13 ms·

If Everyone Else is Such an Idiot, How Come You're Not Rich?

261 points by CWuestefeld 15y ago

joebadmo 15y ago
One of the important points I've heard Clay Christensen make is that incumbent companies often get destroyed (disrupted) by small players not because they're incompetent, or even because they're making bad decisions. Each decision along the way seems perfectly rational. Christensen frames it ultimately as a problem of measurement, that people are measuring the wrong thing, therefore optimizing for or solving the wrong problem. I think this article correctly points out that Hastings isn't stupid, but he's in a tight spot, just because of the circumstances.
- runjake 15y ago
  Seems it's all too common that those who are watching the metrics, forget that the metrics change.
  - joebadmo 15y ago
    Yes, another, maybe even more important point that Christensen makes is that smart people get sucked into these metrics not because they haven't been educated well enough in the tools that business school programs give them, but because they fail to think critically, to ask the right questions, and to form the correct narratives. And this is a criticism that applies not just to business, but to engineering, product development, design, etc. You can be the best problem solver in the world and it won't help if you're solving the wrong problems. And this sort of thinking is something that a broader liberal arts education can at least encourage, which is why I'm still a proponent of the liberal arts, and wish people would find more value in them. (Yes, I was a Comp Lit major.) (Obviously, it has to be a well-executed program in any case, and an unserious student isn't going to learn anything in any case, either.)
  - ChuckMcM 15y ago
    Or to put it slightly differently, the act of measuring a system changes it. Pretty much any system, but for businesses this is especially true. As you measure, you respond to the measurements, and the response ends up being reflected in future measurements. Sometimes the new system created by this feedback path heads off into the hinterlands like a glider flying off the gameboard in Life. A real world example was BYTE magazine. They were polling their readers to see what kind of machine they owned, more and more owned IBM PCs, so they started doing more and more IBM PC articles, which attracted more readers who had IBM PCs. But it left out in the cold people who came to BYTE for non-PC articles (who complained loudly). The key was that the metric 'what computer do you own' did not reflect accurately 'why are you reading this magazine' and yet it was driving what the magazine covered. I'm a big fan of metrics, but I'm also a strong believer in re-assessing periodically how changes in response to a metric have changed the business and measuring that too.
    - dredmorbius 15y ago
      That's a sampling error / selection bias. The were defining (implicitly) their target market as their existing market. Unfortunately, this was serving not to expand but restrict the interest areas within their existing subscriber base. This is a very common mistake. A canonical example would be the "when should we hold this meeting" question ... asked of a meeting's attendees (the answer will almost certainly be biased toward "when we're holding it now").
- InclinedPlane 15y ago
  Or they're measuring or looking at things in the wrong way. It's easy to see the peaks and the valleys in a company but the truly important points are the inflection points. If a big company waits until a small company has taken away 10% of its business it may still be too late to save the company, depending on how long it usually takes to change momentum. Often the reasons for differing degrees of growth come down to different fundamentals. A big company may not even realize that they've screwed themselves over by evoparating all of the best talent out of the company through boneheaded corporate decisions until revenue growth stagnates and then people start to wonder why they can't execute as well as they used to.
- dredmorbius 15y ago
  Even more grossly significant than this is the fact that "logical and/or beneficial at small / individual / short-term scale" need not equate to a best solution or alternative for a population at large or long-term timescale. A classic case in economics is explained very clearly in Mancur Olsen's Logic of Collective Action, which explains why group-based decisions are often at odds with the interests of the group as a whole. Another is Arrow's Impossibility Theorem, which hods that there is no method for constructing social preferences from arbitrary individual preferences. In other words, there is no rule, majority voting or otherwise, for establishing social preferences from arbitrary individual preferences -- so long as you also require unrestricted domain, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives. In other words: democracy not only may not, but cannot deliver an optimum outcome. There are many other such paradoxes and conflicts, many of which I'm becoming increasingly convinced undermine key and manadatory assumptions of a properly functioning free market economy. What changes might fix these is of course a rather longer discussion....
  - robrenaud 15y ago
    Is giving up the independence of irrelevant alternatives that bad?
    - dredmorbius 15y ago
      It's not that irrelevant alternatives are improperly ranked. It's that introducing irrelevant alternatives changes the ranking of relevant alternatives: http://en.wikipedia.org/wiki/Independence_of_irrelevant_alternatives http://en.wikipedia.org/wiki/Independence_of_irrelevant_alte... E.g.: in an election between La Roge and Grebe Sough, if Handle Parr's decision to run changes the outcome between Roge and Sough, you have a dependence on an irrelevant alternative.
  - rgraham 15y ago
    Winston Churchill was clear in his writing that America could not be trusted as an ally in anything that required steadfast determination over longer timelines. The winds of democracy make America a fickle ally. See 'The Gathering Storm.' Public schools don't often teach any of the shortcomings of a democratic society.
- aaronbrethorst 15y ago
  The best book I've read in a long time: http://www.amazon.com/Innovators-Dilemma-Revolutionary-Business-Essentials/dp/0060521996 http://www.amazon.com/Innovators-Dilemma-Revolutionary-Busin...
  - nextparadigms 15y ago
    I still think it's the best/most insightful/most useful business book ever. The implications of truly understanding that book and disruptive innovation can be huge if you're a company founder or a CEO, Product Manager, etc. It's not so easy to internalize. I'm sure a lot of CEO's have read it by now, but I can barely spot some that follow it.
    - mkup 15y ago
      Btw, what do you think about Microsoft trying to apply its desktop OS, descendant of Windows NT, to tablets? Aren't tablets disruptive innovation to desktops (in Christensen terms) and therefore the entire plan is doomed? It looks to me they are making classic management mistake like ones the Christensen's book is full of.
      - aaronbrethorst 15y ago
        Rumor has it right now that they're dropping the Desktop 'app' entirely from ARM tablets. FWIW, every time I run across a friend who still works there, I urge them to read this book. They usually have already.
- _delirium 15y ago
