Paradox of loss aversion

...but it is interesting that, all of a sudden, baseball teams and football teams become, in general, more strategically correct when they have more on the line.
In the World Series, closer usage is a lot better, when you bring your best guy in in the eighth inning or the seventh inning. You see in the NFL teams will go for two more often in the playoffs, go for it on fourth down more often in the playoffs. Which is a hint that when the stakes are low, culture tends to prevail. When the stakes are high and the outcome of the game is all that matters, then things are different.

An answer from Nate Silver in a conversation with Tyler Cowen, emphasis mine. The context is sports, but this is a paradox that occurs in real life so often, especially in the business world.

[BTW, a conversation between those two should be self-recommending, but if it isn't, consider this a recommendation. Sports and politics (what's the difference, really?), New York real estate, food, travel...they cover all their favorite topics.]

So often, companies will try anything that what is the right move, just because it's culturally expedient. Pressure from shareholders, investors, employees, reporters, your current users, and the public at large prevent companies from doing the right thing until they're at death's door.

It may be uncomfortable to do something controversial when things are going well (why rock the boat?), but it's far more pleasant to make changes when you're still growing than when you've hit the shoulder of the S-curve and are starting to flatline.

Mathematically, you should never buy insurance in Blackjack, even if you are dealt a Blackjack yourself, but depending on how you've been running up until then, you might buy insurance, just to break a losing streak. When things are going bad, you might stop hitting on 16 or 12 even when the probability says you should, even though it's sub-optimal strategy.

So many times at Amazon we'd do things that the stock market would punish, but Bezos had enough control of the company and the conviction to ignore the cultural pressure and make the right long-term move. It's not surprising that some of the most successful technology companies today like Facebook, Amazon, and Google are able to shrug off external pressures. The founders have a controlling stake, of course, but also the will to enable their employees to play optimal strategy all the time, even if the risk of failure is higher.

Successful modern technology CEOs remind me some of studio executives in the 60's, many of whom, like Robert Evans, enabled directors to take creative risks. Now that most movie studios are public corporations, largely set up as financing vehicles, that type of movie is harder to get off the ground. The economics have changed, too, but the larger point is that leaders who understand that loss aversion is sub-optimal strategy need to create an environment in which the right types of failures are tolerated, even encouraged.

Loss aversion is most damaging, I suspect, when it's your current users who protest the loudest. If you're not willing to do your own customer segmentation, the market does it for you, and the largest segment is the the silent majority that choose not to use your product/service.

Especially for networks, analyzing the people who've tried and abandoned your service is just as important, if not more so, than rejoicing over those that have. The latter are of course critical to understanding your product-market fit, but the former are just as critical to assess when you're likely to hit the upper shoulder of the S-Curve.

The paradox of loss aversion is that so much of tech is winner-take-all, like tournament poker instead of a cash game, so loss aversion is often the strategy that leads directly to total loss.

Minecraft as platform

Fun appreciation of Minecraft by Robin Sloan.

To play, you must seek information elsewhere.

Was it a conscious decision? A strategic bit of design? I don’t know. Maybe Markus Persson always intended to create an in-game tutorial but never got around to it. If so: lucky him, and lucky us, because by requiring the secret knowledge to be stored, and sought, elsewhere, he laid the foundation for Minecraft’s true form.

Minecraft-the-game, maintained in Sweden by Persson’s small studio, is just the seed, or maybe the soil. The true Minecraft (no italics, for we are speaking of something larger now) is the game plus the sprawling network of tutorials, wikis, galleries, videos—seriously, search for “minecraft” on YouTube and be amazed—mods, forum threads, and more. The true Minecraft is the oral tradition: secrets and rumors shared in chat rooms, across cafeteria tables, between block-faced players inside the game itself.

When I first started working on the Amazon Web Services team in 2003, one of the things Jeff Bezos hammered home to us was the importance of building everything at the most atomic level possible so they could be reassembled in ways unimaginable even to us. I had lunch with him once and we were talking about our interests outside of work, and he mentioned his love of this book Creation: Life and How to Make It by Steve Grand. The book discusses, among other things, how complex things can be built if you have the right building blocks, and one of the most important attributes of those building blocks was that they be defined as simply and atomically as possible.

So, for example, when we discussed a payment web service, Jeff didn't want a security layer built in. That was something separate from the core of an atomic payments service which should just be about sending and receiving money. 

I have not played Minecraft before, but Sloan's article gives me the sense it has that same atomic nature that characterizes generative platforms for really creative work.

My favorite networked services all have that quality, but capturing value from these building blocks in the form of revenue is a trickier problem and often involves building products and services on top of that very platform.

One of my favorite and most beautifully atomic building blocks of the web, Twitter, is grappling with that same issue. I've been meaning to share some thoughts on some possible ways forward for Twitter because the possibilities are fun to contemplate and it's a service I really love. That's a subject for another post, but suffice it to say that they have huge potential given their elegant architecture, and that can be both a blessing and a curse as some Chinese proverb goes.