calls this type of uncertainty risk.

    An example of risk is rolling a pair of dice.  Before we roll, we know in advance what the odds are for each possible outcome (provided that the dice are fair).  Knowing these odds forms the basis for all of the games of chance that we can play.  Dice are relatively simple, cards a bit more complicated, but we can know all of the odds with them in advance.

    Dice for various games, especially for rolepla...
    Dice for various games, especially for roleplaying games. Español: Dados en forma de poliedro regular (de 4, 6, 8, 10, 12, 20 y 100 caras) y el dado típico de 10 caras. (Photo credit: Wikipedia)

    Genuine uncertainty is different.  This occurs when we don’t even know the possible outcomes in advance, let alone their probabilities.  Genuine uncertainty occurs in complex systems, where lots of actors interact over time – the economy, for example.

    The important point that Knight makes is this: real opportunities for profit only exist in the face of genuine uncertainty.   Which means that if we want to innovate successfully, we not only have to deal with uncertainty, we must seek it out.

    The Problems of Uncertainty

    We’re not the most rational decision-makers in the first place, and confusing uncertainty with risk makes things worse.  Here’s how:

    • We act like everything is just a risk.  Here is how Knight puts it:

      Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable. The confusion arises from the fact that we do estimate the value or validity or dependability of our opinions and estimates, and such an estimate has the same form as a probability judgment; it is a ratio, expressed by a proper fraction. But in fact it appears to be meaningless and fatally misleading to speak of the probability, in an objective sense, that a judgment is correct.

      When we act like everything is a risk, we greatly increase the chance of failure.  However, the opposite can also be a problem:

    • We act like everything is unknowable. Uncertainty often gets blamed for inaction.  Barry Ritholtz takes aim at the problems with this:

      It finally dawned on me what the uncertainty trope is all about. It took a conversation with a nervous chief executive to reveal it, but I teased out the answer.

      Most of the time, people exist in a happy little bubble of self-created delusion. We engage in selective perception, seeing only the things that agree with us. Our selective retention retains the good stuff and disregards most of the rest. In our minds, we are all younger, better-looking, slimmer, with more hair than the camera reveals.

      In short, we construct a reality that bears only passing resemblance to the objective universe.

      During those brief instances when the facade fades, the curtain gets pulled back and the ugly reality becomes clear. We get a glimmer of understanding about our own lack of understanding. That’s when the grim reality of the human condition is revealed — and it terrifies us.

      The next time you hear someone mention uncertainty, ask yourself this: How much less do they actually know about the future today vs. what they knew last week or year? How much less do they think they know?

      We can’t use not knowing as an excuse to not act – because we never know.

    It seems like we either suppress uncertainty, and act overconfidently, or we overemphasise uncertainty, and don’t act at all.  Both are bad outcomes.

    How to Respond to Genuine Uncertainty

    Managing risk is pretty straightforward.  You match up your investment to the odds of it paying off.  Managing uncertainty is trickier.

    Fortunately, there are a few things that we can do.  It’s important to cope with uncertainty effectively, because doing so allows us to go where the opportunities are.  Here are some strategies:

    1. Aggregate.  When I get in my car to drive to work tomorrow, it’s impossible to know if I’ll have an accident or now.  And yet I have car insurance.  How can this be?Insurance works because when you add up enough individual cases of uncertainty, you might end up with probabilities.When we’re talking innovation, this means that Linus Pauling was exactly correct when he said that the best way to have a great idea is to have a lot of ideas. Volume can reduce uncertainty.  This is what venture capital firms do too when they make a wide range and high number of investments.
    2. Seek out uncertainty to increase the chance of hitting it big.  If you enter the lottery, the odds of winning are higher than the payout – it’s a sucker bet.  Innovation is the opposite – the odds of winning are lower than the payout – it’s a positive feedback loop.  Taking advantage of this is a smart play.  This is the process of looking for positive outliers.
    3. Understand that when we face uncertainty, some ideas will fail.  But this is what drives progress.  William Janeway has an interesting take on this in his book Doing Capitalism in the Innovation Economy:

