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An interesting bit from the article was that he talks about 'sunk cost' with the defining example of ordering a dessert when you're nearly full and feeling comp

by matt_s 8y ago

An interesting bit from the article was that he talks about 'sunk cost' with the defining example of ordering a dessert when you're nearly full and feeling compelled to finish it. > There was an economist once early in my career who said to me, “You know, if you’re right, what am I supposed to do? What I know how to do is solve optimization problems.” A career economist not wanting to change their ways because they have spent a career doing things when presented with a possible outcome that maybe those things didn't matter as much. Also: > If you think of companies that have come and gone, like Kodak, which invented the digital camera, but they had an almost-monopoly in film, and didn’t really think this digital thing would go anywhere. Blockbuster Video, which came along and put tens of thousands of mom-and-pop video stores out of business, only to be put out of business by Netflix. These are human behaviors to recognize - sunk cost. It can sink a company. Something to be wary of as a startup grows past adolescence and into adulthood.

RickS 8y ago
My understanding with Kodak is that they invented digital tech far earlier than expected (pre 80s) and hushed it to avoid cannibalizing their existing film business. I suspect Blockbuster behaved similarly. It's hard to kill the golden goose. Still examples of the sunk cost fallacy, for sure, but it feels like "lack of realization" is perhaps the wrong attribution.
- matt_s 8y ago
  In a way, it is sunk cost all the way down. Those companies' entire existance - supply chain, manufacturing, down to identity of what they do was so etched into everything it was hard to change.
  - nvarsj 8y ago
    It happens all the time with large companies. Motorola is another, mostly forgotten example. They invented digital radios for cell phones, but they were so entrenched in analog radios at the time that they gave the technology away to a small company called Nokia. A few years later, they collaborated with Apple on an iTunes equipped cell phone, and shared their own internal designs of a full screen phone. I think this phenomenon is one of the few ways a big company can die.
- tonyedgecombe 8y ago
  I don't think Kodak did hush it, they had some pretty advanced digital cameras early on, they were pioneers. The problem was they were a film company not a camera company, those businesses are so distinct they were never likely to cross from one to the other. They would have been better ignoring the whole digital camera thing and looking for other opportunities where they could leverage their skills and assets. Or just wound down gracefully.
  - danieltillett 8y ago
    Kodak saw what was coming ahead of everyone else (they owned the digital camera field from the mid 1970 onwards), but it did them no good. The problem was there just is not as much money in digital photography compared to chemical photography. Kodak is a classic example that no amount of foresight will save you when the entire industry changes underneath you.
tynpeddler 8y ago
Sometimes it's a mistake to think about how these companies could pivot to adapt to new technology. A major feature of capitalism is that companies are (relatively) unimportant and it's the market and society that really matter. Without companies collapsing, it can be really difficult to recycle the manpower and capital invested in obsolete business models. Blockbuster's organizational, legal and physical infrastructure was wholly devoted to video rental via physical stores. Decommissioning those organizational components and creating the systems necessary to spin up and run an online video portal would have required changes in the company so massive that it would effectively be a different company. Even if Blockbuster had bought Netflix early on, Blockbuster would have been left running an organization they did not understand in a market that only vaguely resembled something it was familiar with. Even worse, and totally contrary to modern management theory, management skills alone are necessary but not sufficient to operate a growing and dynamic company on the forefront of technology. The entire management organization of Blockbuster would have been totally unequal to the task of operating Netflix competently.
- azernik 8y ago
  This is, by the way, a problem I see with a lot of public policy - in a market system, what's good for companies is not necessarily what's good for the system. Steve Eisman puts this well in [1] when talking about why he's investing in bank stocks even though he thinks prospective rollbacks in Dodd-Frank reforms are a bad idea: "There's two issues. There's what I think about the financial system and what I think about financial stocks, and the two don't necessarily correlate." [1] https://youtu.be/NJodqhzqPKQ?t=4m10s https://youtu.be/NJodqhzqPKQ?t=4m10s
  - ctchocula 8y ago
    I liked the Steve Eisman character from The Big Short, but I was disappointed his prediction bank stocks would do well didn't play out. KBE: 44.49 Jan 30, 2017, 47.82 July 11, 2018 = 7.48% price growth (I couldn't find numbers for total return and too lazy to compute from distribution history) VFAIX: 20123 Jan 30, 2017, 23569 July 11, 2018 = 17.1% total return VFIAX: 22291 Jan 30, 2017, 27729 July 11, 2018 = 24.4% total return KBE: SPDR Bank ETF VFAIX: Vanguard Financial Index VFIAX: Vanguard S&P 500
randomdata 8y ago
It can also sink individuals. I don't know how many times I have watched people fail to make a living in a dead-end career because "it is what I went to school for".

