Backward reasoning

This is the 10th newsletter of Book Lovers sent on October 16, 2015, focusing backward reasoning.
This edition features Avinash K. Dixit and Barry J. Nalebuff.

Don't miss the following letters:


Last week, we’ve talk about the bandwagon effect, characterized by the probability of individual adoption increasing with respect to the proportion who have already done so.

Why does bandwagon effect matter?
Because the path we take shapes our present. And that’s particularly true for technology.

Yesterday trade-offs might not be optimal today yet are still playing a big role.

Today we will consider how to avoid being stuck with a present that was shaped by wrong choices in the past.

The main trick is to use what is called backward reasoning, which is just working backward from the goals.

Let’s take an example to illustrate what backward reasoning is: a gamble between two people. This case is also inspired by the excellent book Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff.

The Game

The rules is very simple: there are two envelopes, each containing an amount of money, the amount of money is either $5, $10, $20, $40, $80, or $160 and everybody knows this. We are told that one envelope contains exactly twice as much money as the other. The two envelopes are shuffled, and we give one envelope to Ali and one to Baba. (pun hidden)

After both the envelopes are opened (but the amounts inside are kept private), Ali and Baba are given the opportunity to switch. If both parties want to switch, we let them.

Suppose Baba opens his envelope and sees $20. He reasons as follows: Ali is equally likely to have $10 or $40. Thus my expected reward if I switch envelopes is (10 + 40)/2 = $25 > $20. For gambles this small, the risk is unimportant, so it is in my interest to switch. 

By a similar argument, Ali will want to switch whether she sees $10 (since she figures that he will get either $5 or $20, which has an average of $12.50) or $40 (since she figures to get either $20 or $80, which has an average of $50).

Something is wrong here. Both parties can't be better off by switching envelopes since the amount of money to go around is not getting any bigger by switching.

What is the mistaken reasoning?

Answer: forgetting to reason backward

A switch should never occur if Ali and Baba are both rational and assume that the other is too. The flaw in the reasoning is the assumption that the other side's willingness to switch envelopes does not reveal any information. We solve the problem by looking deeper and deeper into what each side think! about the other's thought process. 

Suppose that Ali opens her envelope and sees $160. In that case, she knows that she has the greater amount and hence is unwilling to participate in a trade. Since Ali won't trade when she has $160, Baba should refuse to switch envelopes when he has $80, for the only time Ali might trade with him occurs when Ali has $40, in which case Baba prefers to keep his original $80. But if Baba won't switch when he has $80, then Ali shouldn't want to trade envelopes when she has $40, since a trade will result only when Baba has $20. Now we have arrived at the case in hand. If Ali doesn't want to switch envelopes when she has $40, then there is no gain from trade when Baba finds $20 in his envelope; he doesn't want to trade his $20 for $10.
The only person who is willing to trade is someone who finds $5 in the envelope.

  1. We say that innovative organizations need to be more horizontal.
    Quick test to know wether one organization is horizontal: is anyone from the organization capable to speak publicly in the name of it? (not only authorized, but also capable of doing it without feeling overwhelmed)
     
  2. We often say: we are getting lost by too much connectivity. That is a mistake. The problem is not being always connected: it just increases our capacities. We are getting lost if we don't manage our attention. The key is to distinguish connectivity and attention.
Capture d’écran 2015-10-11 à 19.08.26.png

a16z Podcast: A Podcast about Podcasts

Key insights:

  1. the issue for user is managing between the attachment of one show producer (one unique style/voice/vision of the world) AND one topic of interest (eg entreprenership, sport) or mood (looking for humour, sophisticated content, entertainment, etc.) 
  2. mainstream users develop the habits of building their own selection of content (eg: netflix)
  3. best way to market a podcast: being featured or participating in other podcasts
  4. speaking in podcasts = performing
  5. podcast = very intimate relationship

Forecasting Tournaments: What We Discover When We Start Scoring Accuracy

Incredible master class in superforecasting with great thinkers. Really a must watch/listen to. Two of the several lessons learned in part 1:

  1. The correlation between your ability to tell a good explanatory story and your forecasting accuracy is rather weak
  2. The clairvoyance test means that if the question is so well-framed that if you handed it to a genuine clairvoyant who could see perfectly into the future, the clairvoyant could look into the future, say thumbs up or thumbs down, without needing to come back to you for some ex post facto re-specification of what the question was.