      Schumpeter’s process of creative destruction can only proceed by trial and error. We see that which is created through the lens of survivors’ bias and ignore the “hopeful monsters” that economic evolution has spawned and left behind in metaphorical emulation of Darwin’s process of natural selection. No doubt every one of them was launched on the basis of an exercise in forecasting future revenues, costs and an expected value to be compared with a rough estimate of the cost of capital. As Schumpeter well knew, the wastage is the measure of the inescapable uncertainty that attends the practice of doing capitalism: We need only visualize the situation of a man who would … consider the possibility of setting up a new plant for the production of cheap aeroplanes which would pay only if all people who drove motorcars could be induced to fly. The major elements in such an undertaking simply cannot be known … Neither error nor risk expresses adequately what we mean.

      Waste measures uncertainty!

    It’s important to understand the distinction between risk and uncertainty.  The two situations require different responses – and if we confuse the two, we won’t use the right approach.

    And that really increases the risks we face!

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  • Here’s One Good Way to Kill Innovation

    Here’s One Good Way to Kill Innovation

    Encountering an Air Sandwich

    I was teaching exec ed this week and I saw a textbook example of an air sandwich.

    Here’s how Nilofer Merchant describes it:

    An Air Sandwich is a strategy that has clear vision and future direction on the top layer, day-to-day action on the bottom, and virtually nothing in the middle—no meaty key decisions that connect the two layers, no rich chewy filling to align the new direction with new actions within the company.

    I was working with a group of future leaders that had been identified by the management of their company.  The firm is in a pretty conservative industry, but they are starting to try to differentiate themselves through innovation.  This vision has been articulated from the top.  And the young managers in the class had been asked to think about how to embed innovation within the organisation.

    They came back with a series of pretty interesting ideas, and they presented them in our workshop, with a number of senior leaders from the firm present.  And every new idea that the young guys put forward got shredded by the senior leaders.

    Air Sandwich.

    Air-sandwich-200px

     

     

    How Should You Respond to New Ideas?

    There are two ways in which you can respond to new ideas.  Your first response can be “no, that won’t work, here are the problems.”  Or, you can say “that’s interesting.”  And with the second one, you can find ways to build on the idea, or connect it to other ideas to create an even better idea, or at least figure out some way to support the idea.

    The firm I’m working with is in a pretty tough industry, and I suspect that the guys giving the rough feedback would say that’s important for the younger managers to harden up – that if they want to make it in this industry they’ll need to be tough.  And that may well be true.

    But still, if you are trying to build your innovation capability, you can’t take ten of your bright young managers, ask them to come up with creative ideas to help build that capability, and then just absolutely tear those ideas to shreds when they show them to you.  This is particularly important for this firm – because they have set themselves a tough challenge.  But their overall objectives are admirable, and it’s important that they succeed.

    How Should You Respond When Your New Ideas Get Shredded?

    So what can you do if you’re the bottom layer of bread in an air sandwich?  You can’t control how others respond to your ideas, but you can exert some control over your own actions.  Here are some ideas:

    • Learn from it. Getting our great ideas to spread is an important part of the innovation process.  Overcoming resistance is a big part of that.  Every criticism of your ideas contains some element of truth – even if it’s based on a misunderstanding, that shows that you need to get your point across more clearly.  We have to learn from this, and improve the deliver of our new ideas.
    • Don’t take it out on others. One big danger in a situation like this is that the young managers will learn that this how to respond to ideas in their firm, and react the same way when the people working for them come up with new ideas.  This will completely kill off innovation.  Instead, we have to use these experiences to build our empathy.  This way, when others put new ideas in front of us, it might help us respond by supporting the idea, building on it, and connecting it to other good ideas.
    • Change your culture. The culture of a firm is not an unchanging fact of life that simply acts upon us.  We re-create it every single day through our interactions.  Just because our managers act in a particular way doesn’t mean that we have to.  We have the opportunity to start re-shaping a culture by changing the way we respond to things.  If we accept new ideas and build on them, others will start to do so as well.
    • Band together. It’s hard to change a firm’s culture on your own.  So another good idea is to find others that are also committed to driving change, and band together.  Cultures rarely change through edicts – it is one thing that is especially open to bottom-up change.

