Mental Models

Inversion: The surprising secret of winning in business.

jitha

2013 was a big year for me. But at the end of it, I was left wondering if it had been a hopeless waste of time.

I had been thinking about quitting my job and starting up, for a while. But I took the plunge in Jan 2013.

Got two solid co-founders, an interesting SaaS idea, and a few months of runway. Thus began the entrepreneurial dream.

Fast forward 10 months.

The product was ready, customers were mildly interested. But it was clear it wouldn’t work.

It was a structural effort-value mismatch. A long sales process and too much integration effort, but not a must-have product.

We tried many things but the writing was on the wall. The revenue would never justify the effort.

And here’s the other thing: we were running out of runway (personal savings). We couldn’t continue paying salaries for much longer.

So that was it then – end of the entrepreneurial dream? 12 squandered months, and then sanity prevails?

Time to go back to a regular salaried job?

Before we talk about what happened next, let’s take a short break and talk about… tennis.

The Amateur Game of Tennis.

One of my favorite David Foster Wallace (he of “This is water” fame) lines is from his essay, Derivative Sport in Tornado Alley:

I couldn’t begin to tell you how many tournament matches I won between the ages of twelve and fifteen against bigger, faster, more coordinated, and better-coached opponents simply by hitting balls unimaginatively back down the middle of the court in schizophrenic gales, letting the other kid play with more verve and panache, waiting for enough of his ambitious balls aimed near the lines to curve or slide via wind outside the green court and white stripe into the raw red territory that won me yet another ugly point.

It wasn’t pretty or fun to watch, and even with the Illinois wind I never could have won whole matches this way had the opponent not eventually had his small nervous breakdown, buckling under the obvious injustice of losing to a shallow-chested “pusher” because of the shitty rural courts and rotten wind that rewarded cautious automatism instead of verve and panache.

In professional tennis, Federer wins by hitting the ball accurately to the far corner. But in amateur tennis, you win simply by not hitting the ball out of bounds.

In fact, in amateur tennis, you don’t win matches. You avoid losing them.

It’s boring, yes. But that’s a feature, not a bug.

And it’s surprising how far you can go, by just following this dictum: Keep it simple.

Ankesh Kothari has another great example, in How to participate in the Olympics without any skill:

Elizabeth Swaney participated in the 2018 Winter Olympics in freestyle skiing. She skied straight without performing any tricks that the sport is known for. And she came in dead last. That’s not the surprising part however.

The surprising part is that she had never won any skiing competition in her whole life, and yet she qualified for the Olympics!

How can one qualify for the Olympics without winning any competition at all?

Swaney did one thing better than anyone else. She showed up. She attended all of the qualifying events in the two years before the Olympics. All of them. She didn’t miss a single one. And in all of the events, she skied straight, never falling down. Many of the contestants would do tricks and swirls and jumps in the air to show their skills. And many of them would inadvertently fall. Swaney never fell once.

And that’s how, she outperformed her more skilled colleagues and got enough points to qualify for the Olympics without winning any competition. Because she never failed.

Now, this is not just an idea from sport. You’ve heard of it before…

Inversion: A surprisingly powerful idea.

The power of Inversion

One of Charlie Munger’s pet mental models is Inversion.

It’s a simple but profound idea.

To win, don’t lose.

Morgan Housel has a great paragraph about how Warren Buffett did exactly this:

There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”

But we know that’s the key to the majority of his success; it’s just hard to wrap your head around that math because it’s not intuitive. There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up And Wait.”

If you take away Buffett’s top 10 bets, he would look quite mediocre. The two secrets of his success are:

  1. Not striking out. He stays within his circle of competence, so he never risks complete ruin.
  2. He’s been doing this consistently for 75 years

That’s what winning is mostly: not losing.

Over a 40 year career, as long as you don’t shoot yourself in the foot, you’ll win.

In a power law world, optimize for staying in the game.

In a power law world, effort ≠ outcomes.

Luck plays a big role. One big break can make all the difference.

In such situations, it’s important to stay in the game.

It’s like surfing – you need to stay in the water. You need to be patient, and lie in wait for the big wave.

It’s hot out there. You might be ready to leave in an hour. “The water’s quiet today, let’s go grab a beer.”

And just as you step out, there comes a monster wave!

That’s why…

Do what you can to stay out there.

Don’t burn out. Keep adequate runway.

Keep experimenting and trying different things – you don’t know what will click.

But don’t take existential risks. Take small risks that you can manage.

Nowhere is this truer than in the case of startups. 90% of startups fail. A tiny proportion reach steady profitability. And a much tinier proportion create life-changing wealth.

So… I’m going to give you some strange advice.

Don’t be like Elon Musk.

Elon Musk is the archetypal visionary entrepreneur. Ignore naysayers, stick to your vision, and win big.

But again, don’t be like Elon Musk!

He bet all his wealth throwing one last Hail Mary. And he did that several times. Funding one last launch for SpaceX after all the previous ones had failed. Saving Tesla from the jaws of bankruptcy.

In this universe, it all worked out and he’s the world’s richest man. But it so easily might not have worked, and he would have flamed out.

Pablo Escobar's Brother Says Elon Musk Stole His Flamethrower Idea, Wants $100 Million Payment
Instead, he’s selling flamethrowers.

So don’t be like Elon Musk. Be like Phil Knight instead.

In 1966, his company, Blue Ribbon Sports, was running out of cash to expand. His bank refused to give him working capital. And the only other bank in town had already rejected his application!

So he went back to work as a CPA at PwC. Plowed most of his salary back into the business to make it work.

He did this for 5 years.

First, the company stayed barely alive. But soon, some of its experiments started working.

The company still exists today, btw. You may know of it as Nike.

Quick interlude: If you like what you’re reading, don’t forget to subscribe! Many say Sunday Reads is the best email they receive all week.

Coming back to my story.

Where did we leave off?

Oh yes, me staring at a blank wall and a vanishing bank balance, wondering if this was it.

But then I asked myself, “Did you really expect that your first idea would be a hit?”

Of course not. So, the answer was clear: Do whatever we can to keep going.

So I went back to my consulting firm. Luckily I had enough trust in the system to work part-time (8-16 hours a week) on specific projects.

I put all my income back into the business. My co-founder did the same.

We pivoted the company and hired developers to build a consumer-facing app instead.

And the payoff came soon after.

We launched the product within 5 months. And within one month of launch, we had 18K users. We were onto something!

I’ve written before about what happened next. How we went from ~20K users to 200K users, with *zero* marketing spend.

But it all started with that one move. Flipping from default dead to default alive.

What did I learn?

At the highest level, this is what I learned: To win, don’t lose.

To win, don't lose. Invert.