62% of Americans Have Under $1,000 in Savings, Survey Finds

I've been really surprised with the following data set. American don't save much...
(left: savings balances by age, right: savings account balances by income)

Bandwagon effect & the ideology of lean

This is the 9th newsletter of Book Lovers sent on October 4, 2015, focusing on game theory, especially on bandwagon effect, and its effect in the adoption of new technologies.
This edition features Avinash K. Dixit and Barry J. Nalebuff.

Don't miss the following letters:

Rear-View Mirror

Last week, I've written a plea for relativism (and long content), in which I’ve highlighted two considerations:
1. as Spinoza wrote in Ethics, we don't desire things because we judge them to be good; on the contrary, we judge something to be good BECAUSE we desire it.
2. we should always remind ourselves that between all and nothing, there is something. Often we are engaged in battles that lure us into thinking that their can be only two camps… when in reality there are many more.


This Week

This week, this newsletter has been inspired by the greatest book I know about game theoryThinking Strategically by Avinash K. Dixit and Barry J. Nalebuff. Whereas many books on game theory are filled by mathematics, this one is free of formulas and gives us nonetheless a very rigorous introduction to game theory. We understand very easily its key principles (brinkmanship, bargaining, unconditional moves, vicious circles), with a great diversity of illustrations, drawn from the military world, public policies, sport, political campaigns, etc. A must read, I swear. ;)


The Bandwagon effect

I’ll focus this newsletter on something called “bandwagon effect”, that points out the necessity of thinking strategically even in a world of increased complexity. The bandwagon effect is characterized by the probability of individual adoption increasing with respect to the proportion who have already done so. As more people come to believe in something, others also "hop on the bandwagon" regardless of the underlying evidence.

In this extract, the authors show that history matters in determining today’s technology choices. What could appear trivial is in fact very problematic: historical trade-offs may be irrelevant considerations in the present.

As they say “the important insight from game theory is to recognize early on the potential for future lock-in — once one option has enough of a head start, perior technological alternatives may never get the chance to develop. Thus there is a potentially great payoff in the early stages from spending more time figuring out not only what technology meets today's constraints, but also what options will be the best for the future.”

The ideology of lean

That doesn’t seem very much in coherence with the way we develop innovative product, right?
Under today’s ideology, we build prototype called “MVP” (minimum viable product) that we test and improve with quick iterations and small feedback loops. We never fire out if today's constraints will be the best for the future (and that is not a question of technical debt, I see you in the back raw!).

Discover two stories, from the book Thinking Strategically, that show how our society has been shaped by things like “hoof-and-mouth disease” and the “submarine space constraints”:

Gasoline as the best power source

"In 1890 there were three ways to power automobiles stearn, gasoline, and electricity — and of these one was patently the other two: gasoline. ... [A turning point for gasoline was] an 1895 horseless carriage competition sponsored by the Chicago Times Herald. This was won by a gasoline-powered Duryea - one of only two cars to finish out of six starters — and has been cited as the possible inspiration for R. E. Olds to patent in 1896 a gasoline power  source, which he subsequently mass-produced in the "Curved-Dash Olds." Gasoline thus overcame its slow start. Steam continued viable as an automotive power source until 1914, when there was an outbreak of hoof-and-mouth disease in North America. This led to the withdrawal of horse troughs — which is where steam cars could fill with water. It took the Stanley brothers about three years to develop a condenser and boiler system that did not need to be filled every thirty or forty miles. But by then it was too late. The steam engine never recovered. 

