This last year has given us some momentous news: eco-disaster with the Gulf Oil spill, devastating earthquakes in Haiti Chile, and Japan, threat of nuclear meltdown, riots in the Middle East, and sluggish recovery from a financial crisis. Economic, ecological, urban, energy, and political systems have all been pushed beyond their presumed limits.
It might be that global news and the Internet have simply brought events that decades ago would have been marginalized in the back pages of our newspapers to the forefront of our attention, resulting in a sense of perpetual apocalypse. Or it could be that the modern world has been overshadowed by a flock of Black Swans.
Nassim Taleb's bestselling book, The Black Swan, tells the story of how experience only predicts the future as long as systems are stable. Of course, the defining events shift the system boundaries rather than stay within them. (Taleb tells the story of the turkey convinced that he's loved and cared for and that his owners want the best for him until the day before Thanksgiving when ALL of his experience is suddenly made meaningless and his world view is shattered. The events of 9-11 and the Great Recession, of course, are events that change what is predictable.)
Our modern world may just be so dependent on interdependent, ultimately fragile systems that a parade of news like we've seen in the past year is inevitable. Even if the probability of any one system collapsing or causing destruction is only .1%, we live in a world so populated by these systems that the probability of ONE system reaching a tipping must be close to 100%. Somewhere, a political system will have reached a tipping point and a people will be thrown into violent clashes and social turmoil. An energy system will either become expensive, unstable, or blow up. And the list goes on.
This is a time of perpetual apocalypse for a simple reason: we depend upon systems that we still understand only dimly and can predict and manage with even less confidence.
Isn't it time to invest massive amounts of research money into the development of better models for understanding and managing these systems? The world will not become less complex, but only more so. If we have to live with Black Swans, perhaps we can at least get them to fly in formation.
R World (Ron Davison muses aloud)
Showing posts with label probabilities. Show all posts
Showing posts with label probabilities. Show all posts
11 July 2009
Betting on Google (or Why Chrome OS Is a Lottery Ticket Worth Scratching Off)
The guys at Google came up with a secret sauce in the form of algorithms that efficiently and quickly search the Internet. They understand probabilities. And that might be as good a reason as any to bet on their continued success.
Google has a fascinating policy of letting programmers work one day a week – 20% of their time – on their own projects. This has already translated into popular products like gmail and google news. Some projects come from central management and some come from the cubicles. This is not much different from successful economies where some projects (e.g., NASA or the early Internet) come from centrally-planned government programs and some come from unexpected sources like the garage or the back of a cocktail napkin.
One of the insights to come from the world of probabilities and into the world of finance in the last century is the notion of the high probability of low probability events. The lottery is the simplest example. The odds of any ONE person winning are incredibly low. Buying a lottery ticket to win money is almost like buying an airplane ticket to commit suicide. The odds are terribly low for any one person to win and yet the odds that SOMEONE will win are incredibly high.
Venture capitalists differ greatly from bankers in this regard: they take an equity position in success and know that only a small percentage of their investments have to become the next Yahoo or … well, Google in order to offset the many investments that don’t pay off. They don’t embrace failure but they know it is inevitable.
Google has seemed to realize that a corporation has a huge advantage over a venture capitalist in this game. A corporation can provide a risk free environment in which individuals can start projects that might become market successes or merely technical successes or might never become successful. The corporation can provide the infrastructure (e.g., HR, marketing, etc.) that can absorb so much time from the entrepreneur. And if one of these projects like gmail or google news should become successful, they offset the many projects that don't come to fruition.
Further, even the failures are never clearly failures. If an employee learns a new skill or gains a new market insight from trying something new, that can be applied to the next venture. And with everyone taking on their own project, the entire organization has a vastly different mindset in regards to projects. Thinking about how to create and deliver products to market becomes pervasive. This sort of culture can be more valuable than any one project.
All that to say that the many critics who are already pointing out why Google Chrome OS – Google’s attempt to capture Operating System market from Microsoft – will fail could be right. The odds of this ONE product becoming a success are pretty low. (But it is still a good bet. Microsoft gets about $15 billion a year in revenue from Windows.) But each time they try another venture like this, the odds of generating profit to match what's generated by their search engine go up.
Oh, and one other thing. I remember when Microsoft’s Excel and Word were obvious failures. It took some time before they seemed like something other than cute substitutes for the seemingly invincible Lotus 1-2-3 and Multimate Word Processor. The fact that gmail does not have as much market share as Outlook does not mean it will not eventually have more. It is rarely the released product that conquers the market – it is usually the evolved product that owns a market.