  I'm sure someone has done a study trying to account for it, but it seems you also have to take into account that the small companies, taken in aggregate, are trying out tons of things simultaneously, most of which will fail: often one big incumbent is being besieged by hundreds of startups who each think they have a new angle. So even though one small company might eventually win and look like geniuses who did it on a shoestring budget, the machine that produced them, so to speak, involved hundreds of companies and a lot of resources all gunning for the incumbent in parallel.
- firebones 15y ago
  Taking Stanford's Machine Learning course this fall has given me a couple of new analogies to explain the innovator's dilemma. Think of business strategy as the learning hypothesis, and the learning algorithm seeks to increase profits by minimizing the error between what value they capture and the available dollars in the market. Successful companies walk the surface, making stepwise reductions in this error rate. This often leads to a perfectly rational descent to a local optima. These local optima can be very deep and very profitable, which makes it even more difficult to turn attention to steps that will introduce loss and variance in order to find a more profitable (or global) optima. "Randomizing" the starting points (the effect of hundreds of startups in a market) can increase the likelihood of a better optima being found, as can large companies attempting the same with lots of small bets (e.g., 20% time) which then are cultivated using the proven learning algorithm (i.e., management approach.) True visionaries are able to hasten the process by scouting out where these new optima are likely to reside.
bryanh 15y ago
Wealth does not necessarily correlate with intelligence.
- cek 15y ago
  And intelligence does not necessarily correlate to good decision making (or business acumen).
  - ggwicz 15y ago
    And "business acumen" has nothing to do with good decision making.
    - sskates 15y ago
      Isn't that what business acumen is? The ability to make good business decisions? http://en.wikipedia.org/wiki/Business_acumen http://en.wikipedia.org/wiki/Business_acumen
- DevX101 15y ago
  I'd be willing to bet that self-made wealth from non-politicians correlates strongly with intelligence.
  - weff 15y ago
    Also perseverance and luck.
    - glimcat 15y ago
      Intelligence already likely correlates well with being a stubborn bastard. It helps with the part where you obsessively study topics everyone else thinks are too boring or inaccessible.
      - _delirium 15y ago
        Most of the most intelligent people I know are actually pretty bad at monetizing that, though, in part precisely because they're way too distracted by the constant drive to learn new things (rather than picking a few and building a solid market niche), and in part because many seem more interested in the mental challenge of understanding something than the actual profits from monetizing that understanding.
onedognight 15y ago
> Hastings wanted to get the DVD-only customers off of Netflix so that he wouldn't have to pay for streaming rights they weren't using (or paying for). I've heard this argument multiple times now, but it flies in the face of the much more logical argument made in the very next paragraph that the content companies want to replace their cable income (no matter what). Meaning in this case if he splits the company in two then they double their prices on the streaming. Given this, splitting seems like a big step for a temporary reprieve.
27182818284 15y ago
It was a good plan executed too quickly. First price increase to make mail less attractive, then split the companies down the road, then get rid of your part with mailing DVDs completely and then truly become the Netflix company you want to be. The only thing they seemed stupid about was how fast they could execute those steps. They did it too quickly and it unnerved customers and investors.
BrokerChange 15y ago
A company in the 70's sold 500 of it's restaurants (it's main source of revenue) and the "pundits" called them crazy. The stock took a hit but the CEO remained on course. He stuck to his guns. 30 years later, it is one of the most successful companies in its industry. You may have heard of them- Walgreens. The CEO of Netflix is not dumb. He killed Blockbuster. He knew what he was doing when he split the company to save the future of his company. His only mistake was not sticking to his guns.
- pyre 15y ago
  That seems like a bit of confirmation bias. You're arguing that Neflix can do no wrong because: 1) They took out a large incumbent competitor, therefore it's impossible for them to make bad decisions. 2) A single company in the past made an unpopular decision that worked out well for them. I could similarly say that Apple firing Steve Jobs was the best thing that they ever did. Just look at them today!
  - nuclear_eclipse 15y ago
    I imagine there are quite a few people who would agree with you; had Jobs stayed on at Apple, he wouldn't have learned the hard-won lessons from starting Pixar and NeXT.
    - ceejayoz 15y ago
      Yes, but the lesson learned should be "sometimes things unexpectedly wind up working out well", not "fire your CEO and you too could become the highest market cap company in the world"...
    - tsunamifury 15y ago
      Interesting correction: George Lucas actually started Pixar, not Steve Jobs.
  - BrokerChange 15y ago
    I think you're missing my point. Netflix taking out BlockBuster does not prove they can do no wrong, merely that Reed Hastings a perfectly capable CEO, and smarter than the media would have you believe. If you read about the history of the company, they started by SELLING DVD's. They barely made any money renting them. But, Reed Hastings made the decision to split that company because it wasn't the future. His 10,000 customers complained but he stuck to his guns. And look at them now. The largest streaming company in the world. He was placed in the same situation this past year. Stick to a business model with no future (DVD's-a dying medium), or split the company to improve negotiating terms for streaming deals(the future) and hopefully sell off "Quickster." It was a brilliant plan that poised Netflix for the next generation of digital distribution. Instead they backed down and changed direction, looking weak in the process.
alexholehouse 15y ago
I think this boils down to the fact that if you look at historic proceedings the outcome seems obvious, because the details which make it obvious are the ones reported. There is a total bias to write what looks like a progressive narrative, when the reality is usually far from it. i.e. A->B and B->C then CLEARLY A->C. Except when A went to B, A could also have gone to D, E, or F, but you don't write about that, because clearly covering all your bases would be ridiculous, and it's generally difficult to evaluate the likelihoods of any options except B, where the likelihood of B is 100%.
nostromo 15y ago
I think the issue is more about timing your business decisions, not making smart or stupid ones. Netflix is worried about the end of physical media, as they should be. They are looking 3 or 5 years down the road and trying to position the company to be successful then (as well as today). However, for the average customer today, DVDs are still very important. And for the average investor, next quarter's earnings are much more important than earnings in 2015. I think Netflix made the right decision for next year, or maybe 2013 -- but made it too early; they got ahead of their customers. (An easy thing to do when you live in Silicon Valley.)
- WalterBright 15y ago