While there is little doubt that today's gasoline technology is better than steam, that's not the right comparaison. How good would steam have been if it had had the benefit of seventy five years of research and development? While we may never know some engineers believe that steam was the better bet."

Light-water reactors are suboptimal yet the norme

In the United States, almost all nuclear power is generated by light-water reactors. Yet there are reasons to believe that the alternative technologies of heavy-water or gas-cooled reactors would have been superior, especially given the same amount of learning and experience. 

[Two main reasons for the curious minds:
(a) h
eavy-water reactors can operate without the need to reprocess fuel
(b) 
both heavy-water and gas-cooled reactors have a significantly lower risk of a meltdown]

The question of how light-water reactors came to dominate has recently been studied by Robin Cowen, in a 1987 Stanford University Ph.D. thesis.

The first consumer for nuclear power was the U.S. Navy. 
In 1949, then Captain Rickover made the pragmatic choice in favor of light-water reactors. He had two good reasons. It was then the most compact technology, an important consideration for submarines, and it was the furthest advanced, suggesting that it would have the quickest route to implementation.

[...] At the same time civilian nuclear power became a high priority.
The Soviets had exploded their first nuclear bomb in 1949. In response, Atomic Energy Commissioner T. Murray warned, "Once we become fully conscious of the possibility that [energy-poor] nations will gravitate towards the USSR if it wins the nuclear power race, it will be quite clear that this race is no Everest-climbing, kudos-providing contest." [...]

Considerations of proven reliability and speed of implementation took precedence over finding the most cost-effective and safest technology. Although light-water was first chosen as an interim technology, this gave it enough of a head start down the learning curve that the other options have never had the chance to catch up.

 

Weekly #MustRead articles

This week, we will talk about three articles, two of which has been pointed out by people I like, so I'll pass them along with my thoughts on them.

1. Baptiste Bachellerie send me a piece that he loved (He told me “I like his concept of thin versus thick value (value that take externalities into account) that he describes in 'The New Capitalist Manifesto'.”).

As I really enjoyed the reading (but didn’t agree that much with the author), I share with you the article and the answer I sent him. 
The article is titled The Unicorn Bubble (Or, Why You Shouldn’t Want to be the Next Uber), written Umair Haque, who tells us that we shouldn’t take Uber as a guide to innovate.

He raises very good questions (and highlight the necessity to take into account externalities) and assures that Uber has not such a great strategic position (low entry barriers, low switching costs, and low power). To be honest I was quite bittersweet at the end of the reading for the 3 following points:

1. In theory he's quite right about switching cost & barriers to entry but I feel they are harder and harder to take into consideration now in the digital world: we tend to underestimate  (a) the cognitive cost of switching -- power of habits, (b) the barry that constitute users (both suppliers & demanders) which provides a tons of knowledge -- data + inside knowhow + brand.
Groupon is yet a really interesting counter-example: a strong brand that has been almost forgotten in the blink of an eye. Did they lack a sense of belonging from their user or some kind of magic in the use?

2. I'm quite cautious about the tactics of dominance: Uber is in a very specific position -- a massive legal "grey zone" at the very least. I don't like how they operate as a whole (they are quite agressive) but I don't think we can legitimately say they are weak because they have to fight to be authorized.

3. I really think - as many people do when they talk about innovation - that we shouldn't compare companies when they are giant success with new (or at least "young") entrants. Uber might have a terrific valuation but the firm is only 6 years old. Apple used to have lots of traits he highlights: a low bargaining power (and disputable practices), a barry that was really hard to cross in front them - Microsoft built tremendous network effects thanks to the interoperability of its softwares- and was really easy to switch from.