In life and business, winning is not as much about spectacular victory, as it is about *not losing*.

Do the small things right and don’t die, and over a 40 year career, you’ll win big.

More specifically, I came away with three lessons:

#1. Optimize to stay in the game, in a power law world.

When luck is a big factor, you need to have as many “at-bats” as possible. So prioritize staying alive.

To win big, you need to take risks. You need to experiment. But never take the risk of ruin, no matter how small.

Don’t play Russian roulette, even if the gun has a hundred slots and just one bullet.

Take risks, but also protect yourself. When in doubt, remember the barbell strategy (I also wrote about the barbell strategy for crypto investing here).

#2. When you see an opening, swing hard!

When the big wave does come, that’s the time for action!

In late 2014, we saw an opportunity to partner with PAYBACK (India’s largest loyalty player at the time, with ~50M users). We went all-out to get the deal (including a lot of negotiation prep: Never Split the Difference is a great resource. My summary here).

We also guerrilla-ed our way into a free video endorsement from a movie celebrity. But that’s a story for another day.

#3. Keep it simple.

When you’re about to try something new in your business, ask yourself:

  • Is this like curving the ball into the top corner? What if I miss? Is it game over?
  • Or is there something simpler I can do, to keep the ball in play?

When in doubt, keep the degree of difficulty low. Make it easy.

Stack a few easy steps on top of each other, and voila! You have a 10/10 triple somersault.

PS. There are many great examples of successful entrepreneurs who kept their previous jobs when they started up.

The most fascinating is Herb Kelleher, who kept his private law practice for 14 years after starting Southwest Airlines.

Read that again – 14 years, running a frigging airline as a side hustle!

More in my twitter thread here.

The Grand Unified Theory of Management

jitha 2 Comments
Theory of Constraints

The Theory of Constraints is the closest we have to a Grand Unified Theory of Management. It cuts straight to the problems that matter, be it in business or your personal life.

It’s a simple statement:

Any system with a goal has one limit. Worrying about anything other than that limit is a waste of resources.

Eli Goldratt propounded it in his 1984 book, The Goal, as a series of observations on assembly line manufacturing. But it applies to nearly everything.

Why is it so powerful?

Three Easy Pieces

The Theory of Constraints is a set of three simple statements, in a tightly connected chain of logic:

#1: Every system has one bottleneck tighter than all the others.

A limiting factor more limiting than the others. A weakest link in the chain.

#2: The performance of the system as a whole is limited by the output of this one bottleneck.

If you increase the throughput of this one bottleneck, the throughput of the entire system increases.

#3: Therefore, the only way to improve the performance of the system is to improve the output at the bottleneck.

What does this mean? It means that any improvement not at the constraint is an illusion. For the same reason there’s no way to strengthen a chain without strengthening its weakest link.

You can do your best to increase capacity of all the non-bottleneck steps. Or, when you realize there’s actually excess capacity at all these steps (by definition – when the bottleneck is at full capacity, all other steps have excess capacity) you can do your best to fill them up.

But it will make no damn difference at all.

Stated even more simply, this is the Theory of Constraints:

Any system with a goal has one limit. Worrying about anything other than that limit is a waste of resources.

Theory of constraints - Summary

So, solving any problem is a series of three simple (but not easy) steps:

  • Step 1: Identify the current most limiting factor.
  • Step 2: Identify the most obvious way to improve this limit, and implement it.
  • Step 3: Go back to Step 1. Because there will be a new limiting factor. There is always one limiting factor.

Why do we not do this totally obvious thing?

When your business struggles to deliver its output, or you struggle to lose weight despite all your attempts – it’s usually because of one of three reasons:

Solving the wrong limit:

You’re hiring more capacity in the sales team to get more deals. But the constraint is really in the delivery team.

In the weight loss domain: you’re cutting calories, when the issue is that you’re stressed and cortisol is wrecking havoc with your body.

Solving yesterday’s limit:

This is a little like army generals who fight the last war.

Yes, sales was the constraint 6 months ago, and so you decided to hire 3 people. But it’s no longer the limiting factor after you got one person.

Once a limit is removed, doing more of it just won’t help.

As Taylor Pearson says in his article, “what got you here won’t get you there”. What gets a business off the ground is not what keeps it in the air.

Not realizing when the limiting factor has changed:

By focusing the entire team on sales proposals, guess what, delivery is suffering. So now inflow of business is no longer the limit. It’s actually servicing that business.

But you don’t realize it until 3 months from now, when the clients don’t renew.

There’s a meta-reason too.

There’s a meta-reason too, which causes us to make these errors.

Seeing something that’s hard to solve, we decide to solve something easier.

A great example of this is the classic Bike-Shed Effect, or the law of triviality.

From Wikipedia:

Parkinson provides the example of a fictional committee whose job was to approve the plans for a nuclear power plant spending the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike shed, while neglecting the proposed design of the plant itself, which is far more important and a far more difficult and complex task.

The example is fictional. But we’ve all seen it.

Like spending a company leadership meeting discussing how to increase profits by reducing employee per diems. Instead of the real strategic choices to navigate a recession. (I’ve seen this).

Sometimes it’s almost too banal.

We start the meeting saying, “there are 4 topics to discuss today. Let’s do the easiest 3 topics quickly, and then devote some time to the thorny one”. Well, guess what, you spend 25 min on the easy topics (Parkinson’s Principle – work expands to fill the time you give to it). And then the next 5 min scheduling a follow-up to discuss the thorny issue.

OK, I’m being a little unfair. Because this stuff is HARD. We want to make progress. It boosts our self-esteem, among other things. And ticking a box “DONE” feels like progress. Even when it isn’t.

At other times, this mistake is almost invisible. It looks like more legitimate progress.

I used to run a consumer internet startup in India. An app called Smart Saver, where people could upload receipts from their grocery purchases, to get cashbacks.

During our initial days, my team and I brainstormed and built a lot of features to keep people on the app. Including both mechanisms (do xyz tasks to earn more cashback) and content (giving cashbacks for brands we hadn’t yet partnered with), etc.

But any progress on this was an illusion.

As a small app with 20K users at that time, the main constraint wasn’t retaining those 20K users. It was a constraint, yes. But it wasn’t the critical one.

The critical constraint was going from 20K → 200K users.

Any cool features we were building would solve only the less-important constraint.

But it was actually worse than that. Onboarding funnels themselves are leaky. So, any down-funnel feature would be seen only by a proportion of the users who installed the app. The rest would have dropped out of the funnel at the top! So, our cool and nifty features would be seen only by a small proportion of the miniscule 20K users we had!

I wrote about this in Drunkards and Streetlights:

We brainstorm and build cool new features for our apps, when the onboarding funnel itself is leaky. Andrew Chen calls this the next feature fallacy….

for most of a startup’s life (after Product/market fit, but before it becomes a Facebook), the top of the funnel (i.e., how you get new users) is the biggest constraint.