It is true that lottery tickets are unlikely to pay off. It is also true that only people who buy them ever win the lottery.
Google has a fascinating policy of letting programmers work one day a week – 20% of their time – on their own projects. This has already translated into popular products like gmail and google news. Some projects come from central management and some come from the cubicles. This is not much different from successful economies where some projects (e.g., NASA or the early Internet) come from centrally-planned government programs and some come from unexpected sources like the garage or the back of a cocktail napkin.
One of the insights to come from the world of probabilities and into the world of finance in the last century is the notion of the high probability of low probability events. The lottery is the simplest example. The odds of any ONE person winning are incredibly low. Buying a lottery ticket to win money is almost like buying an airplane ticket to commit suicide. The odds are terribly low for any one person to win and yet the odds that SOMEONE will win are incredibly high.
Venture capitalists differ greatly from bankers in this regard: they take an equity position in success and know that only a small percentage of their investments have to become the next Yahoo or … well, Google in order to offset the many investments that don’t pay off. They don’t embrace failure but they know it is inevitable.
Google has seemed to realize that a corporation has a huge advantage over a venture capitalist in this game. A corporation can provide a risk free environment in which individuals can start projects that might become market successes or merely technical successes or might never become successful. The corporation can provide the infrastructure (e.g., HR, marketing, etc.) that can absorb so much time from the entrepreneur. And if one of these projects like gmail or google news should become successful, they offset the many projects that don't come to fruition.
Further, even the failures are never clearly failures. If an employee learns a new skill or gains a new market insight from trying something new, that can be applied to the next venture. And with everyone taking on their own project, the entire organization has a vastly different mindset in regards to projects. Thinking about how to create and deliver products to market becomes pervasive. This sort of culture can be more valuable than any one project.
All that to say that the many critics who are already pointing out why Google Chrome OS – Google’s attempt to capture Operating System market from Microsoft – will fail could be right. The odds of this ONE product becoming a success are pretty low. (But it is still a good bet. Microsoft gets about $15 billion a year in revenue from Windows.) But each time they try another venture like this, the odds of generating profit to match what's generated by their search engine go up.
Oh, and one other thing. I remember when Microsoft’s Excel and Word were obvious failures. It took some time before they seemed like something other than cute substitutes for the seemingly invincible Lotus 1-2-3 and Multimate Word Processor. The fact that gmail does not have as much market share as Outlook does not mean it will not eventually have more. It is rarely the released product that conquers the market – it is usually the evolved product that owns a market.
It is true that lottery tickets are unlikely to pay off. It is also true that only people who buy them ever win the lottery.
02 November 2007
5 Change in Thinking - the Monty Hall Paradox
This Monty Hall Paradox is counter-intuitive. You're likely to win money betting on it with friends, a win-win because it'll teach them to look for relationships and earn you money.
Basically, get yourself three cards and another person. One should represent the dream job and the other two can represent your unemployment check. One person should play game show host, the other contestant. After the person chooses one card, lift up one of the cards she didn't choose - showing her the unemployment check. Now, ask her if she'd like to switch from the first card she picked to the one you didn't turn over.
This simulation is set up to allow a group of people to choose whether they will always stay with their first choice, always switch, or flip a coin to decide whether or not to switch. The narration in the video assumes that you've done this and run 20 simulations testing each rule, or scenario. Note that the most common belief - the , it doesn't matter so I'll flip a coin belief - actually falls into the category of self-fulfilling prophecy. If you flip a coin, you really do get 50-50 results. But if you challenge what you think you know, you'll probably learn something new.
Basically, get yourself three cards and another person. One should represent the dream job and the other two can represent your unemployment check. One person should play game show host, the other contestant. After the person chooses one card, lift up one of the cards she didn't choose - showing her the unemployment check. Now, ask her if she'd like to switch from the first card she picked to the one you didn't turn over.
This simulation is set up to allow a group of people to choose whether they will always stay with their first choice, always switch, or flip a coin to decide whether or not to switch. The narration in the video assumes that you've done this and run 20 simulations testing each rule, or scenario. Note that the most common belief - the , it doesn't matter so I'll flip a coin belief - actually falls into the category of self-fulfilling prophecy. If you flip a coin, you really do get 50-50 results. But if you challenge what you think you know, you'll probably learn something new.
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