You are reading a New York Times article this morning. It’s an article by Dennis Overbye on the physicists who migrated to Wall Street and are now on the firing line as we look for someone to blame for the meltdown.
And you come across this passage.
Dr. Derman said the idea of a “right level” [for prices] is a “bit of fiction.”
And then this:
Dr. Taleb [in The Black Swan] has waged war against one element of modern economics in particular: the assumption that price fluctuations follow the familiar bell curve that describes, say, IQ scores or heights in a population, with a mean change and increasingly rare chances of larger or smaller ones.
But many systems in nature, and finance, appear to be better described by the fractal statistics popularized by Benoit Mandelbrot of IBM which look the same at every scale. An example is the 80-20 rule that 20 percent of the people do 80 percent of the work, or have 80 percent of the money. Within the blessed 20 percent the same rule applies, and so on. As a result the odds of game-changing outliers like Bill Gates’s fortune or a Black Monday are actually much greater than the quant models predict, rendering quants useless or even dangerous, Dr. Taleb said.
“Ah,” you say. You think you’ve learned something but as usual you’re not quite sure what. You put the Times aside.
Later in the day, you happen upon an article from the Harvard Business Review. It’s called Shaping Strategy in a World of Constant Disruption. It’s by John Hagel III, John Seely Brown, and Lang Davison.
This article recommends that corporations consider fashioning a “ecosphere,” an infrastructure, a platform in the marketplace. Google AdSense is used as a case in point.
Google’s AdSense has protocols governing how ads are submitted, priced, presented, and paid for. It allows even small advertisers and Web sites to invest minimal time and effort, with little oversight from Google, and still generate value for one another. This platform’s scalability makes specialization by participants economically attractive.
In a weird way, you can’t help feeling that the first article and the second article are speaking to one another.
Here’s what I came up with. I don’t doubt you can do better.
Hagel, Seely Brown, and Davison are arguing that there is a way out of the tiny incremental movements that make most markets. They are proposing something bolder, more manufactured. Most economic players look for markets in place, and then hope through better products, prices and promotion to induce a migration until the market belongs to them. In a sense, Hagel, Seely Brown, and Davison say, start again.
The Blue Oceans argument signals this same impatience. It bids the corporation go out hunting for undiscovered domains where there is no real competition. It’s all just wishful thinking really. But Hagel, Seely Brown, and Davison give us Blue Oceans with a brain. They propose the creation of blue oceans, not just there serrendipitous discovery.
Back to the Black Swan passage above. It says sudden shifts can and do happen and when they do, order will sometimes restore itself at each level. There is, in other words, an stability in the instability. In the Hagel, Seely Brown, and Davison way of thinking, we can induce instability and take the world and the market someplace new. Magically, the world will reform to our advantage.
Well, not magically. In the world of science, we can assume (or at least posit) the operation of fractal logic. The same law of order is operating at each level. In human affairs, we may not make this assumption. There may be natural laws or patterns of order in the human community, but we have to find them out.
Certainly, some of the answer lies in Smith’s invisible hand. Interested parties pursuing their private interests will find a way, and finding a way they will make a market. And at this point, things are colorless. These markets are content agnostic. Within certain limits, we don’t need to know or care about what’s getting bought or sold. We need only “sit back and watch” the thing take shape.
But here’s the rub. As corporations get into the business of world making, we are contemplating a marketplace where interest and advantage is not enough to bring people in. At the very least, we will need to sell the idea of how we create value. At the very least, we need demonstrate the idea of what we think we’re doing, not just the advantage that will flow to the user of our idea.
And this puts the marketplace on the verge of creating more than markets. Now they are on the verge of creating worlds. And I think this is coming in any case. I think we are beginning to suspect that we make worlds more surely and we can make them more interesting, when we supply some cultural or at least social materials. This is what branding is about. This is how Nike and Starbucks define what it is they do. Shoes? Coffee? Please. A much larger idea is at issue. But something much larger than branding is implicit in the enterprises undertaken by Facebook and Amazon. Capitalism may have embarked on a post-Smithian enterprise a long time ago.
Ok, so the corporation that wants to shape the world is obliged to make it vibrate with something other than advantage. Interest is good. Interesting is better. Supplying meanings is key. These are so much bailing wire for our emergent little world. It gives it form, and, giving it form, it makes it robust.
I’m not sure why but this little example leaps to mind. Consider the cafeteria at a public building that contains several city services, things like the tax department and the Motor Vehicle Bureau. Now consider a restaurant in Hollywood frequented by agents, producers and script writers.
In the first place, everyone is there for a reason; they are just starting or finishing their interaction with the city. They look at other people in the cafeteria, if they look at one another, with scant interest. Who are these other people? Who knows? Who cares?
The Hollywood restaurant is a different place. The parties are known to one another as old friends and old enemies. And even when they aren’t known to one another, an industry veteran can take one look at a nearby table and say, who’s who, how the negotiation is going, and what the upshot is likely to be. And she will do it with relish. She likes exercising her X-ray vision. It’s fun to read the world this well.
When Hagel, Seely Brown and Davison invite the corporation to shape markets, they open up a new prospect. It won’t be easy, this terra forming. At the moment, we are good at making meaning (Facebook) and good at making money (Amazon), but we are not good at doing both.
Overbye, Dennis. 2009. “They Tried to Outsmart Wall Street.” The New York Times, March 10 http://www.nytimes.com/2009/03/10/science/10quant.html?_r=1&pagewanted=2&th&emc=th (Accessed March 10, 2009).
Hagel III, John, John Seely Brown, and Lang Davison. 2008. Shaping Strategy in a World of Constant Disruption. Harvard Business Review. October.
Kim, W. Chan, and Renée Mauborgne. 2005. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press.
Taleb, Nassim Nicholas. 2007. The Black Swan: The Impact of the Highly Improbable. New York: Random House.