And any improvement not at the biggest constraint is an illusion. For the same reason there’s no way to strengthen a chain without strengthening its weakest link.

We realized this 6 months in. We started focusing our efforts solely on that critical constraint – building our user base and onboarding flow.

We did get to 300K users. And then we hit a different critical constraint, one that we couldn’t solve. Another story for another day.

Any progress not at the constraint is a trick you’re playing on yourself.

I’ve been angel investing in startups for the last 3+ years, with middling success. It was only recently (after a 10x exit, as it happens), that I realized the critical constraint. The structure of angel investing itself.

Until I solve for that (work in progress), I won’t be more successful.

I wrote about this as well in Drunkards and Streetlights:

…the hardest part is finding the best companies.

Even if you’re almost psychic at picking winners, you can only pick winners among the startups you see (i.e., under your streetlight).

And in a power law world (which the world of startups certainly is), one startup makes all the difference. What if it’s one you just missed investing in? That one networking dinner you missed. That one week you were on holiday. The unicorn is just 5m away from your streetlight, but completely in the dark.

And it doesn’t end there. Even if you do find tomorrow’s billion dollar company, so will other, bigger institutional investors. And they will have no remorse muscling you out, as Paige Craig found out with Airbnb….

But let’s say you clear this hurdle as well. …What happens then?

Congratulations. You get muscled out in the next big round. This happened to me and OperatorVC.

OK then. So what do we do?

A cliche (or two) is a good place to start.

First, take a step back.

It’s important to see the larger picture. And you can’t do that when you’re busy solving a problem in some tiny nook of your system.

Next, make a list.

Step #1: Define your objective function: What is the definition of “victory” here?

This may sound trivial, but it isn’t. Far too often, you realize that you (and your team) might not be optimizing for the truly important stuff.

Step #2: Make a list of all the factors that will help you achieve this victory. Be as detailed (or not) as you want.

Important to think broad enough.

If your objective function is “Improving profitability”, just listing all the cost heads isn’t enough.

Far too often, the biggest factor driving (or constraining) profitability is revenue. There’s a limit to how much you can cut, but no limit to how much you can earn.

Similarly, the environment often plays a disproportionate role, but we ignore it. For example, the biggest constraint on your productivity is often in the environment, rather than in your process.

Step #3: Identify the most critical constraint.

This is deceptive. Sometimes the most critical constraint is obvious. At other times, it isn’t.

It helps to ask, for each of the factors listed: “If I make a 20% improvement in this element, will it drive a 20% improvement in the overall outcome?”

That’ll get you thinking. “Yes, improving the efficiency of the finishing machine will help! Oh, but wait a sec – actually then it’ll just bunch up at quality control.”

Remember – at any time, there’s always ONE constraint that’s more critical than others.

Step #4: Fix the critical constraint, and then go back to Step 3 (now there’ll be a new most critical constraint).

A couple of examples.

Taylor Pearson has a great example from business, in his article: Business Strategy: A Framework for Growing Any Business.

Source: Business Strategy: A Framework for Growing Any Business

Start with the four big heads, and see which is a bottleneck. e.g., Let’s say it’s Personal operations. Then you dive in, and figure out which sub-head is causing the problem. And then you solve for that. Repeat.

This is also something I faced when I was trying to increase my writing throughput.

I used to feel that I’m not reading enough, and that was hampering my writing (due to inadequate source material).

But when I thought about it (and looked at my notes), I realized that I was actually reading enough. It’s just that I wasn’t processing the notes fast enough. i.e., that’s the bottleneck I need to solve for.

Therefore, now, whether or not I read any new articles / books, I reflect and write everyday.

Soon, the bottleneck might shift back to the top of the funnel. I’ll be ready.

Hope you liked the article. If you’d like to receive more such articles directly in your inbox, don’t forget to subscribe to Sunday Reads!

Fortnite, Apple, and the Fate of the Metaverse – A Game Theory Perspective

jitha 1 Comment

I woke up Friday morning to see this video trending on Twitter.

I thought it was quite epic. Fortnite mocking Apple with a parody of its own iconic Super Bowl commercial from 1984. (See original below if you haven’t).

Now, I don’t play Fortnite, but I have been following the ongoing war (if only of words, until this week) between Epic Games (the maker of Fortnite) and Apple.

But when the two players took it up a few notches this week (Apple banned Fortnite on the App Store; Epic released the video above, and also started a lawsuit and a PR campaign against Apple), my first thought was: “Such an interesting move!”

Because that’s what this is – one move, in an ongoing battle of wits between the two players.

And like all games, it can be analyzed, to predict the outcome.

But first, an overview of the game board.

If you’re already familiar with Fortnite and the ongoing saga, feel free to skip this section.

But if, like me, you haven’t played Fortnite and are wondering what the fuss is about, read on.

Fortnite is an online video game developed by Epic Games. It’s quite new – launched only in 2017. But it has been a gargantuan success – in just 3 years, it has amassed 350 million users (as of April 2020).

Beyond being just a game, it also doubles up as a virtual world for people to interact. Think Second Life, only much better. Think Metaverse, if you’ve read Snow Crash. Or the Oasis from the movie Ready Player One.

Like most games, it has a mobile app for iPhone and Android. And like all mobile games, it has to pay Apple and Google a cut (30%) on all in-app purchases.

In Fortnite, players can buy skins, “costumes”, or virtual currency called V-bucks (1000 V-bucks for $9.99) for use in the game. This is a substantial source of revenue for Epic Games. Fortnite brought in USD 1.8 Billion in revenue in 2019. Of course it pinches to give Apple 30% on all purchases.

Epic has tried to push Apple to waive this fee for Fortnite in the past, but Apple has stayed firm.

So, this week, Epic snuck in an update in its mobile app, allowing users to purchase V-bucks directly from the company, side-stepping the App Store’s 30% commission. Something Apple prohibits developers from doing.

And so, to nobody’s surprise, Apple banned the app.

And Epic immediately released the video above, announced an anti-trust lawsuit, and started a social media and PR campaign.

And by the way, Epic planned this from the start [1].

I know what you’re thinking. Why would Epic voluntarily get its app banned from the App Store, losing millions of users?

It all makes sense, I promise.

But for that, you need to understand the two players.

Player 1: Epic Games

Epic Games has been going at Apple for a while, regarding the App Store monopoly.

See here, for instance, Tim Sweeney (CEO of Epic Games) comparing Apple to the DMV.

Tencent owns 40% of Epic Games. Having a Chinese company as a significant owner is not an amazing situation to be in, in the US today.