    This is Why Innovation is a Challenge

    Innovation is hard – if it weren’t, everyone would be doing it.  The environment that we create for new ideas is an important part of building an innovation culture. One of the big problems with shooting down ideas immediately is that doing so assumes that we can know in advance which ideas will work and which won’t.  But we can’t.  This is why experimenting and prototyping are such critical innovation skills.

    The best way to figure out which ideas are good is to try them out.  If they work, scale them up.  Here’s how Saul Kaplan puts it:

    Learn by doing. Constantly test new ideas. Learn, share and repeat. The world is ever changing — stay ahead of the curve. Embrace the art of discovery.

    We need to try more stuff. Innovation is never about silver bullets. It’s about experimentation and doing whatever it takes, even if it means trying 1,000 things, to deliver value.

    My main piece of feedback to the teams was: “how could we prototype your ideas?”  If we test an idea, gather data from the test, and learn, that is the best way to combat a culture that shoots new ideas down on sight.  It’s a lot harder to argue with data.

    Testing your ideas, and making evidence-based decisions are two more ways to change your culture.  That’s my new idea for the day.  How will you respond – will you tell me why it won’t work, or will you build on it to make it better?

    (the air sandwich picture was included in a nice post by Adam McKibben)

     

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  • More is Better, Until It’s Not

    More is Better, Until It’s Not

    Collaboration is an important part of innovation.  The days of the lone inventor are gone (if they ever really existed at all) – now, it takes a network to innovate.

    But how much collaboration do we need?

    This is one of the questions that Keld Laursen and Ammon Salter  looked at in a landmark article on open innovation in 2005.  This graph shows the key finding:

    Screen Shot 2013-02-18 at 1.44.33 PM

    The vertical axis shows the innovation effectiveness in the firms they surveyed, and the horizontal shows the number of innovation collaborations they have.  It shows that adding innovation partners makes firms more innovative, up to about 11 partnerships.  After that, adding more partners erodes performance.

    This provides a strong argument in favour of open innovation – up to a point.

    The key question is why does it turn back down?  This upside-down U shape is actually a very common research finding.   You frequently see it in systems that require attention.  Keld and Ammon think that in this case, it means that if you have too many partners, you can’t pay enough attention to each, and your results start to get worse.

    Edith Penrose found a similar effect in her great research back in the 1950s.  She showed that there is a limit to managerial attention.  This is what makes it hard to manage more than one business model within the same firm, why teams work best with no more than 8-12 people in them, and why there is a limit to any span of managerial control.

    In his new book To Sell is Human, Dan Pink talks about similar findings in the research of Adam Grant.  Grant looks at sales results relative to a person’s level of extraversion.  Everyone knows that extraverts make the best salespeople, right?  Well, wrong, actually.  Check this out:

    GrantExtraversion-e1359528308233

     

    Pink says:

    As you can see from the chart, the folks who fared the best — by a wide margin — were the in the modulated middle. They’re called “ambiverts,” a term that has been in the literature since the 1920s. They’re not overly extraverted. They’re not overly introverted. They’re a little of both.

    He adds more detail in this post, and also has a test where you can test whether or not you’re an ambivert too.

    This is interesting for a couple of reasons.  One is that we often search for black and white answers – but business rarely offers them.  Is collaboration good?  Yes, but only up to a point.  Is extraversion good if you’re a salesperson?  Yes, but only up to a point.

    Figuring out where that point lies is part of the art of managing.  And being comfortable with the ambiguity in this is an even bigger part of that art.

    So just remember: more is better, but only until it’s not.

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  • Innovation Happens in the Gaps

    Innovation Happens in the Gaps

    What are the connections between these three things?

    First: Comics – the magic happens in the gaps between panels

    In his terrific book Understanding Comics, Scott McCloud explains that comics are special because all of the real action occurs in the gaps between panels – this is the part that readers fill in using their imagination.

