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Monday, June 04, 2007

About chess

Hollywood star Jessica Alba in this month’s In Style fashion magazine was quoted, “It’s dorky, but I like it. Nanotechnology blows my mind.”
Here’s something else to blow her mind when fighting with fellow gossip rag gals over which L.A. hotspot to eat at. Entrepreneurs can use the same tactic to negotiate term sheets. It’s a three-step process and probability is skewed in your favor:

First, challenge your opponent to rock, paper, and scissors. When you throw out your hand, go intentionally and noticeably late. Thus your opponent has revealed their first move and accuses you of being late. Demand a do-over and insist you’ll play fair this time. Now, most of the time your opponent will try to use reverse psychology—strategizing that you’ll think that they will change—and therefore most opponents repeat exactly what they threw the very first time. In this game, odds are good you’ll only have to beat their last hand.

Much of life and business (and all of gaming) is anticipating what an opponent will do next, selecting a strategy to attack or defend and then evolving from there.

It’s the theory of games, and in game theory, I’ve written often of the 2/3 game. Where the winner is the person who guesses the number between 0 and 100 that is closest to 2/3 of the average number picked by everyone. We know that any number above 67 won’t be picked. And 2/3 of that is about 45. You could also argue that perfect rationality would have everyone picking 0. But that only works if all players are perfectly rational and have assumed that all others are too. Last year I wrote this:

So, if you think everyone would pick 50, you should pick 2/3 of that which would be 33. But if everyone else realizes this also, then you should pick 22. But if everyone else is thinking this also then you should go down to 14. You can see taken to its mathematical extension where this is going—all the way to zero. But we know from personal experience and from markets, that people don't behave as mathematical theories predict. In fact, many people in the above game pick numbers of 50, many do in fact pick zero, but the best odds you have of winning typically hover around you picking a number between 15 or 20. That's because most people go two degrees of what other people think and not further.

I often refer to such games as Keynesian beauty contests. From the man himself:

"...professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.

It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees."

Like a game of chess—it's not enough to think a few moves ahead—you must think at least one move ahead of the number of moves your opponent thinks. Or as I've previously recounted more colloquially: two guys are in the woods when a bear comes running. One starts running, the others shouts, "it's no good—you'll never outrun a bear." The running guy turns back and says, "I don't have to. I only have to outrun you."

So: varying your strategy against an opponent keeps them on their toes. It keeps them guessing what you’ll do next.

It's why my eyes open instead of rolling when I learn that science fiction writers will be helping Homeland Security to anticipate attacks. We need their creativity. Our enemies aren't going to use shoes and 3oz bottles (unless they read my column and use the rock, paper, scissors trick)-it's the unknown unknowns we have to know about. Random checks of random things would make it harder for would be attackers to anticipate what's getting checked at any given airport. No matter how absurd or how low the probability, its good (and sad) to see our defenses evolving.

In evolution, Kevin Kelly has called this “The Infinite Game”. It has no end, no finish line, no winners—only players. Like life: you play to keep playing.

Evolution in businesses is much the same. There’s a website called Innocentive which is like an eBay for scientific problems. You post a challenge (like trying to find how to make some molecule) and some scientist tackles it, replies with a solution and collects a bounty. Here’s the interesting thing: some companies post phony problems to intentionally misdirect competitors that are scavenging the same site to get a whiff of what the other guy might be planning. The fake scent sends them on a different trail.

Sometimes it’s blind copycatting. Consider: A good number of telecom players blindly followed or mimicked WorldCom's capital spending—and it wasn't even real!

A similar strategy was allegedly concocted by the US intel community in Reagan’s Star Wars and other highly touted defense spending arms race. The result: the former USSR spent itself into bankruptcy (they fell off the anecdotal treadmill). As Lewis Carroll wrote when Alice met the Red Queen after running and getting nowhere:

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing. "A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

This so-called Red Queen Effect defines the relationships that evolve between predators and prey. When any prey adapts (stronger, quicker) they’re matched by counter-adaptations from their predators. It’s an ever-escalating arms race with any advantage being transient at best. The threat of being eaten or not eating is ever present.

This same threat is also why we have sex. Our threat is the biggest collective one on the planet (besides the proverbial prognostication of Pogo, “We have met the enemy and he us.”). That threat is the 10^30 microorganisms that are the largest part of the planet’s biomass. Bacteria, viruses, fungi, protozoa, micro-algae, you name it (actually it’ll take you too long).

All of sex, all our pursuits of material status; and all our obsessions with symmetrical beauty as indicators of fertility—derive from what I’ll dub that Tourneau-tuner with ocular obstructions and severe macular degeneration (read: the “blind watchmaker” aka ‘evolution’).

Sex shuffles the deck. Instead of 52 cards, we have 46 chromosomes (23 from each gametes). Sure enough, there’s that word ‘game’ again. The shuffling yields different hands—quite literally actually. Different fingerprints, different allergies and immune systems to fend off the weight of the world’s biomass that would do us harm. All those microorganisms evolve quicker than we do—their lives are shorter (then again, I’m not sure if I’d prefer one enormous Kafka-esque cockaroach that lived a long-time or many hundreds of thousands of them in my building that reproduce and died quickly).


Back to shuffling, in business: mergers and acquisitions serve much the same effect. Metaphorically, they infuse the DNA of one company into that of another—sometimes the effect creates a duo that better fights old and new competitors. Sometimes there is an auto-immune response and it eventually spits it back out (see recent headlines and Chrysler).

In the venture capital world, small companies might fail (and far quicker than large companies) but the cumulative iterations learned from each other’s mistakes, coupled with adapting and evolving, births new sectors and yield GMs, Genentechs, Googles who in their time (and on their era's fitness landscapes) disrupt the old order.

Evolution in life and technology markets is about variation (through random mutation) or iterative product designs or business models, natural selection (through market forces, consumer demand) and amplification through capital markets that quickly pump up or turn off the flow of cash to those businesses or individuals that can best allocate it to the highest returning opportunities.

I’ll save all the intricacies and analogies between biology and business in errors mutations and things doing a Bill-Murray-in-Tokyo—that is getting “Lost in Translation”. But I will relay this apocryphal story:

A young monk arrives at a monastery. He’s assigned to helping the other monks copy the old canons and laws of the church by hand.

He notices all of the monks are copying from copies, not from the original manuscript. So, the new monk goes to the head abbot to question this, pointing out that if someone made even a small error in the first copy, it would never be picked up! In fact, that error would be continued in all of the subsequent copies.

The head monk, says, "We’ve been copying from the copies for centuries, but you make a good point, my son." So, he goes down into the dark caves beneath the monastery where the original manuscripts are locked away in a vault that hasn't been opened for hundreds of years. Hours go by and nobody sees the old abbot.


So, the young monk gets worried and goes down to look for him. He sees him banging his head against the wall and crying. "We missed the R! We missed the R! We missed the R!"


His forehead bloodied and bruised, the young monk asks the old abbot, "What's wrong, father?" With a choking voice, the old abbot sobs, "The word was...CELEBRATE!!"

by wolfe

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