To learn more about Epic Games and its strategy, check out Matthew Ball’s epic (well) six-part primer.

Player 2: Apple

Apple has significant share of the mobile phone market in the US (~60% of mobile phones in the US are iPhones).

It’s embroiled in an anti-trust battle with the US government.

It has a history of arm-twisting and bullying smaller companies. For instance, if your company’s logo is a fruit, even if it’s not an apple, Apple can make your dreams go pear-shaped.

Do these two logos look similar to you? To Apple, they do.

Epic is not the first company at loggerheads with Apple regarding the 30% commission. Netflix and Spotify, among others, have stopped selling subscriptions on the App Store altogether. You can use Spotify and Netflix on iPhones. But if you want to pay for them, you have to visit their websites.

OKAY. Enough talk, let’s get on with the game.

The game begins. Ready Player Two.

Apple has pre-committed to removing an app from the App Store if it tries to bypass its rules. No matter how important the app is.

Given this pre-commitment, Apple had no choice when Epic tried to bypass it with its “sneaky” update.

In a sense, Epic forced Apple’s hand by doing this. It forced Apple to appear aggressive by banning its app. Even though it was the only move Apple could plausibly make.

Epic was already engaged in a PR battle with Apple (accompanied no doubt by closed-door negotiations). Apple wasn’t budging.

Epic could have continued the battle of attrition. But instead, by forcing Apple to carry out its threat, it has constrained the gamespace.

It has made it much harder for Apple to now offer only a symbolic olive branch.

But again, why would Epic want to get its app banned, losing millions of users?

Fact is, as Peter Rojas says in this interview, this is not a exorbitantly expensive threat for Epic to make. Only 20% of Fortnite players are primarily on mobile.

And this number is likely to grow over time, making it harder for Epic to take this approach in the future.

Ergo, the best time to do this was yesterday. The second best time is NOW.

Like Denzel Washington says,

Training Day Denzel Washington GIF - TrainingDay DenzelWashington …

Game Theory Sidebar 1:

Threats and commitments are important tools in strategic games and negotiations.

To quote Thomas Schelling in The Strategy of Conflict [2]:
“The sophisticated negotiator may find it difficult to seem as obstinate as a truly obstinate man. Deterrence won’t work for the truly obstinate.

It’s very easy to keep demanding during a negotiation, because you (a) will always accept less, than not having a deal, and (b) you can always retreat if they don’t accept. But the other side knows this too, so it’s an impasse.

If a man comes to your porch and says he’ll stab himself if you don’t give him $10, you’re more likely to listen if his eyes are bloodshot.“

“Bargaining power = the power to bind oneself”.

“It’s a voluntary but irreversible sacrifice of freedom of choice, to signal that you can’t retreat from a certain ask.”

“If you commit to a path of action, the opposite party has lost all leverage”

Epic just stole Apple’s lunch. And leverage.

The Middle Game

Epic is trying to rally developers to its side. It’s trying to paint the battle as a David vs. Goliath struggle. The meek, tiny developer taking on the formidable bully.

But it’s unlikely to work, for two reasons:

  • Epic is a huge company itself (valued at USD 17 billion), backed by Tencent, a USD 600 billion behemoth. This is like Godzilla fighting King Kong. We don’t care, except the fast-paced action is fun to watch.
  • Small developers might actually prefer the App Store [3], because it gives them a semblance of a level playing field. Consumers trust all apps on the App Store, because they know Apple has vetted and approved them. So, even if you’re a small developer, customers don’t worry about giving you their credit card details. Trust is important!

Epic will no doubt also play up the anti-trust / monopoly angle.

It will ask, “Should one company have so much control on mobile users’ choices?” This line of attack has more promise, as we’ll see in the end game.

Apple, for its part, is trying to tell consumers it’s no big deal (it is).

Image

Before we go to the endgame, a quick interlude.

Game Theory Sidebar 2:

Quoting again from The Strategy of Conflict:

In a negotiation, if you ask for 60% and then go down to 50%, you will be expected to dig your heels in. And so the counter-party will push less. If you say 47%, they’ll assume that you can give up more and will push until you find another persuasive new boundary.

In war, similarly, one cannot satisfy an aggressor by letting him have a few square miles on this side of a boundary. He knows that we both know that we both expect our side to retreat until we find some persuasive new boundary that can be rationalized.

That’s also why “just one more drink” is a very unstable compromise.

Some outcomes have intrinsic magnetism. Outcomes that are prominent, unique, simple, or have a precedent / logic, drive agreement towards them. Often, this eventual compromise point can be predicted in advance.

For example, in a price negotiation: rounding down, splitting the difference, etc. are explicit expectations of counter-offer. And you often have no choice but to follow this drill. Even if you had strong prior reasons to quote 51.5% as your first offer.

These focal points / likely outcomes are called “schelling points”.

Framing the situation in a way that coordinates expectations of the opposite party towards your favored outcome – this schelling point – can multiply the probability of success.


So what’s the “schelling point” of this battle between Apple and Epic Games? Let’s see in the end game.

The End Game

I see three possible outcomes from this impasse.

Outcome 1: Apple gives in and waives the commission for certain in-app purchases.

There is a sort of precedent for this.

McDonald’s doesn’t pay a commission on every in-app purchase of food. Neither does Uber, on every ride booked through the app.

But there’s an important distinction. Food purchases and cab rides have a very real marginal cost of fulfillment.

What about virtual currencies? Not so much. 1000 V-bucks on Fortnite cost Epic exactly zero real bucks to make.

And this is an outcome Apple really does not want.

If they allow this once, the floodgates will open. Every app will move to an in-app purchase model, and frame it in exactly the same way as Epic Games has.

And even Apple accepts this as a special deal with Epic Games, it sets a dangerous precedent. Because Microsoft xCloud and Google Stadia (cloud gaming services) will come next.

No, this is not a hill that Apple wants to die on.

Luckily for Apple, this is also not a position Epic games can defend.

As Ben Evans says,

Moreover, the App store is not all eye-gouging profiteering. It does provide a service, and that does costs money.

  • Users like it – it allows them to trust new apps from unknown developers.
  • Developers like it too, for the same reason. It gives them a level playing field.

Putting it all together:

Probability of Outcome 1: 10%.

Outcome 2: Apple reduces its commission and everyone wins.

Again, this makes sense at a high level.

Apple’s 30% has no basis in logic. Steve Jobs chose 30% because it was the same as iTunes.

What! Let’s get this straight. In 2003, iTunes decided to charge artists 30% of individual song sales. That’s the only reason why the totally unrelated App Store charges 30% for apps!

There is clearly room to go down. And push comes to shove, Apple would be ready to reduce the commission. After all, it already has different slabs of commission for different kinds of products.

