Category Archives: Innovation

Capitalism, Socialism and Democracy (1950) – Joseph Schumpeter

In this book, Joseph Schumpeter coined the term “creative destruction”. ‘Nuff said.

And to recap, the other books in the Design and Innovation reading list are:

The Medici Effect – Frans Johansson – $14 paperback on Amazon Excerpts
The Innovator’s Dilemma – Clayton Christensen – $12 paperback on Amazon Excerpts
Adapt: Why Success Starts With Failure – Tim Harford – $12 paperback on Amazon Excerpts
The Black Swan – Nassim Nicholas Taleb – $12 paperback on Amazon Excerpts
The Underachiever’s Manifesto – Ray Bennett – $10 hardcover (only edition) on Amazon Excerpts

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The Black Swan (2007) – Nassim Nicholas Taleb

Economist and hedge fund manager Taleb explains that rare, outlier events are not as rare would like to believe, and have such a disproportionate impact that almost nothing else counts, no matter how large a sample of the non-outlier events we see Therefore we should cultivate positive ones (see discussion of the British Spitfire in Adapt) and guard against the negative ones (the 2008 financial crisis). Rational Wiki does a good job of explaining that a black swan event from the book has three properties:

Rarity

The black swan is a rare event. It lies outside the realm of common experience and nothing in our past experience points to its possibility. A black swan is that million-to-one chance that statisticians said would never happen because it was a million-to-one chance. Of course, million-to-one chances happen 9 times out of 10.

Extreme impact

When the black swan strikes, it has a massive impact. It is two of the world’s tallest buildings being destroyed, it is a stock market crash that wipes out billions, it is a tsunami or earthquake over a major city. Not only is the qualitative nature of the black swan outside our regular experience (meaning we can’t see it coming), so is its sheer size — a single event can dominate over all other factors.

Retrospective predictability

This property explains the concept of “black swan blindness” or “black swan denial”. It is the illusion that we can actually see things coming. This is because of the narrative fallacy; our ability to construct a sensible story using only the pertinent information, happily discarding the information that wasn’t actually useful in the end. This can only be done with the benefit of hindsight — failing to understand this makes you more vulnerable to their effects.

Rational Wiki goes on the why Gaussian statics betrays us as a model when we rely on it most:

An important point of Taleb’s is his criticism of the usage of “Gaussian” normal distributions as the backbone of statistical modelling when applied to phenomena that do not seem to follow such a distribution and are instead skewed by rare, but massive outliers. He comes up with the concepts of “Mediocristan” — the realm of properties that are Gaussian in nature, like people’s weight or height — and “Extremistan,” where properties like a person’s fortune, market behaviour or success in intellectual or artistic professions are unevenly distributed, and the inclusion or exclusion of one extreme outlier can massively change the overall picture.

This can be best visualised with a quick thought experiment. Take 100, or even 1000 people and compare their heights. Even adding in Robert Wadlow, the tallest man ever recorded, and his massive 2.72 meter frame he would only take up 0.17% of the total height and would barely skew the average by a single percent. However, if you took 100 or 1000 or even 10,000 people, compared their wealth and added Bill Gates’s amassed fortune he could easily dominate the group, holding 99+% of the money in the group. As Taleb notes when discussing this particular thought experiment in The Black Swan, the other thousands in the group barely represent a rounding error in Bill Gates’s personal fortune, or the average daily change due to random economic fluctuation. It’s this particular property that leads Taleb to conclude that history doesn’t just feature black swan events, but is controlled and shaped by them almost exclusively, with the little accumulative changes making little impact in the grand scheme of things. In Extremistan, a single outlier can absolutely dominate the group as a whole.

Links below are to second edition – 2010

Also see Taleb’s recent book Antifragile

Adapt: Why Success Always Starts With Failure (2011) – Tim Harford

From the book publisher

In this groundbreaking book, Tim Harford, the Undercover Economist, shows us a new and inspiring approach to solving the most pressing problems in our lives. When faced with complex situations, we have all become accustomed to looking to our leaders to set out a plan of action and blaze a path to success. Harford argues that today’s challenges simply cannot be tackled with ready-made solutions and expert opinion; the world has become far too unpredictable and profoundly complex. Instead, we must adapt.

