Originally published at: https://blog.12min.com/why-most-things-fail-summary/
Evolution, Extinction and Economics
Who Should Read “Why Most Things Fail” and Why?“Why Most Things Fail” is Paul Ormerod’s successor to his popular “Butterfly Economics.”
In it he does what he did best in his previous book as well: he explains phenomena in economics by examining lessons from biology.
He presents a wide array of theories and subjects to gain better access to the nature of the failure.
We recommend this remarkable book to all readers that have pre-knowledge in this field.
About Paul OrmerodPaul Ormerod was a founder of a consulting firm, the head of the economic assessment unit at The Economist, a professor at the universities of Manchester and London, and the director of economics at the Henley Center for Forecasting in England.
"Why Most Things Fail Summary"No corporation is immune to failure.
Even monopolistic corporations are not completely safe.
Risk is accompanying every business endeavor.
At the end of the 19th century, pioneering economist Alfred Marshall argued that big companies, just like old trees, will eventually die out.
Later in his career, around the beginning of the 20th century, he changed his thesis, arguing that large corporations come to a point when they stagnate, but they do not die out.
But, guess what?
He was right the first time.
When you look at history, you will notice that most of the companies that existed in Marshall’s time do not exist anymore.
However, economists seem to ignore this fact of business reality, treating failure like some kind of exception to the rule.
In other words, traditional economics is connected to equilibrium (the balance between demand and supply), which is static.
However, societies are made of people who act in different circumstances, which has nothing to do with being static.
In fact, they are continually changing and moving.
Furthermore, traditional economics simplifies the approaches for business management, which is an extensive and complex subject.
Hence, most of the data that traditional economics offers, such as pricing, costs, and competitive response, are frequently not adequate.
People need to understand that failure shows itself in many faces since economic systems are almost random.
Any economic phenomenon is a combination of countless small decisions. So, it is not possible to assess how individual choices influence the “big picture.”
Big effects do not always result from big causes.
In his time Marshall came up with an economic theory, which ignored all uncertainty in economics. His supply and demand graphs leave no room for chance.
However, think of auctions.
Auctions show that Marshall ignored a vital fact of market life.
Then there is the game theory which was thought to be a right approach to examining the market since it offers techniques which can be used to analyze different strategies and payoffs.
However, the inventor of game theory, Merrill Flood, gave the argument up realizing that people do not act in a way that would be “rationally” the best.
Game theory has numerous limitations indeed when applied to real life condition. For one, it is highly unpredictable.
Yes, at first the theory may sound, but unexpected things and interactions happen which mess up the “logical and reasonable” outcome that one would expect.
Hence, logic and reason will not help us in any way to predict how others would act in a particular situation.
Then there are the borrowings from evolutionary biology that many economists make, believing that evolution is survival of the fittest, which should be true for the business environment and well.
However, that is not the case.
The relationships among species are very complicated, and absolute fitness cannot be determined. Fitness is related to a particular moment when all connections are aligned.
The truth is, evolution is random.
Predators and prey may at first glance seem antagonistic, but they actually cannot survive without one another.
Extinction seems to be required for the world to keep functioning well.
Similarly to animals, businesses operate in an environment that cannot be thoroughly analyzed.
Even well made, reasonable models do not resonate with businesses since they do not allow for the unexpected, uncertain and unclear to play its part.
Key Lessons from “Why Most Things Fail”1. The Prisoner’s Dilemma Game 2. The Reality of Extinction 3. Government Regulation
The Prisoner’s Dilemma GameTwo prisoners face a choice: if both confess they will get a moderate sentence. If neither confesses, they go free. If one confesses to the other, he will go free, and the accused will get a life sentence.
The best individual option is a confession, and the best option for both of them is to be silent.
Although accusation of the other is a guaranteed way to get released, prisoners always choose remaining silent, defying reason and logic.
The Reality of ExtinctionFirms do not need to face a massive external shock, such as unstable politics and war, to become extinct. Yes, failure can be a result of external factors, but it does not have to be.
The same goes for “mistakes.” Companies do not always fail because of bad decisions.
Extinction is built into the system. The relationships between all actors in the economic order are impossible to enumerate.
Hence, just a small change can result in failure.
Government BewareGovernments often set rules and penalties for different economic events, guided by the logic of the traditional economic theory.
However, since economics is random, it is easy to come up to the conclusion that it cannot be regulated.
Governments should instead encourage experimentation and innovation.
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“Why Most Things Fail” Quotes[bctt tweet="Paradoxically, failure at the detailed, individual level, whether plan or animal, company or government policy, is absolutely necessary for the health and vitality of the system as a whole." username="get12min"]
[bctt tweet=“We need change and evolution to make progress.” username=“get12min”]
[bctt tweet=“Evolution implies extinction, the discarding of ways of working that have outlived their usefulness.” username=“get12min”]
[bctt tweet=“Societies that attempt to shut themselves off from the process of change are the real losers.” username=“get12min”]
[bctt tweet=“Change is difficult. Change is disturbing. Change brings uncertainty. Change creates failure. But it also creates success.” username=“get12min”]
Our Critical Review“Why Most Things Fail” is a remarkable book, on a compelling subject.
However, it is far from easy to read, so readers who lack at least basic knowledge of economic studies and scientific writing may find it too hard to understand.