Maybe it can reduce it to a new schelling point. 25%? 20%?

However, this is not what Epic wants. They want to pay zero percent commission to Apple.

To Epic, the stand is philosophical. And while this may be a coincidence – it’s also more lucrative ?.

  • Today, mobile accounts for only 20% of Fortnite users. Epic can afford to reject any sweeteners and fight for the grand prize. Better to fight now, rather than later when the downside of a ban is higher.
  • And there’s an even grander prize waiting. Epic has its own app store (not allowed on iOS yet), where it charges other games a commission of 12%. Seeing how successful Apple’s App Store is, that’s a lucrative business to be in.

So yes, a commission reduction will happen. Apple will make a peace offering. It may even lead to a tenuous peace.

But it won’t end the negotiations. Epic will hold out for Outcome 3.

Probability of Outcome 2: 30%.

Outcome 3: Apple allows other app stores.

This is what the App Store is, to iPhone users. The only bridge crossing into town.

A user cannot download an app to the iPhone from outside the App Store. Android has alternate app stores and also allows you to directly install apps. iPhone does not.

The analogy of the toll bridge is one that trust-busters and anti-monopolists like to use. It came up in antitrust investigations when Buffett acquired the Buffalo Evening News in 1977. And it will come up for Apple.

This is where Apple’s position is weakest, and this is where Epic is hitting it.

As M. G. Siegler says in “The App Store Commandments“, maintaining an “only bridge to the iPhone” approach made sense in 2010. But it’s not acceptable anymore.

This is what Epic is gunning for. Breaking the Apple App Store’s monopoly on the iPhone, and introducing its own Epic app store.

Epic could have held out for a reduction in fees (Outcome 2). It could have negotiated a win-win closed door deal (Outcome 1). But no.

By forcing Apple to ban its app, Epic has bent reality through a new focal point – the inability to reach users if Apple aggressively bans an app.

This then, is the long-term schelling point – alternate app stores for iPhone.

It may take one year. It may take two. It will be fought hotly by Apple, before it capitulates.

All it’ll take is one bad Congressional anti-trust hearing. And then, Apple will look at Android. It’ll see that even though Google allows other app stores, its Play Store still accounts for a huge majority of Android app downloads[4].

It will reason that developers will still prefer the Apple App Store, if only because there will be much fewer users on other app stores.

Probability of Outcome 3: 60%.

And that’s how Apple will finally get a second app store. And a third. And a fourth.

All it takes is one big bite.

Hope you liked the article. If you’d like to receive more such articles directly in your inbox, don’t forget to subscribe to Sunday Reads!

Footnotes:

[1] Read more details in this article from the Verge: “The company behind Fortnite dared Apple to shutter its game on iPhones. Now Apple has gone ahead and sort of done that.

[2] The Strategy of Conflict is a great book on applying Game Theory to the real world. It’s unfortunately not available on Kindle. Don’t worry if you can’t access a physical copy – there are PDFs of the book that you can find on Google.

[3] I said the App Store is more pro-developer than less. But of course, we haven’t heard Tim Cook chant chant “Developers… Developers…” like this guy.

[4] Except in China, where Google Play is banned.

The best of Jitha.me – A Compilation

jitha

Today I send out the 100th issue of Sunday Reads. It’s a good time to look back.

So I’m compiling some of the most well-received articles I’ve written over the last few years. On startups, business and management, and on mental models that make us more effective at what we do.

Hope you find the articles useful! Don’t read them all at once. Read whatever catches your fancy. You can always come back later ?.

[PS. It’s also a good time to subscribe if you haven’t. You’ll get issue #101 next Sunday. I promise you won’t regret it.]

The World of Startups

How to save yourself from a bad startup idea that looks good.

(Go to article).

This is an article I wrote in late 2015, a couple of years into my startup and when I was just starting OperatorVC, the angel fund I invest through.

It struck a chord with readers. It still gets 100+ views a week (and ranks in top 3 on Google for “bad startup idea”) despite being not very optimized for search.

We have plenty of startup ideas. Many of them are bad, and we dismiss them right away (or our friends warn us off the idea).

They’re the easy ones.

The dangerous ones are the ideas that look quite good. The ones that give you goosebumps, and then three wasted years.

In this article, I list some of the common patterns that such plausible (but actually bad) ideas have, so that you can spot them early and save your time.

Read on here.

On a related note: Why describing your startup as the “Uber of X” is a bad idea. Yes, despite what Y-Combinator says.

How Uber solved its Chicken and Egg problem (and you can too!).

(Go to article).

Some of the most exciting companies of the 2000s are multi-sided networks. Think Uber, or Airbnb, or even ecommerce marketplaces. They’re massive, and they have immense defensibility.

Anyone who wants to compete needs to get both suppliers and consumers, at the same time.

That’s the proverbial chicken and egg problem. How do you get consumers when you don’t have suppliers, and vice versa?

Turns out there are four specific ways you can solve the chicken and egg problem.

Read on here for examples of each of these solutions.

I’ve also captured it as a framework on Slideshare, that you can download.

Your Minimum Viable Product can be more minimum than you think.

(Go to article).

Most of us in the startup community understand the concept of a Minimum Viable Product, or MVP. It’s the most basic version of your product that still delivers your core offering.

Aiming for an MVP helps entrepreneurs (especially first-timers) avoid the rookie mistake – building too much product before validating market need. We all want the ten revolutionary features in our first version. But not only will these features take five extra months to build, most users will also not see them.

So that’s the concept of an MVP. Sounds simple, right?

And yet, we slog for 3 months to build the MVP. And congratulate ourselves on finding out it didn’t work, and then spend another 3 months on a pivot.

Three months is way too long! Why does the MVP take so long?

The reason is that we’ve got the notion of an MVP all wrong.

Read on here.

The World of Business and Management

What I learnt from talking toilets in rural Bihar.

(Go to article).

My last project in consulting (back in 2012) was to develop a market-based solution to the problem of sanitation in rural Bihar (one of India’s poorest states).

At that time, less than 20% of households in rural Bihar had toilets. And many of those who did have toilets, didn’t use them – they would defecate in the open instead.

Against this intimidating backdrop, we set out to build a private-sector led solution to the problem.

And we were fairly successful. The project helped over 500K rural households construct toilets in their homes. It increased the number of toilets in our focus districts by 10 percentage points.

This article talks about the timeless lessons I learned through the project, on markets, consumers, and how to sell.

On a related note, the job to be done framework. Or, as they say, “You don’t sell saddles. You sell a better way to ride.”

What doesn’t get measured… doesn’t exist?

(Go to article).

We’ve all heard the saying “What gets measured, gets managed”.

A simple, yet powerful thought. With a simple corollary – what doesn’t get measured, doesn’t get managed.