Deftly weaving together psychology, evolutionary biology, anthropology, physics, and economics, along with the compelling story of hard-won lessons learned in the field, Harford makes a passionate case for the importance of adaptive trial and error in tackling issues such as climate change, poverty, and financial crises—as well as in fostering innovation and creativity in our business and personal lives.

From the book, Chapter 3

The following excerpt from the book discusses the Spitfire, the radical plane that saved Britain during WWII. It is so pithy and evocative I might as well quote it verbatim. A larger section of the book has been excerpted in the online magazine Slate. The business blog by Tim Kastelle and John Steen also has a good review of the book.

When we invest money now in the hope of payoffs later, we think in terms of a return on our investment—a few percent in a savings account, perhaps, or a higher but riskier reward from the stock market. What was the return on [the] investment of 10,000 pounds? Four hundred and thirty thousand people saved from the gas chambers, and denying Adolf Hitler the atomic bomb. The most calculating economist would hesitate to put a price on that.

Return on investment is simply not a useful way of thinking about new ideas and new technologies. It is impossible to estimate a percentage return on blue-sky research, and it is delusional even to try. Most new technologies fail completely. Most original ideas turn out either to be not original after all, or original for the very good reason that they are useless. And when an original idea does work, the returns can be too high to be sensibly measured. The Spitfire is one of countless examples of these unlikely ideas, which range from the sublime (the mathematician and gambler Gerolamo Cardano first explored the idea of “imaginary numbers” in 1545; these apparently useless curiosities later turned out to be essential for developing radio, television, and computing) to the ridiculous (in 1928, Alexander Fleming didn’t keep his laboratory clean and ended up discovering the world’s first antibiotic in a contaminated Petri dish).

We might be tempted to think of such projects as lottery tickets, because they pay off rarely and spectacularly. They’re rather better than that, in fact. Lotteries are a zero-sum game—all they do is redistribute existing resources, whereas research and development can make everyone better off. And unlike lottery tickets, bold innovation projects do not have a known payoff and a fixed probability of victory. Nassim Taleb, author of The Black Swan, calls such projects “positive black swans.”

Whatever we call them, such ventures present us with a headache. They are vital, because the payoff can be so enormous. But they are also frustrating and unpredictable. Usually they do not pay off at all. We cannot ignore them, and yet we cannot seem to manage them effectively either.

Various Formats on Amazon

The Innovator’s Dilemma (1997) – Clayton Christensen

The classic book on disruptive technology by Harvard Business professor Clayton Christensen. Find out why disruptive technology sneaks up on competitors, and why it is routinely ignored by the dominant market players.

From the Book

There are times at which it is right not to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

Every innovation is difficult. That difficulty is compounded immeasurably, however, when a project is embedded in an organization in which most people are continually questioning why the project is being done at all.

Hardcover on Amazon

Also see Clayton Christensen’s recent best seller, How Will You Measure Your Life?

Hardcover on Amazon

The Medici Effect (2004) by Frans Johansson

From the book publisher

Why do so many world-changing insights come from people with little or no related experience? Charles Darwin was a geologist when he proposed the theory of evolution. And it was an astronomer who finally explained what happened to the dinosaurs. Frans Johansson’s The Medici Effect shows how breakthrough ideas most often occur when we bring concepts from one field into a new, unfamiliar territory, and offers examples how we can turn the ideas we discover into path-breaking innovations.

From the book, Chapter 8

Linus Pauling, Nobel Laureate in both chemistry and peace, once said, “The best way to get a good idea is to have a lot of ideas.”

How then, can you seize the myriad opportunities at the Intersection?

There are at least three ways to proceed:

Strike a balance between depth and breadth
Actively generate many ideas
Allow time for evaluation

One way to handle the need for broad but deep knowledge is to team up with someone who has a different knowledge base from yours.

[Within an individual] one should gain knowledge in one specific area before striking out to other fields. I am not talking about world-leading expertise here, but enough to call it a core competence. Mijail Serruya at Brown’s Brain Science Program says that no matter how broadly other view him, he can “at least teach a second year course in neurology.”

Hardcover on Amazon