    ScottMcCloud

     

    A huge amount of effort and creativity goes into making the comic, but then the reader finishes the story in her head.

    Second: Tools Don’t Solve Problems, People Do

    Here’s an apocryphal story making the rounds of various photography sites:

    A well known New York photographer goes to a socialite party. On his way in the hostess says to him, ‘Oh I love your photos, you must have an amazing camera!’. They have dinner and at the end of the night, on his way out, the photographer comments to the hostess, ‘I really loved the food, you must have an amazing stove.

    Third: Seth Godin on helping people be more perfect

    Check this out from Seth Godin:

    Most people in the US can’t cook. So you would think that reaching out to the masses with entry-level cooking instruction would be a smart business move.

    In fact, as the Food Network and cookbook publishers have demonstrated over and over again, you’re way better off helping the perfect improve. You’ll also sell a lot more management consulting to well run companies, high end stereos to people with good stereos and yes, church services to the already well behaved.

    The Story: Creativity Happens in the Gaps

    I see the same story in all three pieces: Creativity happens in the gaps.

    I’m a lousy cook.  So if I go out and buy The Fat Duck Cookbook, and follow each recipe as closely as possible, I still won’t be cooking like Heston Blumenthal.

    Why not?  Because I don’t know enough to fill in the gaps.  As much as I love Scott McCloud’s book, I disagree with him when he says that “what happens between these panels is a kind of magic only comics can create.”  I actually think that applying creativity and imagination in the gaps also explains the other two stories.

    We can only sell cookbooks to people that are already great cooks because they have the skills needed to be able to fill in the gaps in a recipe creatively and with imagination.  And this is why, as in the case of the photographer and the cook, focusing on tools can be incredibly misleading.

    Innovation Happens in the Gaps

    A couple of years ago, I met with the senior management team from a really large organisation in Brisbane.  They wanted to talk to me about being more innovative.  We started by talking about what innovation is, and then quickly went through managing innovation as a process, and a few other key ideas.

    Then one of them said: “We tried a big innovation initiative a few years ago and it didn’t work.”

    There were nods around the table.  I said something like:

    “Let me guess.  You asked everyone for their ideas.  Lots of people submitted innovation ideas, but there was no mechanism in place for choosing the best ones.  You didn’t have any budget attached for execution either, so nothing much came out of it.  And in the end, everyone that put an idea in ended up feeling disillusioned and morale actually went down.”

    As I talked, there were sheepish nods around the table.

    They didn’t know enough about innovation to fill in the gaps.  They wanted to buy the innovation version of the expensive camera, or the great stove.

    They had the same problem that Seth Godin outlines: they’re actually not good enough innovators to benefit from the tools that are available to them.

    What Should You do If You’re Just Starting Out?

    Forget about tools.  You have to build your basic innovation skills.

    Once you’ve done these things, then you can go out and start buying expensive tools to support innovation.  But only then.

    There are no innovation short cuts.  You have to build your skills first.

    Once you have, then you’ll have enough knowledge to really use your imagination.  Then you’ll know that innovation happens in the gaps.

     

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  • Reading This Post Will Change Your Brain!

    Reading This Post Will Change Your Brain!

    Reading this post will change your brain

    I’m not sure if the change will be good or bad, but reading this will change your brain. I’m sure you’ve heard the arguments about the internet – google is making us stupid, and even more alarming – using the internet changes your brain!  That must be bad, right? Well, not necessarily.  The problem with this argument is that everything you do changes your brain.

    Using google changes your brain, eating a donut changes your brain, and yes, reading this post changes your brain. The correct question to ask isn’t “does doing X change my brain?”  but rather “what activities do the changes enable?” Nicholas Carr wrote the original article Is Google Making Us Stupid, and he understands this distinction.  His argument is that the rewiring in our brains caused by internet usage makes it harder for us to concentrate for extended periods, and that we are losing the ability to focus and follow complex arguments. Ironically, his argument is sophisticated enough that a lot of people seem to misconstrue it.