But in reality, the corollary is far more extreme.

In the eyes of the person responsible, what doesn’t get measured… doesn’t really exist!

Read on here, to see the dark flipside of this common management adage.

On a related note, the Availability heuristic. Or “what you see is all there is”.

How to manage your team LIKE A BOSS (even while working remote).

(Go to article).

This is a more recent, and more topical article.

Effective team management (whether in-person or remote) can be distilled into five key axioms.

Call them the Minimum Effective Dose, or the 80:20 of team management.

Team management 101

Read on here .

Hiring Great People.

(Go to article).

This links back to the previous article. You can only work with people you end up hiring. So, hiring well has an inordinate influence on your team’s future output.

Hire well, and you have an NFL Dream Team. Hire badly, and at best you get a squabbling dysfunctional family. Not much effective team management you can do there.

In the same vein as the previous article, here are 7 key learnings on hiring.

1. Hire only when you absolutely need to.

2. Don’t be too hard on yourself. 1 in 3 hires don’t work out – if you do it right.

3. False Positives are OK. False Negatives are not.

4. What to look for in candidates: drive and self-motivation, innate curiosity, and ethics.

5. A few tips for running an interview process. Most important one – do reference checks.

6. How to let people go. Decisively, but with sensitivity. It’s your fault – not theirs – that you hired them into a role where they can’t succeed.

7. Diversity will not happen on its own. You’ve got to make it happen.

Read on here.

The World of Mental Models

What are “mental models”?

They are tools that help us understand the world faster and better. Instead of approaching every new problem from scratch.

Simple but powerful concepts, that help us understand situations more clearly, and make quicker yet better decisions.

For example, take this core principle from economics: “There ain’t no such thing as a free lunch“. It reminds us to look at every wonderful business deal with care. What’s the catch? There’s always a catch.

In a way, mental models help us think in a more “modular” fashion.

Modular programming makes software much faster. In the same way, mental models are the modules that soup up your decision-making engine.

Mental models are the modules that soup up your decision-making engine.

Over the years, I’ve written about a few powerful mental models, that have helped me think faster (and better) about business problems.

Listing a few of them below.

Hope you like some of these articles!

Do write back or comment with the articles you liked best, and I’ll share more on those topics in the coming weeks.

And don’t forget to subscribe, so you get issue #101 of Sunday Reads!

They will never take… our FREEDOM!

jitha
psychological reactance
Mel Gibson in Braveheart, feeling a little blue.

Last Friday, the lockdown in Singapore was lifted. It was a glorious, sunny day. As I looked out of my window and saw a few people swimming in the pool (it was closed through the lockdown), my first thought was, “I’ll go for a swim this evening. It will be amazing.”

My second thought was, “Wait, that doesn’t make sense!”

  1. I hate swimming.
  2. I’m not a good swimmer.
  3. In the two years I’ve lived in this condo, I’ve never used the pool. Not once.

So what the hell happened there?

What happened was, I got some freedom back, and I loved it. Even if I’ve never actually used that freedom, and therefore, its value to me is precisely zero.

This was a benign example. But this yearning for freedom, even when we don’t actually need it, is an intense force driving our behavior.

The term for this is Psychological reactance. Here’s Wikipedia on the subject:

Reactance is an unpleasant motivational arousal (reaction) to offers, persons, rules, or regulations that threaten or eliminate specific behavioral freedoms. Reactance occurs when a person feels that someone or something is taking away their choices or limiting the range of alternatives.

As Dr. Robert Cialdini says in Influence: The Psychology of Persuasion, this is a powerful impulse.

As opportunities become less available, we lose freedoms. And we hate to lose freedoms we already have.

This desire to preserve our established prerogatives is the centerpiece of psychological reactance theory.

According to the theory, whenever free choice is limited or threatened, the need to retain our freedoms makes us desire them (as well as the goods and services associated with them) significantly more than previously. So when increasing scarcity—or anything else—interferes with our prior access to some item, we will react against the interference by wanting and trying to possess the item more than before.

That’s why we have these videos of people rejecting masks in different parts of the US.

In this one, a protester thunders, “I will not be muzzled like a mad dog!”.

And the video in this twitter post has a few strange quotes:

  • “They want to throw God’s wonderful breathing system out the door.” Umm, no.
  • “You, doctor, are going to be arrested for crimes against humanity!” (for saying that people should wear masks).
  • “The mask is literally killing people”.

That’s why young parents experience the “terrible twos”.

Around the age of two, children come to a full recognition of themselves as individuals. This newfound sense of autonomy also brings along the concept of freedom. And the child wants to explore and test (again and again) the boundaries of this freedom.

Much to the chagrin and frustration of the parents.

There’s this hilarious example in Cialdini’s book, about banned detergents in Florida.

Dade County (containing Miami), Florida, imposed an antiphosphate ordinance prohibiting the use—and possession!—of laundry or cleaning products containing phosphates.

A study done to determine the social impact of the law discovered two parallel reactions on the part of Miami residents.

First, in what seems a Florida tradition, many Miamians turned to smuggling. Sometimes with neighbors and friends in large “soap caravans,” they drove to nearby counties to load up on phosphate detergents. Hoarding quickly developed; and in the rush of obsession that frequently characterizes hoarders, families were reported to boast of twenty-year supplies of phosphate cleaners.

The second reaction to the law was more subtle and more general than the deliberate defiance of the smugglers and hoarders. Spurred by the tendency to want what they could no longer have, the majority of Miami consumers came to see phosphate cleaners as better products than before.

That’s also why book censoring doesn’t work.

Or rather, it works too well. It’s every new writer’s dream for their first book to be banned.

Readers not only want the book even more than before, the book also gets a halo effect of “truths they don’t want us to hear”.

Have you noticed other examples of psychological reactance? Of how we overvalue unimportant freedoms we’re about to lose? Hit reply or comment, and let me know!

COVID-19 and Taboo Tradeoffs

jitha
COVID-19 Quarantine

Scott Alexander has written a great “where are we now” primer on COVID-19: When all you have is a hammer, everything starts looking like a dance.

Apart from his updates on how we’re doing in our battle against the virus, there were two pieces I wanted to call out. One interesting, and one insightful.

Why are some countries containing COVID-19 better than others?

Scott evaluates the different theories for why some countries are doing better than others.

  • Stay at home orders: Don’t seem to have mattered at all.
  • General government policy: Also seem to matter much less than we’d imagine. We thought Korea and Taiwan are doing well because of their brilliant governments. Japan, on the other hand, denied the problem for a long time so they could still stage the Olympics. Yet, they’re not doing too shabbily.
  • Testing policy: Yes, this matters, as I’ve mentioned before in Sunday Reads #85: Black Swans, Honesty, and Dishonest Statistics. But most (developed) countries are now testing properly, so this doesn’t explain the differences either.