by matt_s 8y ago

RickS 8y ago

My understanding with Kodak is that they invented digital tech far earlier than expected (pre 80s) and hushed it to avoid cannibalizing their existing film business. I suspect Blockbuster behaved similarly. It's hard to kill the golden goose. Still examples of the sunk cost fallacy, for sure, but it feels like "lack of realization" is perhaps the wrong attribution.

matt_s 8y ago
In a way, it is sunk cost all the way down. Those companies' entire existance - supply chain, manufacturing, down to identity of what they do was so etched into everything it was hard to change.
- nvarsj 8y ago
  It happens all the time with large companies. Motorola is another, mostly forgotten example. They invented digital radios for cell phones, but they were so entrenched in analog radios at the time that they gave the technology away to a small company called Nokia. A few years later, they collaborated with Apple on an iTunes equipped cell phone, and shared their own internal designs of a full screen phone. I think this phenomenon is one of the few ways a big company can die.
tonyedgecombe 8y ago
I don't think Kodak did hush it, they had some pretty advanced digital cameras early on, they were pioneers. The problem was they were a film company not a camera company, those businesses are so distinct they were never likely to cross from one to the other. They would have been better ignoring the whole digital camera thing and looking for other opportunities where they could leverage their skills and assets. Or just wound down gracefully.
- danieltillett 8y ago
  Kodak saw what was coming ahead of everyone else (they owned the digital camera field from the mid 1970 onwards), but it did them no good. The problem was there just is not as much money in digital photography compared to chemical photography. Kodak is a classic example that no amount of foresight will save you when the entire industry changes underneath you.

tynpeddler 8y ago

Sometimes it's a mistake to think about how these companies could pivot to adapt to new technology. A major feature of capitalism is that companies are (relatively) unimportant and it's the market and society that really matter. Without companies collapsing, it can be really difficult to recycle the manpower and capital invested in obsolete business models. Blockbuster's organizational, legal and physical infrastructure was wholly devoted to video rental via physical stores. Decommissioning those organizational components and creating the systems necessary to spin up and run an online video portal would have required changes in the company so massive that it would effectively be a different company. Even if Blockbuster had bought Netflix early on, Blockbuster would have been left running an organization they did not understand in a market that only vaguely resembled something it was familiar with. Even worse, and totally contrary to modern management theory, management skills alone are necessary but not sufficient to operate a growing and dynamic company on the forefront of technology. The entire management organization of Blockbuster would have been totally unequal to the task of operating Netflix competently.

azernik 8y ago
This is, by the way, a problem I see with a lot of public policy - in a market system, what's good for companies is not necessarily what's good for the system. Steve Eisman puts this well in [1] when talking about why he's investing in bank stocks even though he thinks prospective rollbacks in Dodd-Frank reforms are a bad idea: "There's two issues. There's what I think about the financial system and what I think about financial stocks, and the two don't necessarily correlate." [1] https://youtu.be/NJodqhzqPKQ?t=4m10s https://youtu.be/NJodqhzqPKQ?t=4m10s
- ctchocula 8y ago
  I liked the Steve Eisman character from The Big Short, but I was disappointed his prediction bank stocks would do well didn't play out. KBE: 44.49 Jan 30, 2017, 47.82 July 11, 2018 = 7.48% price growth (I couldn't find numbers for total return and too lazy to compute from distribution history) VFAIX: 20123 Jan 30, 2017, 23569 July 11, 2018 = 17.1% total return VFIAX: 22291 Jan 30, 2017, 27729 July 11, 2018 = 24.4% total return KBE: SPDR Bank ETF VFAIX: Vanguard Financial Index VFIAX: Vanguard S&P 500

randomdata 8y ago

It can also sink individuals. I don't know how many times I have watched people fail to make a living in a dead-end career because "it is what I went to school for".