  >And for the average investor, next quarter's earnings are much more important than earnings in 2015. I hear this all the time, and it's just not true. I see stock moves all the time based on the prospects for distant future earnings - Amazon is a prime example. So is any stock with a high P/E.
  - chollida1 15y ago
    This can be true: > I see stock moves all the time based on the prospects for distant future earnings - Amazon is a prime example. So is any stock with a high P/E. and this statement can also still be true: >And for the average investor, next quarter's earnings are much more important than earnings in 2015.
    - WalterBright 15y ago
      Investor sentiment is accurately reflected in the stock price. If investors were incorrectly letting short term thinking dominate their buy/sell activity, then a long term investor should be able to make higher-than-market investment returns by betting against those incorrect short term thinkers. I don't see this happening, hence I don't buy the idea that investor sentiment is incorrectly biased towards short term thinking. Consider Amazon again - its stock zoomed for many years after its IPO and despite losing vast sums every quarter and many predictions that it would never climb out of those losses. Obviously, investors were pricing the stock based on a very long term outlook (and were amply rewarded for their prescience).
mikeash 15y ago
I can think of a couple of counterarguments. First, the video rental business was ripe for disruption once DVDs became sufficiently popular. Once you had a video medium that was small enough to cheaply ship through the mail and durable enough to keep in circulation for a while, it was inevitable that somebody would challenge the incumbent brick-and-mortar stores and win. Netflix may have simply been in the right place at the right time through sheer luck. Second, intelligence isn't a single thing. It's a blanket term for a huge collection of disparate characteristics. The intelligence which lets me write code at a level well beyond most of the population is not the same kind of intelligence that would make me succeed in business. Perhaps the kind of intelligence that lets a person build a successful business from scratch is not the same kind that lets a person sustain an existing large business. I think the article makes a good point, that we tend to ignore complication and subtlety in favor of simplistic explanations like "he's stupid", but I think it goes way too far in the other direction. Rather than assume the CEO is stupid because his company is having trouble now, the author assumes the CEO is smart because his company had success in the past, which is no better.
sinzone 15y ago
You're assuming that all the smartest want to become rich. Maybe not.
- daenz 15y ago
  I noticed that too. One explanation could be that many really smart people understand that "the game" is inherently stupid/degrading/unimportant and would rather not waste their intelligence and lives fighting other people to "win" it. Maybe they want to further human understanding in peace and not be a tall poppy that gets cut down all the time[1] http://en.wikipedia.org/wiki/Tall_poppy_syndrome http://en.wikipedia.org/wiki/Tall_poppy_syndrome
- sandee 15y ago
  Yes. Ask Stallman, Linus et al
  - _delirium 15y ago
    Also all the old Bell Labs people who're now at Google. I'm sure Rob Pike could get more money than he does at Google if he wanted to go into the startup game, but he isn't interested.
tsunamifury 15y ago
After working in finance I've come to believe that most wealth is accumulated through brute force. You get money by using leverage to take other peoples money -- its actually very simple from an intelligence perspective. It may take some genius to gather the resources necessary to forcefully gather wealth, but the actual gathering of it is not a matter of 'smarts'.
- codyrobbins 15y ago
  No. Perhaps most of the wealth that you saw, working in finance, may have come from brute force (although I would disagree with that claim, prima facie, as well); but that doesn’t mean most wealth is accumulated that way. You get money by using leverage to take other peoples money No. That theory is called mercantilism, and we figured out that it’s wrong about three hundred years ago. You get money by bringing about the manifestation of value into the world. People who make money via leverage are doing that in a very specific way, but it’s far from the only way to do it.
  - jbooth 15y ago
    1949 was 300 years ago?
    - codyrobbins 15y ago
      1700 was three hundred years ago, when John Locke pointed out in his Second Treatise that the amount of wealth in the world is not fixed.
      - mindblink 15y ago
        Interesting... I would be like to look up the direct quote. Would you have the chapter or section reference?
        jerf 15y ago
        You need a citation that some guy once said that the amount of wealth in the world is not fixed? What would the world look like if it weren't true? There's no reasonable or useful definition of wealth for which the world of today has exactly as much wealth as the world of 10,000 years ago. (Or 1,000, or 100. 10, well, that can be successfully argued either way. It's not been a great 10 year run.)
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sskates 15y ago
If you've ever run a company or any sort of organization, you'll realize that walking around blind is the default. It takes effort to get information on what's going on. Because you can't wait forever for perfect information, you end up taking calculated risks like Netflix did with Qwikster where it's not clear in advance if it will pan out. As the OP realized, this results in Monday morning armchair quaterbacking from people who ask "why didn't they make the right decision in advance, are they stupid or something?" When in fact, no, they are not stupid, they just don't have perfect information about what will happen. Incidentally, this is the largest advantage of startups- the cost of a risky bet is much lower because you don't have to risk hemorrhaging hundreds of thousands of customers each time you make a bet. As a result, you can take many more risks and come to a better solution more quickly. edit: downvotes? what?
- balsam 15y ago
  it should be interesting to us, for you and only you to be able to see who downvoted you.
  - davidw 15y ago
    That would be a fantastic way to promote "revenge" voting.
    - Mz 15y ago
      Also a fantastic way to promote grudges. People who have been "publicly" ugly tend to want to justify it and are thus inclined to continue to be ugly as "proof" that they were right to do so to begin with. I would rather people have the chance to change their mind about me and move on. I have certainly changed my mind about some people and am less inclined to downvote their remarks than I once was (which sounds more personal and ugly than I mean it -- I am trying to say that getting to know someone better can change how you interpret something they have said). First impressions aren't always accurate.
      - balsam 15y ago
starwed 15y ago
Reminds me of the following Terry Pratchett quote: >A European says: "I can't understand this, what's wrong with me?" An American says: "I can't understand this, what's wrong with him?" >I make no suggestion that one side or other is right, but observation over many years leads me to believe it is true. This post is about exactly those two attitudes, though here it has nothing to do with what side of the Atlantic you're on!
zobzu 15y ago