2. Nicolas Debock told me about his fondness for Carlo Rovelli, who could be, in his opinion, one of the greatest thinker of our time. I’ve looked for an introduction to his thinking and was not disappointed!
Rovelli tells us that we should “forget time” to understand the world. Contrary to what generally assumed, the physical world does not exist "in time". At the basic microscopic level, the world is better described in terms of a a-temporal theory, where physical laws do not express time evolution of physical variables, but just relations between variables. He explains that time is just a trick introduced in physics to help us study other variables, and this trick (using time as the “prime variable”) doesn’t work anymore when we try to combine general relativity, and quantum field theory.

For him, time only exists in our day-to-day life because of our ignorance of the microscopic state of the world: “if we knew every variables, there would be no time. [...] time is a side effect of ignorance.”

A great interview by Hélène Le meur in La recherche (french): Il faut oublier le temps

3. I've found an article myself! ;)
In Shifting tides: Global economic scenarios for 2015–25, 3 directors of McKinsey -- Luis Enriquez (McKinsey’s Brussels office), Sven Smit (Amsterdam office), and Jonathan Ablett  (expert in the North American Knowledge Center in Waltham) wonder how will evolve the global economy in the next 10 years.
Will we witness a global convergence? Will it be linked with an acceleration of a deceleration of the economy?

They've articulated four global scenario, shaped by the 3 sets of factors outlined below:

  1. near term forces: (a) monetary stimulus (most countries have a negative interest rate to encounter the weak demand) and (b) shifting energy markets (oil prices fell by 50 percent in the latter half of 2014, Even after a slight rebound, they remained well below average levels of the past five years)

  2. long term forces:

    1. inexorable trends: (a) urbanization and (b) aging (life spans are growing and birthrates falling), which both impose burdens -among them, lower productivity, falling demand, and rising health and pension loads

    2. uncertain forces: (a) technological innovation and (b) global connectivity (trading relationships are increasingly dense and complex, with financial & economic flows seem to diverge since 2010)

If you enjoyed this week's newsletter, please forward it to someone you like.

And start the conversation by replying to this email or by sending my a quick tweet: @willybraun

Looking forward to having your feedbacks and your impressions after the readings.
Warm regards, 
Willy

How to choose the game before choosing how to play it

This is the 7th newsletter of Book Lovers sent on September 20, 2015, highlighting the need to not only look at efficiency but also at effectiveness. The game you play matters a lot.
This edition features Saint Augustinus, Paul Watzlawick, Peter Drucker, Tim Ferriss and George Leonard.

Don't miss the following letters:

Protect your time. Feed your inner life. Avoid too much noise. Read good books, have good sentences in your ears. Be by yourself as often as you can. Walk. Take the phone off the hook. Work regular hours.
-- Jane Kenyon - Everything I Know About Writing Poetry

Last week, we were talking about the fight against homeostasis and the way to initiate change. We also mentioned the importance of looking beyond our natural tastes.

The main takeaways: to initiate change, we must appeal to both our Elephant and its Rider, that’s to say to emotion AND rationality.

For that, we need to (1) direct the rider, because what looks like resistance is often a lack of clarity, (2) motivate the elephant, because otherwise it's exhausting trying to keep an elephant in line, (3) shape the path, because what looks like a people problem is often a situation problem.

This week, we will wonder: where should we be heading if we choose to change?

But before speaking about the right direction, we need to consider if selecting a direction is needed. And I have to confess that it is something that wasn’t natural for me.

Love vs strategy

This is a difficult topic for me, because my beliefs resonated hugely with the words of Saint Augustinus “Dilige et quod vis, fact” (love and do what you will). More precisely he wrote:

Once for all, then, a short precept is given you: Love, and do what you will. Whether you hold your peace, through love hold your peace; whether you cry out, through love cry out; whether you correct, through love correct; whether you spare, through love do you spare: let the root of love be within, of this root can nothing spring but what is good.
-- Saint Augustinus Hipponensis, In Epistolam Ioannis ad Parthos, Tractatus 7 (407-409)

Do not waste your time predict the future, just root your thoughts and your actions with genuine love and enthusiasm. That belief in goallessness was strengthened by one of the reading that impacted me the most in my Youth:  The language of change by Paul Watzlawick (highly recommended). I discovered in this book that many resolutions lied in the change itself, independently of the content of the change.  