    My actual personal brain!
    My actual personal brain!

    Interactions change us

    So yes, using the internet does change our brain.  It makes it easier for us to do some things, and harder to do others. Personally, I’m not convinced by the evidence people have suggesting that internet use decreases our powers of concentration.  And as for google, well, we’ve been outsourcing complexity to various tools for centuries – I’m not sure how this is all that different.

    It was Plato that argued that writing things down was causing a horrible deterioration in our ability to remember things.

    That might be true, but it also means that the part of our brains that devoted to remembering stuff could now work on other activities – and some of those have turned out to be pretty useful.

    Who do you want your customer to become?

    The idea that interactions change us is the central issue driving Who Do You Want Your Customer to Become? by Michael Schrage.  Seth Godin outlines the implications of this question in his new book The Icarus Deception:

    Everyone you interact with is changed forever. The only questions are: How will they be different? and How different will they be? Author Michael Schrage wants you to ask, “Who do you want your customers to become?” At first this seems like a ridiculous question. Your customers are your customers. Your coworkers are your coworkers. This isn’t true.

    Connection creates change. Unless you are selling a standard commodity, the interactions you have with the market change the market. Zappos turned its customers into people who demand a higher level of service to be satisfied. Amazon turned its customers into people who are restless with online stores that don’t work quite as well or quite as quickly. Henry Ford turned his customers from walkers into drivers.

    When you disappoint someone (or exceed their expectations), that interaction is going to color all the interactions that person has tomorrow and next year. Apple is talked about more than any other company for one simple reason: They have huge aspirations for who they want their customers to become, and they deliver on them.

    … Answering Schrage’s question honestly gives you a chance to describe the change you want to see in the world. Not at the Henry Ford industrial-scale level, of course. No, but even if you connect with six people, you are changing them.

    Changing them how? Whom do you want them to become? I’d like you to become an artist. To make connections that matter. That’s my mission.

    By writing, Godin wants his readers to become artists.  And Schrage himself wants to change how we innovate:

    Significantly, they should become managers and leaders who are justifiably more confident that they are asking the right questions when they look to innovate and create new value in new ways. They should have the courage to take smarter risks and the ability to learn faster because they know they’re committed to treating their customers with empathy and respect. Most importantly, they should become more successful. Why? Because successful innovators know how to ask the right questions and create the most value for themselves and their customers. The Ask of this book is that you become an innovator who gets the best possible return on the innovation investments you make in your customers.

    Who will we become?

    I think that both Schrage and Godin miss an important point though.  Yes, when we send our ideas out into the world, they change the people with whom they interact.

    But sending these ideas out, and seeing how they interact with people changes us as well.

    Asking who you want your customers to become is a great way to clarify your value proposition.  Changing your answer can help you innovate your business model. I think it’s a transformative question, and Schrage’s book is definitely worth reading.

    But we need to pair this with another question – who do we want to be?  If we make our customers stupider, it makes us shallower.  If we make our customers more transactional, we’ll often end up greedier.

    Here’s the change that I’d like to see from our interactions over ideas: that together we figure out how to make work work better.

    For too many people, work is lousy.  Most organisations are mediocre, at best (maybe even 90% of them!)  We need to innovate how we manage, how we deal with our people, and how we deal with customers.

    If my writing this and your reading this helps us take even a small step in that direction, I’d be very happy.

    Reading this post will change your brain. Now let’s change our behaviour.

     

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  • In Which We Discover the Secret to Social Success

    In Which We Discover the Secret to Social Success

    It’s getting hard to keep up with all the different social tools that are flying at us every day.  We constantly hear things like:

    “If you’re not on Pinterest you’re in big trouble.”

    or

    “Blogging is dead.”

    It seems like people are putting a lot of effort into trying to figure out which tools they should use, and how they should use them.  What’s the best way to deal with all of this us? I’ve been repeatedly hit in the face with the answer to this recently from my network, which teaches me a lot.

    So here is the secret to social success:

    Connect with people.