Just to take the headline without the context: being rich and being smart are not necessarily synonymous and one never required the other. In other words, smart people often do NOT aim to be rich. They have more interesting goals and they usually either sacrifice "common wealth" for them, or are just ok with a decent amount of money. Money's nothing. Money's not a goal. Never been. Smart evil people go after power control and knowledge. Money is a side effect. Dumb people only go after money (which comes and go, really).
- marknutter 15y ago
  Well, smart people also choose to pontificate about topics on which they consider themselves smart. If your aim isn't acquiring wealth, you may not be the best authority on the topic of acquiring wealth.
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sanjiallblue 15y ago
This article ignores a very central tenet of becoming rich: Luck. Most people didn't get in the position they were because they were geniuses. Few individuals fill that role. They get there because they were lucky. Bill Gates certainly wasn't the best programmer of his day and he most definitely wasn't the most adept businessman and he wasn't the most brilliant thief. He was lucky. He turned out a product that everyone wanted at exactly the right time. Now, as businesses have evolved alongside technology there certainly is slightly less luck (I would personally contend only slightly). But the founders of Netflix probably weren't the first people to think about mailing rental DVDs to customers, they just had the money and the capital to make it happen when the market was just enough ready to accept their existence. They developed expertise in that particular business, mailing DVDs to customers, and killed an entire other industry (for all intents and purposes) in the process. How the author relates this to their streaming model (what was motivated the change) is baffling to me. Her entire premise seems to try and imply that the wealthy are somehow more intelligent and that, pardon the frankness, is fucking idiotic. Netflix didn't become a giant through streaming content. They parlayed DVD money into a streaming business because the whole industry was making a very obvious shift in that direction. I mean hell, if they were half the geniuses that the author makes them out to be they wouldn't have selected Silverlight as the backbone of their service. All I saw was a group of lucky people in one industry try to jump into another industry that appeared deceptively similar, and just because Hastings is their CEO doesn't make me think he's intelligent. If anything he's demonstrated that he doesn't fully understand the economics of splitting media. The Quickster Announcement came off to me as a very stubborn businessman, tricked into thinking himself intelligent and a captain of industry by his fabulous luck, making a rash decision to vindicate a strong opinion he had behind closed doors. The only thing I can take from this article is that money does a very good job of making the rich think that they're intelligent.
- nazgulnarsil 15y ago
  this belief pays little if any rent.
  - sanjiallblue 15y ago
    I beg to differ, but I'm sorry if you haven't had the same luck.
chippy 15y ago
The rich don't think everyone else is an idiot - they think everyone else as marks, johns, consumers, customers.
CPlatypus 15y ago
This same principle often applies to reading others' code. It's common to look at it, see something inscrutable, and decide that the author was an idiot. Then you try to rewrite it, trip over all the same bugs that the author had learned to avoid, and maybe - if you're smart and honest with yourself - accept that you had unfairly maligned your colleague. I've written about this before, as have many others including Joel Spolsky. My favorite is this: http://notinventedhe.re/on/2010-4-22 http://notinventedhe.re/on/2010-4-22 If you re-read the article with an eye toward how it describes the behavior of programmers even more than it describes that of business people, it becomes much more valuable.
Sherlock 15y ago
MS. McArdle is a journalist with strong insights in tech and finance. Her blog is a good read, if you skip the politics content, which isn't so bad either.
quinndupont 15y ago
The answer to that question is simple, but unpopular: ready access to capital (i.e., being rich). There's a reason why all the money in the world is held by less than 1% of the people, and this has nothing to do with the 1% being the smartest.
- gnosis 15y ago
  A very rich man was asked by a journalist how he made his first million. The rich man answered that he started off with just a few pennies, put them in a pay phone and made a phone call: "Dad, can you please lend me a million dollars?"
pasbesoin 15y ago
Because the idiots compromised my health before I knew better, or rather knew how to get away from and effectively avoid this. This is the part of abuse that people persistently don't get: It often works, by chronically if not permanently disadvantaging the victim. There are people who succeed in spite, but you're down to talking about individual circumstances and variables, then.
- Mz 15y ago
  Health issues and abuse (largely separate issue) are a big part of my story. I've been recovering from both, but at high cost -- like I'm deeply in debt and being evicted from my apartment. Perhaps not the best place from which to be giving "money" advice (not that this is really that). In my case, I'm clear my finances would be far worse if I had not recovered my health, that my current fairly dire situation is still an improvement over what I would face with conventional treatments/accepting the problem. I'm still trying to figure out how best to share information on how I accomplished that. It's possibly stupid (and often goes over very badly) to try to offer encouragement in that regard given the large gap between that encouragement and my ability to adequately convey what I did. Suffice it to say you have my sympathies and agreement.
  - pasbesoin 15y ago
    Thanks for stepping forth to respond. I... without trying too hard to find my own words -- understand, or experience for myself, the difficulty in trying to communicate about such a situation. These days, I no longer try too hard, and I tend to keep things brief, myself. Only if someone seems both genuinely interested and capable of understanding, will I willingly go further. (I still kick myself for those times when I slip and say more than my intuition tells me is wise.) I also should qualify my comment by saying that I don't want to cast myself and the worst of victims. Such experiences are so personal. And it's difficult when someone wants to "lay them out on the table" with a measuring stick, and probably also whatever brand of Scotch tape they happen to carry. :-)
    - Mz 15y ago
jonnathanson 15y ago
While I am opposed to blatant armchair quarterbacking, we must be careful to avoid the "appeal to accomplishment" fallacy (http://en.wikipedia.org/wiki/Appeal_to_accomplishment http://en.wikipedia.org/wiki/Appeal_to_accomplishment), or any derivative thereof. Analysts can be justified in critiquing a CEO's strategies, even if they've never been CEOs themselves. Critics can knock a bad movie, even if they've never personally directed a movie. Sports commentators can critique a basketball player's performance, or a coach's call, even if they've never played or coached. Etc. You don't have to have done something in order to form a cogent opinion of it. Of course, it is certainly unfair to label Reed Hastings an "idiot," or to claim that Netflix, as a whole, has "no idea" what it's doing. History has proven both of those positions wildly untrue, barring a few hiccups here and there.

