Thoughts of The Week #55

Thoughts of the Week is a review of the most interesting thoughts I encountered on Twitter and on other mediums during the last week. It is free, but if you like it, you can support me on Patreon.

1/5: Closed systems

“If all you’ve ever known are closed systems you live in flatland, you literally cannot conceive the real world.” – Michael Driver (link)

I recently re-posted on Twitter the following thought experiment from Nassim Nicholas Taleb’s Incerto:

Imagine flipping a coin ten times and observing ten “heads”. What are the chances that upon the 11th flip it comes up as “heads” again?

Statistics textbooks mention that flips are independent events and do not influence each other. Accordingly, the probability of heads is still 50%. They even provide a name for the tendency of seeing trends where there aren’t: the gambler’s fallacy.

However, in real life, the true answer is “more than 50%”.

There are two possible reasons for which the coin flipped heads ten times in a row. Either you have witnessed an extraordinary event due to randomness, or the game is rigged (the coin is fake or the person throwing it is a skillful swindler).

In the bounded world of textbooks on statistics, it is assumed that the coin and the throw are fair. In the unbounded world of real life, there might be events which are not covered by the rules of the game. 

The correct answer to the question “what are the chances of the 11th flip being heads” is: 50% x (1 + the probabilities that the game is rigged). The total is strictly larger than 50%, as one cannot exclude the possibility that the game is rigged.

What is rational under known or bounded conditions is irrational otherwise, and the other way around. This is called the ludic fallacy.

The implication: whenever you think that someone is behaving irrationally, either he knows something you don’t, or he’s not accepting some boundaries you arbitrarily imposed.

2/5: Attention

“We will debate attention inequality like we debate wealth inequality.” – David Perell (link)

Attention is the new real estate. It is scarce and businesses can be built on top.

I wouldn’t be surprised if, in the near future, someone will propose we regulate attention. After all, some countries already do it during election time, mandating a maximum air time per candidate or otherwise assuming equality.

To continue the partial analogy with real estate, what are the interest rates on attention? How do they vary as attention span decreases and alternatives increase? How does it impact audience acquisition costs?

These questions all seem pretty nebulous now, but I wouldn’t be surprised if the analogy would grow increasingly relevant. After all, someone is already microselling attention (e.g., Basic Attention Tokens / BAT).

3/5: Just In Time

“Just In Time (JIT) production is a form of operational leverage. And like all forms of leverage, there is a non linear downside effect.” – Dan McMurtrie (link)

Businesses which implemented strict JIT with a supply chain sourcing from China are getting serious problems this week.

The common example about JIT is avoiding storing components in a warehouse, asking instead the supply truck to come just in time to unload the components to the production line, saving handling and storage costs.

There is a common misunderstanding about JIT. It is not about removing waste (though doing so is a welcomed byproduct). JIT is about removing buffers so that problems can surface so that they get addressed.

Buffers such as warehouses hide problems like a fragile or unreliable supply chain. If you have a stocked warehouse, you don’t care about the supply delivery being a few hours late. Removing buffers allows problems to surface so that they become urgent and get addressed.

Problems grow the size they need for you to acknowledge them. Solving problems early is how you keep them small.

However, removing buffers also makes a system more fragile, as companies are discovering this week.

The solution is to prevent the systematic usage of buffers while keeping them in place. For example, keeping some stock but forbidding its usage (if possible).

This way, you can both have your cake and eat it too. The downside is, of course, the storage costs which are still there. The advantage is that you reduce handling costs, drive operational excellence and keep redundancy high.

Bad companies remove observed volatility by increasing skewness (ie, by pushing problems into the future). Great companies remove future volatility by training employees.

(This is an illustrative example only, case-by-case specifics have to be considered. More on this in my book on Operational Excellence.)

4/5: Your list

“If you do anything, make a curated list of the best of everything you’ve ever done. It’s very little marginal work for surprising amounts of marginal benefit.” – Patrick McKenzie (link via David Perell)

I fully subscribe to Patrick’s advice. Here is a list of my Twitter threads, for example and here is a curated list of the best ideas that emerged from my research.

When most people hear the word “portfolio”, they think that it has to be visual or that it has to be huge. Both attributes help, but they should not stop you from creating a curated list of the best of everything you’ve ever done.

It takes 10 minutes to list the top 3 things you’ve done. You can literally do it within today. Then you can reference it very easily with a link, in your email signature, in your twitter profile, etc.

If you worry that your list is not impressive yet, don’t worry. Having a public written list already puts you in the top 5%.

5/5: Lagging indicators

_{Chart by @TESLACharts}

The number of confirmed coronavirus cases is a lagging indicator. It has some information about the past (“some” because we cannot assume 100% test coverage and accuracy), but very little information about the future.

Case in point: data up to the 18th of February in Korea was little indicative if any of what was to come in the next few days.

Instead, we should focus on measuring leading indicators – indicators which have some predictive power. For example, the number of people crossing the border from infected countries, the number of people one meets in his average day, the number of people wearing a mask and so on. (Some of these indicators are positively correlated with the number of cases and some are negatively correlated.)

This is not to say that lagging indicators are never to be used. However. As a rule of thumb, the more the object measured is subject to multiplicative dynamics, the less useful lagging indicators are (up to the point that they can become harmful, for they invite excessive risk-taking).

My own essays of the week

I didn’t publish any essay this week, I was too busy writing my next book, to be published in July (but you can pre-order it today). Here is a review from the first edition.

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(Here is my general disclaimer.)

The order of the thoughts only represents the order in which I encountered them, and does not imply any sort of prioritization. Quotes are edited for punctuation and grammar. Eventual formatting is mine. Also text outside of italicized quotation marks is mine. The inclusion of quotes does not imply my endorsement; merely, that they gave me food for thought. I did not optimize this review for clarity, but for its ability to spark thoughts in the reader.