I realise there’s another question implied by this post: how does this fit into ‘seek ideas at the right level of abstraction’? The story of Milken and Gurley play directly into our preconceived notions of genius — they discovered some secret insight, and then worked out the implications of those insights over the course of their careers. Does this not violate the argument I made in ‘right level of abstraction’?
I think this is one of those cases where the idea of the ‘narrative fallacy’ actually does matter — it’s easy now to look back and say that Milken’s and Gurley’s big ideas translated to lots of effective real world action. But I think if you take a closer look, you would find that there was a great deal of trial and error involved. Gurley’s initial insight might have been “there are businesses that benefit from increasing returns to scale, and I should learn to identify and invest in those”, but I bet there were lots of failed applications of the idea before he learnt “oh, there is this thing called liquidity quality, and it’s different for every marketplace business, but I can learn to identify companies that have that and management teams that understand that!”
Of course, there’s also the possibility that Gurley was working at the right level of abstraction — Arthur made a number of policy recommendations to governments as a result of his work, and he did talk about the history of industries and certain businesses in his research; Gurley was the tech analyst at Credit Suisse First Boston at the time of his discovery of Arthur’s ideas. One could say that Gurley was simply one level of abstraction below Arthur’s domain.
But I do think there’s a gap between:
- Brian Arthur’s Increasing Returns (theory) <—> The dynamics of network effects in Internet marketplaces (application)
- W Braddock Hickman’s Corporate Bond Quality study <—> The actual implementation of high-yield/junk bonds in the 70s, and the various mechanisms pioneered by Milken (application).
The former might be the insight, but there sure is a ton of nuance when it comes to the actual application of the ideas.
I think a lot about Deng Xiaoping’s quote “cross the river by feeling the stones” (摸着石头过河), which he said in relation to China’s shift to a market economy. In Deng’s time, a transition from a communist country with a centrally planned economy to a communist country with a market economy had never been attempted; Deng was trying to express this idea that they knew where they wanted to go, but the actual path to get there was opaque; you had to move by ‘feeling each stone’, step by careful step.
Something similar probably happened with Milken and Gurley. I believe Milken didn’t come up with the idea of using junk bonds to fund hostile takeovers — at least not by himself — his original idea was that he wanted to ‘democratise access to capital’, and many of his deals were with capital-intensive industries like cable and tele-communications. I suspect the game around hostile takeovers was likely proposed(?) by a corporate raider, or perhaps the idea was already in the air in the 70s. Similarly, I’m sure Gurley picked up several foundational ideas when he was involved with eBay in the 90s.
(Note: I couldn’t get hold of a copy of eBoys, which documents the eBay part of Gurley’s story, and I’ve not looked too deeply into Milken’s relationship with the raiders … so I’m not sure of either of these points. I’ll update this if I’m wrong.)
All this is to say that it is easy to make it seem like “get secret idea, win at life” is the whole story; but I think the actual story is a bit more complex, with a lot more trial and error than first meets the eye.
For what it’s worth, I find myself thinking things like “oh, the rise of the creator economy means that I would succeed if I pivoted Commoncog to serve content creators!” and then slapping myself on the wrist and thinking “No Cedric, that’s stupid, that’s the wrong level of abstraction, you should be testing a lower level: are there any content creators who would use a better second brain/read-it-later app? If so, great, maybe the bigger trend is right, but if not, then obviously that trend isn’t playing out for you in the way that you thought it might.”
This sounds stupid now that I’ve written it out, but this thought sequence really happened, and I think it’s the right way to think about such things.