261 points by CWuestefeld 15y ago

One of the important points I've heard Clay Christensen make is that incumbent companies often get destroyed (disrupted) by small players not because they're incompetent, or even because they're making bad decisions. Each decision along the way seems perfectly rational. Christensen frames it ultimately as a problem of measurement, that people are measuring the wrong thing, therefore optimizing for or solving the wrong problem. I think this article correctly points out that Hastings isn't stupid, but he's in a tight spot, just because of the circumstances.

runjake 15y ago
Seems it's all too common that those who are watching the metrics, forget that the metrics change.
- joebadmo 15y ago
  Yes, another, maybe even more important point that Christensen makes is that smart people get sucked into these metrics not because they haven't been educated well enough in the tools that business school programs give them, but because they fail to think critically, to ask the right questions, and to form the correct narratives. And this is a criticism that applies not just to business, but to engineering, product development, design, etc. You can be the best problem solver in the world and it won't help if you're solving the wrong problems. And this sort of thinking is something that a broader liberal arts education can at least encourage, which is why I'm still a proponent of the liberal arts, and wish people would find more value in them. (Yes, I was a Comp Lit major.) (Obviously, it has to be a well-executed program in any case, and an unserious student isn't going to learn anything in any case, either.)
- ChuckMcM 15y ago
  Or to put it slightly differently, the act of measuring a system changes it. Pretty much any system, but for businesses this is especially true. As you measure, you respond to the measurements, and the response ends up being reflected in future measurements. Sometimes the new system created by this feedback path heads off into the hinterlands like a glider flying off the gameboard in Life. A real world example was BYTE magazine. They were polling their readers to see what kind of machine they owned, more and more owned IBM PCs, so they started doing more and more IBM PC articles, which attracted more readers who had IBM PCs. But it left out in the cold people who came to BYTE for non-PC articles (who complained loudly). The key was that the metric 'what computer do you own' did not reflect accurately 'why are you reading this magazine' and yet it was driving what the magazine covered. I'm a big fan of metrics, but I'm also a strong believer in re-assessing periodically how changes in response to a metric have changed the business and measuring that too.
  - dredmorbius 15y ago
    That's a sampling error / selection bias. The were defining (implicitly) their target market as their existing market. Unfortunately, this was serving not to expand but restrict the interest areas within their existing subscriber base. This is a very common mistake. A canonical example would be the "when should we hold this meeting" question ... asked of a meeting's attendees (the answer will almost certainly be biased toward "when we're holding it now").
InclinedPlane 15y ago
Or they're measuring or looking at things in the wrong way. It's easy to see the peaks and the valleys in a company but the truly important points are the inflection points. If a big company waits until a small company has taken away 10% of its business it may still be too late to save the company, depending on how long it usually takes to change momentum. Often the reasons for differing degrees of growth come down to different fundamentals. A big company may not even realize that they've screwed themselves over by evoparating all of the best talent out of the company through boneheaded corporate decisions until revenue growth stagnates and then people start to wonder why they can't execute as well as they used to.
dredmorbius 15y ago
Even more grossly significant than this is the fact that "logical and/or beneficial at small / individual / short-term scale" need not equate to a best solution or alternative for a population at large or long-term timescale. A classic case in economics is explained very clearly in Mancur Olsen's Logic of Collective Action, which explains why group-based decisions are often at odds with the interests of the group as a whole. Another is Arrow's Impossibility Theorem, which hods that there is no method for constructing social preferences from arbitrary individual preferences. In other words, there is no rule, majority voting or otherwise, for establishing social preferences from arbitrary individual preferences -- so long as you also require unrestricted domain, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives. In other words: democracy not only may not, but cannot deliver an optimum outcome. There are many other such paradoxes and conflicts, many of which I'm becoming increasingly convinced undermine key and manadatory assumptions of a properly functioning free market economy. What changes might fix these is of course a rather longer discussion....
- robrenaud 15y ago
  Is giving up the independence of irrelevant alternatives that bad?
  - dredmorbius 15y ago
    It's not that irrelevant alternatives are improperly ranked. It's that introducing irrelevant alternatives changes the ranking of relevant alternatives: http://en.wikipedia.org/wiki/Independence_of_irrelevant_alternatives http://en.wikipedia.org/wiki/Independence_of_irrelevant_alte... E.g.: in an election between La Roge and Grebe Sough, if Handle Parr's decision to run changes the outcome between Roge and Sough, you have a dependence on an irrelevant alternative.
- rgraham 15y ago
  Winston Churchill was clear in his writing that America could not be trusted as an ally in anything that required steadfast determination over longer timelines. The winds of democracy make America a fickle ally. See 'The Gathering Storm.' Public schools don't often teach any of the shortcomings of a democratic society.
aaronbrethorst 15y ago
The best book I've read in a long time: http://www.amazon.com/Innovators-Dilemma-Revolutionary-Business-Essentials/dp/0060521996 http://www.amazon.com/Innovators-Dilemma-Revolutionary-Busin...
- nextparadigms 15y ago
  I still think it's the best/most insightful/most useful business book ever. The implications of truly understanding that book and disruptive innovation can be huge if you're a company founder or a CEO, Product Manager, etc. It's not so easy to internalize. I'm sure a lot of CEO's have read it by now, but I can barely spot some that follow it.
  - mkup 15y ago
    Btw, what do you think about Microsoft trying to apply its desktop OS, descendant of Windows NT, to tablets? Aren't tablets disruptive innovation to desktops (in Christensen terms) and therefore the entire plan is doomed? It looks to me they are making classic management mistake like ones the Christensen's book is full of.
    - aaronbrethorst 15y ago
      Rumor has it right now that they're dropping the Desktop 'app' entirely from ARM tablets. FWIW, every time I run across a friend who still works there, I urge them to read this book. They usually have already.
_delirium 15y ago
I'm sure someone has done a study trying to account for it, but it seems you also have to take into account that the small companies, taken in aggregate, are trying out tons of things simultaneously, most of which will fail: often one big incumbent is being besieged by hundreds of startups who each think they have a new angle. So even though one small company might eventually win and look like geniuses who did it on a shoestring budget, the machine that produced them, so to speak, involved hundreds of companies and a lot of resources all gunning for the incumbent in parallel.
firebones 15y ago
Taking Stanford's Machine Learning course this fall has given me a couple of new analogies to explain the innovator's dilemma. Think of business strategy as the learning hypothesis, and the learning algorithm seeks to increase profits by minimizing the error between what value they capture and the available dollars in the market. Successful companies walk the surface, making stepwise reductions in this error rate. This often leads to a perfectly rational descent to a local optima. These local optima can be very deep and very profitable, which makes it even more difficult to turn attention to steps that will introduce loss and variance in order to find a more profitable (or global) optima. "Randomizing" the starting points (the effect of hundreds of startups in a market) can increase the likelihood of a better optima being found, as can large companies attempting the same with lots of small bets (e.g., 20% time) which then are cultivated using the proven learning algorithm (i.e., management approach.) True visionaries are able to hasten the process by scouting out where these new optima are likely to reside.