    Simple, isn’t it.  It doesn’t matter what tools you use – and if you spend too much time worrying about tools, you’ll forget to use them to do the one thing that matters – connecting.
    Connecting Ideas is the Fundamental Creative Act in Innovation.  You have to connect ideas to ideas to innovate, and you have to connect people to your ideas to get them to spread.  It’s all about connection.

    Earlier, I told you about the best social media strategy of all time:

    Do awesome work.

    That takes care of the connecting ideas to ideas part.  Then, to get them to spread, you need to connect the ideas to people.  And that means that you have to connect with people – that is the core purpose of all of these social tools.

    Connections create value – that is the core message of Nilofer Merchant in her book 11 Rules for Creating Value in the #SocialEra. Here is one of my favourite quotes from the book:

    We want innovation, but without experiencing failure. We want to embrace the new, but without risk. We want to act fast and fluid, but to maintain tight controls. We want to empower everyone, but retain decision rights for ourselves. We want to experiment, but we also want predictability. We want to be flexible to customer input, but remain ruthlessly efficient. We want to adapt, but we fear the death of familiarity.

    This is why it’s hard to go from being an 800-pound gorilla to a herd of nimble gazelles; an organization goes from being a centralized institution that competes through overpowering strength and scale to a set of relationships or interrelationships. Gazelles thrive and win by how they share power with one another. And, as a result, they can act fast, fluid, and flexible. For organizations, this is key to winning in the marketplace.

    As organisations, we win through connections. The same is true for people.

    Here is Shane Mac from his book Stop With the BS:

    All these apps, gadgets, buildings—everything for that matter—they don’t make me smile and think about how much I love what I do. The people I know do. It is the people and my relationships with them that really matter. Done. Simple as that. All we have in life are relationships, so we better start spending more time building new ones and rebuilding old ones. Build bridges, Re-build bridges, never Burn Bridges.

    It’s the relationships that matter. Hugh MacLeod nails it in his latest book Freedom is Blogging in Your Underwear:

    …all the internet is, as Doc Searls said, is a bunch of protocols that “allow us to get along.” Protocols allow us to talk to each other. The stuff in the middle, the stuff that separates us, the stuff that directly makes use of these protocols – hosting companies, web sites, blogging platforms, microblogging platforms, etc. – matter far less.

    You’re on one end of the wire. Just think about who’s on the other end of the wire, and what you can do for them. Worry less about the wire. Worry less about the shiny objects in the middle.

    Just worry about MAKING your own stuff, and the rest of the internet will look after itself.

    So there is your two-step guide to social success.

    Do awesome work.

    and

    Connect with people.

    The problem is that while these steps might sound simple, they’re not.  They take a lot of effort.  That’s what makes the shiny new objects so seductive – they look like shortcuts.

    Unfortunately, there are no shortcuts.  That’s why it’s still remarkable when you do awesome work and connect with people.

    I know that I still have a long way to go myself.  But now that we’ve connected, maybe we can do some of this awesome work together.

     

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  • What Will Make Nate Silver Blow Up? Political Innovation

    What Will Make Nate Silver Blow Up? Political Innovation

    One of the fascinating aspects of the U.S. election last week was the emergence of the poll aggregators.  These were the people that used stats to analyse all of the polls to make predictions about the races. Nate Silver ended up becoming the poster boy for this group when he took a lot of heat in the week before the election from people who didn’t like his predictions.

    His predictions which, as they did in 2008, ended up being remarkably accurate.  His analysis called all 50 states correctly in the Presidential election, and he was very close to getting the popular vote right as well.  His senate calls were also unbelievably good.

    Nate Silver

    Silver explains his approach in his excellent book The Signal and the Noise: Why so Many Predictions Fail, But Some Don’t.  In that, he talks about a number of different ways that people try to model the world, with cases looking at the stock markets, online poker, earthquakes, baseball careers, medicine, and, yes, elections.