My core belief system, in two maxims?

(1) “Love and do what you will” & (2) “Keep on moving and you’ll be safe” (or to be a bit more Watzlawickian, I’d say (2 bis) “Act so as to maximize the possible choices” which implies the necessity of movement). 

But soon, I entered a world (business school & the corporate world) that didn’t work that way.

As they’d say, if you want to become master and possessor of nature you’d better embrace the culture of strategy: setting goals and finding optimal strategy to reach them.

There are already a lot to say and sooner or later I’ll talk about predictability, heuristics, game theory & decision making. 

But let’s focus on something broader for this edition: before maximizing the chances to win the game, you need to choose the game you want to play.

How to choose the game

When you enter the mighty world of business, you’re quickly confronted with concepts such as efficiency & effectiveness (Reminder by Peter Drucker (Management): Efficiency is concerned with doing things right. Effectiveness is doing the right things).

You can be really good at answering your emails, but if you could have a greater impact for your company doing something else, then you should not answer them (you’d be efficient but not effective).

The pace of our lives makes us take too much emphasis in efficiency. We read books and articles to be “more productive”, to “be better organized”, to “use better tools”, etc.
And we want to learn as fast as possible. We are not happiness seekers anymore, we are “life hackers”. We are not marketers, we are “growth hackers”.

And our culture is becoming more and more a culture of instant gratification (#pornfood), quick fix (#weightwatchers), with eyes on the winners only (#topmodels).

As I was thinking such pessimistic thoughts, I remembered a really great book on that matter. 
It is the kind of book that doesn’t make a lot of noise or win prizes. Worst, this is the kind of book you find in personal development. But this is a hell of a book if you ask me.

The book is Mastery, written by George Leonard, a former United States Army Air Corps pilot  and Aikido instructor (5th degree black belt). And as the title state, it is an invitation to the quest of mastery.

If Tim Ferriss, the guru of productivity, will focus on the 20% that makes you learn 80% of what you need to know, George Leonard invites you to spend 99.9% of your time to reach the top 0.1%.

And there are huge differences between these two philosophies of action. The first: “always be improving” and “create deadlines and maximize your learnings in short period of times”. The second: “fall in love with the plateau ; forfeit hard-won competencies in order to advance the next stage” and “practice as long as you are alive”.

For George Leonard, the 5 keys to long-term fulfillment are:

  1. Instruction: get first a first rate instructor that will point out both the good and the bad, keeping in mind that teachers are not perfect and that you will eventually have to say goodbye to your teacher
  2. Practice: for the sake of practice, even when you don’t progress, even when you lose, even when you feel you are worsening, even when you reach the top of the mountain (just climb the next one),
  3. Surrender: learning involves certain indignities, you will not look good from the get-go and even after. There are times when you forfeit hard-won competency in order to advance to the next stage. (like when a golfer decides to change his or her swing)
  4. Intentionality: visualizations, thoughts, images and feelings play into your success
  5. The Edge: you must be able to play the edge while respecting practice. Pushing the limits for higher performance, but never crossing the point of stupidity.

Why is it a hell of a book? I can’t say I was blown away by the novelty of his insights.

But Mastery is exactly what we need, because it offers something else, something we need to be remember.
And I see this book less as a source of rebalance but as a counterpoint: the relationship between voices that are interdependent harmonically (polyphony) yet independent in rhythm and contour.