bryanh 15y ago

Wealth does not necessarily correlate with intelligence.

cek 15y ago
And intelligence does not necessarily correlate to good decision making (or business acumen).
- ggwicz 15y ago
  And "business acumen" has nothing to do with good decision making.
  - sskates 15y ago
    Isn't that what business acumen is? The ability to make good business decisions? http://en.wikipedia.org/wiki/Business_acumen http://en.wikipedia.org/wiki/Business_acumen
DevX101 15y ago
I'd be willing to bet that self-made wealth from non-politicians correlates strongly with intelligence.
- weff 15y ago
  Also perseverance and luck.
  - glimcat 15y ago
    Intelligence already likely correlates well with being a stubborn bastard. It helps with the part where you obsessively study topics everyone else thinks are too boring or inaccessible.
    - _delirium 15y ago
      Most of the most intelligent people I know are actually pretty bad at monetizing that, though, in part precisely because they're way too distracted by the constant drive to learn new things (rather than picking a few and building a solid market niche), and in part because many seem more interested in the mental challenge of understanding something than the actual profits from monetizing that understanding.

onedognight 15y ago

> Hastings wanted to get the DVD-only customers off of Netflix so that he wouldn't have to pay for streaming rights they weren't using (or paying for). I've heard this argument multiple times now, but it flies in the face of the much more logical argument made in the very next paragraph that the content companies want to replace their cable income (no matter what). Meaning in this case if he splits the company in two then they double their prices on the streaming. Given this, splitting seems like a big step for a temporary reprieve.

27182818284 15y ago

It was a good plan executed too quickly. First price increase to make mail less attractive, then split the companies down the road, then get rid of your part with mailing DVDs completely and then truly become the Netflix company you want to be. The only thing they seemed stupid about was how fast they could execute those steps. They did it too quickly and it unnerved customers and investors.

BrokerChange 15y ago

A company in the 70's sold 500 of it's restaurants (it's main source of revenue) and the "pundits" called them crazy. The stock took a hit but the CEO remained on course. He stuck to his guns. 30 years later, it is one of the most successful companies in its industry. You may have heard of them- Walgreens. The CEO of Netflix is not dumb. He killed Blockbuster. He knew what he was doing when he split the company to save the future of his company. His only mistake was not sticking to his guns.

pyre 15y ago
That seems like a bit of confirmation bias. You're arguing that Neflix can do no wrong because: 1) They took out a large incumbent competitor, therefore it's impossible for them to make bad decisions. 2) A single company in the past made an unpopular decision that worked out well for them. I could similarly say that Apple firing Steve Jobs was the best thing that they ever did. Just look at them today!
- nuclear_eclipse 15y ago
  I imagine there are quite a few people who would agree with you; had Jobs stayed on at Apple, he wouldn't have learned the hard-won lessons from starting Pixar and NeXT.
  - ceejayoz 15y ago
    Yes, but the lesson learned should be "sometimes things unexpectedly wind up working out well", not "fire your CEO and you too could become the highest market cap company in the world"...
  - tsunamifury 15y ago
    Interesting correction: George Lucas actually started Pixar, not Steve Jobs.
- BrokerChange 15y ago
  I think you're missing my point. Netflix taking out BlockBuster does not prove they can do no wrong, merely that Reed Hastings a perfectly capable CEO, and smarter than the media would have you believe. If you read about the history of the company, they started by SELLING DVD's. They barely made any money renting them. But, Reed Hastings made the decision to split that company because it wasn't the future. His 10,000 customers complained but he stuck to his guns. And look at them now. The largest streaming company in the world. He was placed in the same situation this past year. Stick to a business model with no future (DVD's-a dying medium), or split the company to improve negotiating terms for streaming deals(the future) and hopefully sell off "Quickster." It was a brilliant plan that poised Netflix for the next generation of digital distribution. Instead they backed down and changed direction, looking weak in the process.

alexholehouse 15y ago

I think this boils down to the fact that if you look at historic proceedings the outcome seems obvious, because the details which make it obvious are the ones reported. There is a total bias to write what looks like a progressive narrative, when the reality is usually far from it. i.e. A->B and B->C then CLEARLY A->C. Except when A went to B, A could also have gone to D, E, or F, but you don't write about that, because clearly covering all your bases would be ridiculous, and it's generally difficult to evaluate the likelihoods of any options except B, where the likelihood of B is 100%.

nostromo 15y ago

I think the issue is more about timing your business decisions, not making smart or stupid ones. Netflix is worried about the end of physical media, as they should be. They are looking 3 or 5 years down the road and trying to position the company to be successful then (as well as today). However, for the average customer today, DVDs are still very important. And for the average investor, next quarter's earnings are much more important than earnings in 2015. I think Netflix made the right decision for next year, or maybe 2013 -- but made it too early; they got ahead of their customers. (An easy thing to do when you live in Silicon Valley.)

