30 January 2012

The value of heterogeneity

The Economist: Buttonwood | In praise of pessimists

Barely a week goes by without a report on the level of confidence among consumers, businesspeople and investors. Optimism is what’s wanted—Keynes talked of the “animal spirits” that influence economic activity. Pessimists are routinely denounced as Jeremiahs. Those who try to bet on falling prices find their activities are restricted.

A cheery disposition may be necessary for societies to function. Daniel Kahneman, a psychologist and Nobel economics laureate, has a chapter in his book “Thinking Fast and Slow” which describes overconfidence as “the engine of capitalism”. No entrepreneur can be sure that his planned investment will succeed but if no one took a risk, new products and jobs would never be created. A certain blindness to the odds may be necessary. According to Mr Kahneman, the chances of an American small business surviving for five years are just 35%. But ask individual entrepreneurs about their prospects and 81% think they have a better than seven-in-ten chance of success.
They write "just 35%" as if that's obviously the wrong number. Is it too low? Surely they aren't implying the ideal number is 100%, with zero failed businesses.

If every prototype a designer builds works, they aren't pushing the envelope enough. If every hypothesis a scientist investigates is found to be true, they aren't asking difficult enough questions.

You need to balance exploration with exploitation. Not every start-up should be a success.  We need a diversity of business approaches to suss out the landscape of the market space, to figure out what works, what can be improved, what can be done.  That means some attempts will fail.  That's nothing to be sad about, because you can only find out what works best by also finding out what doesn't work.

PS See also:
There are good charter schools and bad charter schools. But even the bad charter schools can do good, because they provide data.
I think it's interesting that the people who talk the most about the value of diversity and the important of evolution seem to be the least interested in exploring policy problems using diverse approaches and evolutionary selection mechanisms.

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