Weekly #MustRead articles

1. In The Future and How to Survive It (McKinsey, HBR), Richard Dobbs, Tim Koller and Sree Ramaswamy show that during the last 3 decades corporate net income grew more than 50% faster than global GDP and explain us why (deregulations, privatization, urbanization, industrialization, global presence boosted by increase of a solvent demand worldwide, falling labor costs and higher productivity of both capital and labor). And the biggest beneficiaries are multinationals from North American (26%) and Western Europe (25%).

But the future won’t be as bright. If global economy has expanded by about 3.5£ annually since 1980, its growth averaged less than 2% in the 100 years prior to WWII, and the next 50 years will look alike globally. And they warn especially companies from North American & Western Europe: there is a shift in center of gravity & technology is changing the rules. The competition will get fiercer, with an increasing war for talent and the environment will be less favorable and less predictable. A must read!

2. In The IPO is dying (VOX), Marc Andreessen explains that IPO is getting a second choice for young companies because it implies a lot of costs & a high sensitivity to rumours. He also reminds us that due to regulation most people can’t invest where growth is occurring: the private markets.

3. In France Pavillonnaire (FR), l’envers du décor (Sciences Humaines), Anne Lambert, author of “Tous propriétaires!” highlights a very problematic trend in the suburban habitations in France: women’s work have a bigger opportunity cost due to the need to buy a 2nd car, to look after the children while at work, which is especially high when correlated with precarious job, often in part time and with low wages. So access to home, highly supported by the State, could go with demotion for women.

If you enjoyed this week's newsletter, please forward it to someone you like.And start the conversation by replying to this email or by sending my a quick tweet: @willybraun

Looking forward to having your feedbacks and your impressions after the readings.
Warm regards, 
Willy

Reverse Network Effects

1. Less Sophisticated Participants – See Quora
2. Increase in Abuse wits Scale – Wikipedia / Twitter
3. Becoming Echo Chambers – Youtube shows you videos based on what you’ve watched so you only see things you agree with, not what you need.
4. Hive Mind – Reddit has been criticized for getting too insular
5. Long Tail Abuse – Even Wikipedia only controls quality on top 20% of articles

Do we see reality as it is? Fitness vs Reality

“Reality is like a 3D desktop that's designed to hide the complexity of the real world.“
Evolution has made us a brain that build an interface to reality. And what we see is what fits to our organism in its situation. Spacetime and objects as we see are not the reaIity. Incredible talk by Donald Hoffman.

Must read: Simple Rules for a Complex World

> Identify a bottleneck that is both specific and strategic.
> Let data trump opinion.
> Users make the rules.
> The rules should be concrete.
> The rules should evolve.

source : HBR
more : Simple Rules (book)

 

Warren Buffett — The Investor and Market Fluctuations

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.

… [A]n investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.

Warren Buffett, in his 1987 letter to shareholders

People must learn to hate ; they can be taught to love

“No one is born hating another person because of the color of his skin, or his background, or his religion. People must learn to hate, and if they can learn to hate, they can be taught to love, for love comes more naturally to the human heart than its opposite.” ― Nelson Mandela, Long Walk to Freedom

Four reasons we underestimate the power of digital

First as futurist Roy Amara noted, “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Technological change unfolds exponentially, like compound interest, and we humans seem wired to think about exponential phenomena in flawed ways

Second: we have shifted gears from what economic historian Carlota Perez calls the installation phase of the software revolution, focused on basic infrastructure such as operating systems and networking protocols,* to a deployment phase* focused on consumer applications such as social networks, ridesharing and ebooks

Third: a great deal of the impact of software today appears in a disguised form. The genomics and nanotechnology sectors appear to be rooted in biology and materials science. The “maker” movement around 3d printing and drones appears to be about manufacturing and hardware. Dig a little deeper though, and you invariably find that the action is being driven by possibilities opened up by software more than fundamental new discoveries in those physical fields.`

The fourth reason we underestimate software, however, is a unique one: it is a revolution that is being led, in large measure, by brash young kids rather than sober adults.

(source : http://breakingsmart.com/season-1/towards-a-mass-flourishing/)