The Unseen Pitfall Of Extrapolation In Entrepreneurship
Why we can’t always trust the past to inform our decision-making process for the future.
Probability theory teaches us that when you flip a coin you have two outcomes: heads or tails.
It lands on one of the two, giving the probability of heads 0.5 and P(tails) = 0.5 as well.
But how do you know that?
How did you know there are only two possibilities?
How did you know that when you flipped it, it wouldn’t turn into a fire breathing dragon, burn your house down and fly away?
A gifted hypothetical baby who can speak perfect English but isn’t familiar with gravity, angular momentum, and basic Newtonian physics has no idea what will happen until you either tell him or he empirically experiences it.
To certain people, this seems like a profoundly stupid example, but it’s not.
It illustrates that (some of) the logic we have created is an extension of what we’ve observed empirically.
No one has ever seen a coin toss change into a dragon mid-toss, it always bounces and lands heads or tails, therefore we can assume it’ll always keep doing that and our physics* equations are based on that assumption.
Now such an assumption is reasonable under the laws of nature.
After all, I have experienced gravity every day of my life so it’s reasonable to assume it’ll continue.
I think we‘d’ all be surprised if tomorrow, there’s no gravity.
However, business doesn’t always work like this.
You have to be cautious with assumptions in business.
It is possible ‘’for the coin to change into a dragon mid-toss’’ because unlike the static laws of nature, ours are dynamic.
Why? Because the environment shifts, causing things that were true in 1 business climate to be false in another.
Pretty much all disruptive innovation is created this way.
You have an industry which has operated a certain way for decades and all of a sudden some tiny startup sees a way to do things differently.
‘’Nonsense’’, says the incumbent.
‘’That’ll never work! After all, it has never worked in the past.’’
Sometimes they’re right. Sometimes they’re wrong.
And when they’re wrong, that tiny startup disrupts an entire industry.
How can they be wrong? With so much expertise?
Because just like our coin example, their laws, their intuition, their equations, are extrapolations based on how the world used to be.
And as long as it continues to be like that it works.
But when the world changes, which it often does, they’re screwed.
This means you create a severe dependency on the absence of technological- and market evolution, for the status quo to remain the status quo.
(This is why the taxi industry sued Uber, why the RIAA sued Napster and so on…)
So what enables an incumbent to be disrupted when their way of doing things becomes misaligned with reality, is specifically the pace of technological- and market evolution.
Said in other words, the faster technology evolves and the faster the market evolves, the more they will have to change with it.
Refusing to do so means you’ll be stuck with a product that people don’t want.
And then it’s only a matter of time before selective evolution yields a startup ‘fit’ to survive in the new environment.
Ford made this mistake in the early 1920s.
His dream was to take the car from expensive toy for the rich to affordable to the everyday person… to put America on wheels.
However, as he started reaching that goal and the market became saturated with Model T’s, it created an appetite for cars that weren’t utilities *2.
Which Alfred Sloan capitalized on when he overhauled GM and launched the ‘’A car for every purse and purpose’’ thesis.
I talk about this in the essay: Why Do You Want A Faster Horse?
*Notice I said physics not mathematics. Mathematics is the only science which starts under perfect conditions.
We create axioms and reason from there. The only constraint that we have is that it doesn’t create an internal contradiction with the axioms.
All other sciences don’t function like that.
Richard Feynman once said: ‘’It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are, if it doesn’t agree with experiment, it’s wrong.’’
That’s not how math works. It doesn’t have that obligation. In the purest form of math, mathematicians are just creating and it’s up to people in other fields to see if and how they can apply it to the real world.
*2 Notice that fashion and nutrition went through similar evolution cycles going from mere utility to being more about the experience and being a means to express oneself.