Clearly, there’s still a lot to discover about this virus.

Lockdowns and taboo tradeoffs.

Second, and I found this far more insightful: He also talks about the importance of framing.

Coronavirus has killed about 100,000 Americans so far. How bad is that compared to other things?

Well, on the one hand, it’s about 15% as many Americans as die from heart attacks each year. If 15% more people died from heart attacks in the US next year, that would suck, but most people wouldn’t care that much. If some scientist has a plan to make heart attacks 15% less deadly, then sure, fund the scientist, but you probably wouldn’t want to shut down the entire US economy to fund them. It would just be a marginally good thing.

On the other hand, it’s also about the same number of Americans who died in the Vietnam War plus the Korean War plus 9/11 plus every school shooting ever. How much effort would you exert to prevent the Vietnam War plus the Korean War plus 9/11 plus every school shooting ever? Probably quite a lot!

Sure, you say, “This is a good example. But I already know the importance of framing, and anchoring.”

Great. Then let’s try another one for size.

Suppose you reopened the economy tomorrow. You tried as hard as you could to put profits above people, squeezed every extra dollar out of the world regardless of human cost. And then you put a 1% tax on all that economic activity, and donated it to effective charity. Would that save more people than a strict lockdown?

If a lockdown costs $5 trillion, then the 1% tax would make $50 billion. That’s about how much the Gates Foundation has spent, and they’ve saved about ten million lives.

Ten million is higher than anyone expects US coronavirus deaths to be, so as far as I can tell this is a good deal.

This reminds me of the discussion on Taboo Tradeoffs in the Rationality fan-fic, Harry Potter and the Methods of Rationality. Won’t share any spoilers, but the gist (I paraphrase from Chapters 78-85):

When you compare the value of sacred vs. secular objects (e.g., paying $5M for a liver replacement so a person can live, vs. for improving medical equipment), you make a taboo tradeoff.

Whenever you refuse to pay a certain amount (“I will not donate $2M for upgrading medical equipment”), you set an upper bound on a life.

Whenever you agree to pay a certain amount (“I will pay $5M to get this poor person a liver”), you set a lower bound on a life.

And if these two bounds are inconsistent, it’s an opportunity to move money to achieve a greater good.

Margin of Safety, or why you should always save for a rainy day

jitha

[Note: I shared this mental model with my email subscribers on Feb 12, 2017. If you want to receive a new mental model every week, join the club.]

Margin of Safety: You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000-pound trucks across it.

What it is:

Margin of safety is a critical principle in engineering.

Let’s say we’re building a bridge, and the maximum weight of vehicles we expect on the bridge is 5,000 tons. So do we build it to withstand 5,000 tons? 6,000 tons?

No. We build it to withstand 20,000 tons. That’s the margin of safety.

When you save “for a rainy day”, that’s what you’re doing. Building a contingency fund. A margin of safety for your lifestyle, should you lose your job.

As Seth Godin explains in Breakpoints: when laying a sidewalk, workmen don’t put long slabs of concrete in place. Instead, they keep small gaps every few feet. That’s a margin of safety too – in case the concrete breaks or expands in unpredictable ways.

[Tweet “”You build a bridge that 30,000-pound trucks can go across and then drive 10,000-pound trucks on it.”]

Examples from business:

  • Investing: Margin of safety is a core tenet of value investing, popularized by Benjamin Graham and David Dodd. As Warren Buffett, a long-time protege of Ben Graham, says: “If we calculate the value of a stock to be only slightly higher than the price, we’re not interested.”
  • Startup fundraising: You don’t raise just enough capital to get to your next round of funding. If you want to raise your next round at $1Mn in revenue, raise enough now to get to $2Mn. Better still, raise enough to become profitable. Similarly, don’t start looking for investors when you have one month of cash in the bank. Start when you have six.
  • Capacity planning: Most services organizations keep a bench (idle employees) of up to 20% of their total headcount. So that they can service any sudden requirements. Same goes for manufacturing – as they say, if you have 20% spare capacity, you have no spare capacity.
  • Project planning: When drawing out a project plan, always put in a few buffer days / weeks.

[Aside: we almost never do this. There’s even a name for it. The planning fallacy – how we believe that this time, unlike all previous times, we’ll finish the project on time.]

[Tweet “”If you have 20% spare capacity, you have no spare capacity.” #marginofsafety #mentalmodel”]

Rules to follow:

  1. Always build a margin of safety. Whatever you’re doing, estimate how long, how much money, etc. it’ll take. Then add a buffer.
  2. Expect your plans to go awry. Do a premortem. And then build redundancy / backups.

As Seth Godin says in the article above, there’s no doubt the ground will shift. The question is: when it does, will you be ready?

[fancy_box id=5][content_upgrade id=606]Want to get new mental models straight to your inbox? The next one arrives this Sunday – don’t miss it![/content_upgrade][/fancy_box]

Further Reading:

 

Linked to: Redundancy, Premortem

Filed Under: Engineering

Cognitive Dissonance, or why it’s so hard to persuade people with facts

jitha

[Note: I shared this mental model with my email subscribers on Feb 5, 2017. If you want to receive a new mental model every week, join the club.]

Charlie Munger Quote on Cognitive Dissonance

Why is it so hard to persuade people with facts?

You feel like their argument stands on three key pillars, and you’ve destroyed all of them with hard data. Still, it remains standing. In fact, they’ve dug their heels in even more!

Why does being corrected trigger feelings of anger and dismay?
Short answer: Cognitive dissonance.

 

What it is:

Why does cognitive dissonance happen? As this article says, there are two main reasons:

  • Our brains don’t store facts as standalone pieces of information. We remember data points as a network of interrelated “facts”. So, when one of them is called into question, it feels like the entire network of beliefs is threatened. Loss aversion kicks in.
  • When an argument threatens your world view, self concept, or your very identity, facts can even backfire. You become more convinced of your erroneous stand, when you hear you’re wrong.

Strange things happen when you think your identity is attacked.

See the GMO study in the article above, or this interesting example of cognitive dissonance from the ever-provocative Scott Adams.

And cognitive dissonance isn’t triggered only in an argument. In any setback, you choose the interpretation most favorable to your self esteem. Just ask Aesop:

The Fox & the Grapes - Cognitive Dissonance

[Tweet “”We have a habit of distorting the facts until they become bearable for our own views.””]

Rules to follow:

So, what do you do? Or, as the title of this section says, how do you convince someone when facts fail?