WalterBright 15y ago
>And for the average investor, next quarter's earnings are much more important than earnings in 2015. I hear this all the time, and it's just not true. I see stock moves all the time based on the prospects for distant future earnings - Amazon is a prime example. So is any stock with a high P/E.
- chollida1 15y ago
  This can be true: > I see stock moves all the time based on the prospects for distant future earnings - Amazon is a prime example. So is any stock with a high P/E. and this statement can also still be true: >And for the average investor, next quarter's earnings are much more important than earnings in 2015.
  - WalterBright 15y ago
    Investor sentiment is accurately reflected in the stock price. If investors were incorrectly letting short term thinking dominate their buy/sell activity, then a long term investor should be able to make higher-than-market investment returns by betting against those incorrect short term thinkers. I don't see this happening, hence I don't buy the idea that investor sentiment is incorrectly biased towards short term thinking. Consider Amazon again - its stock zoomed for many years after its IPO and despite losing vast sums every quarter and many predictions that it would never climb out of those losses. Obviously, investors were pricing the stock based on a very long term outlook (and were amply rewarded for their prescience).

mikeash 15y ago

I can think of a couple of counterarguments. First, the video rental business was ripe for disruption once DVDs became sufficiently popular. Once you had a video medium that was small enough to cheaply ship through the mail and durable enough to keep in circulation for a while, it was inevitable that somebody would challenge the incumbent brick-and-mortar stores and win. Netflix may have simply been in the right place at the right time through sheer luck. Second, intelligence isn't a single thing. It's a blanket term for a huge collection of disparate characteristics. The intelligence which lets me write code at a level well beyond most of the population is not the same kind of intelligence that would make me succeed in business. Perhaps the kind of intelligence that lets a person build a successful business from scratch is not the same kind that lets a person sustain an existing large business. I think the article makes a good point, that we tend to ignore complication and subtlety in favor of simplistic explanations like "he's stupid", but I think it goes way too far in the other direction. Rather than assume the CEO is stupid because his company is having trouble now, the author assumes the CEO is smart because his company had success in the past, which is no better.

sinzone 15y ago

You're assuming that all the smartest want to become rich. Maybe not.

daenz 15y ago
I noticed that too. One explanation could be that many really smart people understand that "the game" is inherently stupid/degrading/unimportant and would rather not waste their intelligence and lives fighting other people to "win" it. Maybe they want to further human understanding in peace and not be a tall poppy that gets cut down all the time[1] http://en.wikipedia.org/wiki/Tall_poppy_syndrome http://en.wikipedia.org/wiki/Tall_poppy_syndrome
sandee 15y ago
Yes. Ask Stallman, Linus et al
- _delirium 15y ago
  Also all the old Bell Labs people who're now at Google. I'm sure Rob Pike could get more money than he does at Google if he wanted to go into the startup game, but he isn't interested.

tsunamifury 15y ago

After working in finance I've come to believe that most wealth is accumulated through brute force. You get money by using leverage to take other peoples money -- its actually very simple from an intelligence perspective. It may take some genius to gather the resources necessary to forcefully gather wealth, but the actual gathering of it is not a matter of 'smarts'.

codyrobbins 15y ago
No. Perhaps most of the wealth that you saw, working in finance, may have come from brute force (although I would disagree with that claim, prima facie, as well); but that doesn’t mean most wealth is accumulated that way. You get money by using leverage to take other peoples money No. That theory is called mercantilism, and we figured out that it’s wrong about three hundred years ago. You get money by bringing about the manifestation of value into the world. People who make money via leverage are doing that in a very specific way, but it’s far from the only way to do it.
- jbooth 15y ago
  1949 was 300 years ago?
  - codyrobbins 15y ago
    1700 was three hundred years ago, when John Locke pointed out in his Second Treatise that the amount of wealth in the world is not fixed.
    - mindblink 15y ago
      Interesting... I would be like to look up the direct quote. Would you have the chapter or section reference?
      - jerf 15y ago
        You need a citation that some guy once said that the amount of wealth in the world is not fixed? What would the world look like if it weren't true? There's no reasonable or useful definition of wealth for which the world of today has exactly as much wealth as the world of 10,000 years ago. (Or 1,000, or 100. 10, well, that can be successfully argued either way. It's not been a great 10 year run.)

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sskates 15y ago

If you've ever run a company or any sort of organization, you'll realize that walking around blind is the default. It takes effort to get information on what's going on. Because you can't wait forever for perfect information, you end up taking calculated risks like Netflix did with Qwikster where it's not clear in advance if it will pan out. As the OP realized, this results in Monday morning armchair quaterbacking from people who ask "why didn't they make the right decision in advance, are they stupid or something?" When in fact, no, they are not stupid, they just don't have perfect information about what will happen. Incidentally, this is the largest advantage of startups- the cost of a risky bet is much lower because you don't have to risk hemorrhaging hundreds of thousands of customers each time you make a bet. As a result, you can take many more risks and come to a better solution more quickly. edit: downvotes? what?

balsam 15y ago
it should be interesting to us, for you and only you to be able to see who downvoted you.
- davidw 15y ago
  That would be a fantastic way to promote "revenge" voting.
  - Mz 15y ago
    Also a fantastic way to promote grudges. People who have been "publicly" ugly tend to want to justify it and are thus inclined to continue to be ugly as "proof" that they were right to do so to begin with. I would rather people have the chance to change their mind about me and move on. I have certainly changed my mind about some people and am less inclined to downvote their remarks than I once was (which sounds more personal and ugly than I mean it -- I am trying to say that getting to know someone better can change how you interpret something they have said). First impressions aren't always accurate.
    - balsam 15y ago

starwed 15y ago

Reminds me of the following Terry Pratchett quote: >A European says: "I can't understand this, what's wrong with me?" An American says: "I can't understand this, what's wrong with him?" >I make no suggestion that one side or other is right, but observation over many years leads me to believe it is true. This post is about exactly those two attitudes, though here it has nothing to do with what side of the Atlantic you're on!