    His approach is Bayesian.  This means that you start with a prediction about how an event will turn out, and then modify that prediction as new data arrives.  Throughout the process, you get the likelihoods of the outcomes occurring expressed as a percentage.  Silver doesn’t show his exact method, but he explains all of the variables that his model accounts for on his Methodology page.  Here is what he says about the approach in his book:

    Bayes’s theorem says we should update our forecasts any time we are presented with new information. A less literal version of this idea is simply trial and error. Companies that really “get” Big Data, like Google, aren’t spending a lot of time in model land.* They’re running thousands of experiments every year and testing their ideas on real customers. Bayes’s theorem encourages us to be disciplined about how we weigh new information. If our ideas are worthwhile, we ought to be willing to test them by establishing falsifiable hypotheses and subjecting them to a prediction. Most of the time, we do not appreciate how noisy the data is, and so our bias is to place too much weight on the newest data point. Political reporters often forget that there is a margin of error when polls are reported, and financial reporters don’t always do a good job of conveying how imprecise most economic statistics are. It’s often the outliers that make the news.

    Here are what Silver’s forecasts looked like throughout the year:

    Mark Coddington has a great summary of the discussion of what this means for politics, and Greg Satell tells us what it means for the pundits who got their election predictions so wrong (it’s not good!).  While I love the advance that this level of analysis represents, I’m more interested in what will make it go wrong.

    Models of financial markets blow up when we get events that are assumed to be extremely unlikely by the models.  What would make Nate Silver’s model blow up?

    These sophisticated models will blow up when the polls that they rely on for data all have systematic errors built into them.  This is what the people criticising Silver were arguing – that the polls were not using the correct distribution of voters, hence unskewedpolls.com.

    Contrary to some commentary, this approach wasn’t wrong, or unscientific.  It was actually based on a bet – that the distribution of voters would look more like what we had in 2004 than like 2008.  That’s not hugely unreasonable.  An incorrect distribution of voters polled is what caused the biggest poll screwup in history when the Literary Review predicted that Alf Landon would get 57% of the vote against Franklin Roosevelt. They had predicted the previous five presidential elections correctly.

    In reality, Roosevelt won 62% of the vote that election.  How did the Literary Review get it so wrong?  Their sample was based on telephone directories, magazine subscription lists, and club memberships.  The problem is that in 1936, all of those groups tended to be wealthier, so they were much more likely to vote for Landon.  The sample was wrong.

    The irony of unskewedpolls.com is that Silver’s method actually corrects for potential skew – that is where a lot of the uncertainty comes from in his estimate.  When he said that Obama had an 84% chance of winning going into the last week, it meant that in election simulations based on previous outcomes, 16% of the time there was enough variance in the poll data that Romney would have won.  The unskewing is built into the simulations.

    What could cause all of the polls to be so wrong that this model will break?  It will happen when someone comes up with a major innovation in campaigning.  One way to do this is to use Clayton Christensen’s disruption theory – which says that one way to disrupt in an industry is to target non-consumers (see this pdf from Business Innovation Factory).

    Check out this graph from Andrew Gelman (whose book Red State Blue State is another must-read on the statistics of elections):

    The number of eligible voters that didn’t vote at all last week was about 40%.  That’s a LOT of non-consumers.  If their participation rate were to spike, and if they tended to vote differently than everyone currently voting, it would be unprecedented.

    This is the sort of thing that could cause all of the polls to be systematically wrong.  And if the polls are systematically wrong in a way that the models don’t anticipate, the aggregating models will also be wrong.  That’s how Nate Silver’s model could blow up.

    Of course, this is not a strategy that you could execute by starting a couple of months before the election when your candidate is already in trouble.  It would take a fair bit of planning.  But this is the sort of thing that could lead to a major disruption in U.S. politics.

    This type of modelling works really well as long as the underlying dynamics of a system remain relatively stable.  They don’t work as well when something new happens.

    Political innovation is one thing that can cause such a disruption.  If you want to develop an effective third party in the U.S., or jump-start one that’s not doing so well, I’d be looking at the current non-consumers of voting.  There sure are a lot of them.
    Photo of Nate Silver by JD Lasica used under a Creative Commons license.

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