  1. First, articulate the opposite position accurately. Acknowledge that you understand why someone could hold that opinion.
  2. Stick to the facts, and layer them up gradually. First, the raw information. Then, a second order inference. Agree on both. Only then, bring up your controversial conclusion.
  3. Keep emotions out. Discuss, don’t attack. No absurd absolutes. No ad hominem. And definitely no ad Hitlerum.
  4. Don’t activate identity when arguing a point. Show how changing facts doesn’t necessarily mean changing world-views.

If you and your stubborn interlocutor are a little geeky, try the Double Crux method. [I’m still trying to find a fellow geek I disagree with, to try this.]

[fancy_box id=5][content_upgrade id=606]Want to get new mental models straight to your inbox? The next one arrives this Sunday – don’t miss it![/content_upgrade][/fancy_box]

Further Reading:

 

Linked to: Confirmation Bias

Filed Under: Psychology & Human Behavior

The Premortem, or how foresight can also be 20:20

jitha 1 Comment

[Note: I shared this mental model with my email subscribers on Feb 5, 2017. If you want to receive a new mental model every week, join the club.]

Premortem

Or as more ancient stoics said, “Premeditatio malorum”. Or “premeditation of evils”.

 

What it is:

We’ve all heard of the postmortem in business. When something goes wrong, all the decision-makers get together to diagnose what happened. And learn how to prevent it from happening again.

In theory, at least.

What really happens though, is an advertisement for hindsight bias. Everyone suddenly remembers how they “always knew it wouldn’t work”.

As Amos Tversky said, “The writing may have been on the wall all along. The question is: was the ink invisible?”

[Tweet “”The writing may have been on the wall all along. But was the ink invisible?” #hindsightbias”]

A premortem asks the same question as a postmortem, but before you embark on your endeavor. “It’s two years from today, and our plan has been implemented. But it’s been a disaster. What went wrong?”

Explicitly going through such a thought experiment can help avoid the overconfidence and groupthink that team decisions can suffer from. We all love “playing the devil’s advocate” – here’s an executive license (and order) to do so!

[Tweet “We all love “playing the devil’s advocate” – a #premortem is a clear license to do so! #mentalmodel”]

Examples of premortems / thought experiments:

Here are a few examples of thought experiments to try.

1 Year from Now:

  • We haven’t hit product-market fit yet. We took too long to launch our initial product. What features could we have left out?
  • Half our customers didn’t renew their contracts. Why? What went wrong?

 

3 Years from Now:

  • Our startup has just shut down. We just couldn’t hit a growth trajectory. What are the reasons for this failure?

 

Rules to follow:

  1. When you’re making a big decision, make sure you think about what could go wrong. And protect against it. Don’t only think about what happens when the plan works – you’ll fall prey to the focusing illusion.
  2. Every few months, revisit and repeat the premortem. Have you covered for the main risks? Have any new risks opened up?

[fancy_box id=5][content_upgrade id=606]Want to get new mental models straight to your inbox? The next one arrives this Sunday – don’t miss it![/content_upgrade][/fancy_box]

Further Reading:

 

Linked to: Focusing Illusion, Hindsight Bias

Filed Under: Decision-making

The focusing illusion, or why “it’s not really as important as you think it is”

jitha 1 Comment

[Note: I shared this mental model with my email subscribers on Jan 29, 2017. If you want to receive a new mental model every week, join the club.]

Focusing Illusion Quote

What it is:

Have you been subjected to this nifty party trick? A person at the party claims to be able to read your psychology from manipulating your hand.

He presses your thumb backward, and says, “Hmm, you look like you’re often stubborn.” You’re surprised – it is true!

Later, you cross paths again. This time, he presses the thumb back and says, “You’re a surprisingly flexible person.” And that seems true too. You can think of several instances when you demonstrated surprising flexibility.

 

So which is it? Probably neither. You, my friend, have been subjected to the focusing illusion.

Just like the respondents to a question, “Are you adventurous?” in a research study. 97% said “yes”.

When you think of or focus on something, your subconscious assumes it’s important. After all, why would you think about it otherwise?

It’s recursive logic, with a healthy dollop of confirmation bias.

You focus on it, therefore it’s worth focusing on.

 

Examples in business (and elsewhere):

What you focus on seems important.

  • When you’re fundraising, it seems like make-or-break for your startup. But it isn’t. Money from customers, not investors, will drive success for you. If you’re building something useful, you’ll find a way.
  • You commit a silly mistake at work on Friday evening, and then you’re in torment all weekend. But your boss – he barely notices it on Monday morning. It wasn’t that important after all.
  • “There’s no such thing as bad publicity.” Fading movie stars crave it – at least it gives them presumed importance in the public’s eyes.

[Tweet “”There’s no such thing as bad publicity.” #focusillusion #mentalmodel”]

What you focus on seems true.

  • The positive test: In deciding whether a possibility is correct, we look for hits rather than misses. Just like the adventurous respondents in the survey above, we can be flexible or stubborn. It depends on the question. This kind of one-sided question (e.g., asking only whether you’re dissatisfied about a situation), is called a positive test. Beware when you hear such a question – maybe your counterpart wants to send you down a specific line of thought.
  • Medical students and their diseases: It’s common for medical students to feel they’ve contracted the latest disease they’ve heard about. They read that pneumonia produces pain in a particular place, concentrate attention on it, and get alarmed at the slightest sensation. This is so common, there’s an aphorism for it in medicine:

“When you hear hoofbeats, think of horses, not zebras.”

  • If 2016’s Brexit and US presidential campaigns have taught us anything, it’s this: Say anything often enough, and people will think it’s true.

[Tweet “”When you hear hoofbeats, think of horses, not zebras.” #focusillusion #mentalmodel”]

What you focus on seems causal.

  • Offer people a lot of money to do something, and they’ll do it for free. The listener automatically assumes the task is very important to you. (That’s why you’re willing to pay so much!). Try this the next time you’re trying to jump ahead in line.
  • The most visible action is assumed to be causal: When a company misses its projections, newspapers attribute it to a recent government announcement. Or a tepid product launch to a bad ad campaign.

 

Rules to follow:

How do we save ourselves from the focusing illusion?

  1. Don’t make big decisions in the heat of the moment. It’s quite likely you’re overestimating the importance of a couple of factors. Calm down, sleep on it, and make the decision later.
  2. Beware of one-sided questions. It’s quite likely that your counterpart is priming you towards an answer they prefer.
  3. Whenever you’re making a big decision, do a premortem. Make sure to think about what could go wrong, and protect against it.
  4. In summary, remember Kahneman’s adage: Nothing is as important as you think it is when you’re thinking about it.

[Tweet “Nothing is as important as you think it is when you’re thinking about it. #mentalmodel”]

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Further Reading:

 

Linked to: Confirmation Bias, Availability Heuristic

Filed Under: Psychology & Human Behavior