zobzu 15y ago

Just to take the headline without the context: being rich and being smart are not necessarily synonymous and one never required the other. In other words, smart people often do NOT aim to be rich. They have more interesting goals and they usually either sacrifice "common wealth" for them, or are just ok with a decent amount of money. Money's nothing. Money's not a goal. Never been. Smart evil people go after power control and knowledge. Money is a side effect. Dumb people only go after money (which comes and go, really).

marknutter 15y ago
Well, smart people also choose to pontificate about topics on which they consider themselves smart. If your aim isn't acquiring wealth, you may not be the best authority on the topic of acquiring wealth.

deleted 15y ago

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sanjiallblue 15y ago

This article ignores a very central tenet of becoming rich: Luck. Most people didn't get in the position they were because they were geniuses. Few individuals fill that role. They get there because they were lucky. Bill Gates certainly wasn't the best programmer of his day and he most definitely wasn't the most adept businessman and he wasn't the most brilliant thief. He was lucky. He turned out a product that everyone wanted at exactly the right time. Now, as businesses have evolved alongside technology there certainly is slightly less luck (I would personally contend only slightly). But the founders of Netflix probably weren't the first people to think about mailing rental DVDs to customers, they just had the money and the capital to make it happen when the market was just enough ready to accept their existence. They developed expertise in that particular business, mailing DVDs to customers, and killed an entire other industry (for all intents and purposes) in the process. How the author relates this to their streaming model (what was motivated the change) is baffling to me. Her entire premise seems to try and imply that the wealthy are somehow more intelligent and that, pardon the frankness, is fucking idiotic. Netflix didn't become a giant through streaming content. They parlayed DVD money into a streaming business because the whole industry was making a very obvious shift in that direction. I mean hell, if they were half the geniuses that the author makes them out to be they wouldn't have selected Silverlight as the backbone of their service. All I saw was a group of lucky people in one industry try to jump into another industry that appeared deceptively similar, and just because Hastings is their CEO doesn't make me think he's intelligent. If anything he's demonstrated that he doesn't fully understand the economics of splitting media. The Quickster Announcement came off to me as a very stubborn businessman, tricked into thinking himself intelligent and a captain of industry by his fabulous luck, making a rash decision to vindicate a strong opinion he had behind closed doors. The only thing I can take from this article is that money does a very good job of making the rich think that they're intelligent.

nazgulnarsil 15y ago
this belief pays little if any rent.
- sanjiallblue 15y ago
  I beg to differ, but I'm sorry if you haven't had the same luck.

chippy 15y ago

The rich don't think everyone else is an idiot - they think everyone else as marks, johns, consumers, customers.

CPlatypus 15y ago

This same principle often applies to reading others' code. It's common to look at it, see something inscrutable, and decide that the author was an idiot. Then you try to rewrite it, trip over all the same bugs that the author had learned to avoid, and maybe - if you're smart and honest with yourself - accept that you had unfairly maligned your colleague. I've written about this before, as have many others including Joel Spolsky. My favorite is this: http://notinventedhe.re/on/2010-4-22 http://notinventedhe.re/on/2010-4-22 If you re-read the article with an eye toward how it describes the behavior of programmers even more than it describes that of business people, it becomes much more valuable.

Sherlock 15y ago

MS. McArdle is a journalist with strong insights in tech and finance. Her blog is a good read, if you skip the politics content, which isn't so bad either.

quinndupont 15y ago

The answer to that question is simple, but unpopular: ready access to capital (i.e., being rich). There's a reason why all the money in the world is held by less than 1% of the people, and this has nothing to do with the 1% being the smartest.

gnosis 15y ago
A very rich man was asked by a journalist how he made his first million. The rich man answered that he started off with just a few pennies, put them in a pay phone and made a phone call: "Dad, can you please lend me a million dollars?"

pasbesoin 15y ago

Because the idiots compromised my health before I knew better, or rather knew how to get away from and effectively avoid this. This is the part of abuse that people persistently don't get: It often works, by chronically if not permanently disadvantaging the victim. There are people who succeed in spite, but you're down to talking about individual circumstances and variables, then.

Mz 15y ago
Health issues and abuse (largely separate issue) are a big part of my story. I've been recovering from both, but at high cost -- like I'm deeply in debt and being evicted from my apartment. Perhaps not the best place from which to be giving "money" advice (not that this is really that). In my case, I'm clear my finances would be far worse if I had not recovered my health, that my current fairly dire situation is still an improvement over what I would face with conventional treatments/accepting the problem. I'm still trying to figure out how best to share information on how I accomplished that. It's possibly stupid (and often goes over very badly) to try to offer encouragement in that regard given the large gap between that encouragement and my ability to adequately convey what I did. Suffice it to say you have my sympathies and agreement.
- pasbesoin 15y ago
  Thanks for stepping forth to respond. I... without trying too hard to find my own words -- understand, or experience for myself, the difficulty in trying to communicate about such a situation. These days, I no longer try too hard, and I tend to keep things brief, myself. Only if someone seems both genuinely interested and capable of understanding, will I willingly go further. (I still kick myself for those times when I slip and say more than my intuition tells me is wise.) I also should qualify my comment by saying that I don't want to cast myself and the worst of victims. Such experiences are so personal. And it's difficult when someone wants to "lay them out on the table" with a measuring stick, and probably also whatever brand of Scotch tape they happen to carry. :-)
  - Mz 15y ago

jonnathanson 15y ago

While I am opposed to blatant armchair quarterbacking, we must be careful to avoid the "appeal to accomplishment" fallacy (http://en.wikipedia.org/wiki/Appeal_to_accomplishment http://en.wikipedia.org/wiki/Appeal_to_accomplishment), or any derivative thereof. Analysts can be justified in critiquing a CEO's strategies, even if they've never been CEOs themselves. Critics can knock a bad movie, even if they've never personally directed a movie. Sports commentators can critique a basketball player's performance, or a coach's call, even if they've never played or coached. Etc. You don't have to have done something in order to form a cogent opinion of it. Of course, it is certainly unfair to label Reed Hastings an "idiot," or to claim that Netflix, as a whole, has "no idea" what it's doing. History has proven both of those positions wildly untrue, barring a few hiccups here and there.