When Action Beats Prediction - Commoncog

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One of the big ideas that we’ve covered in the past couple of weeks is the notion that ‘management is prediction’ — the W. Edwards Deming observation that you cannot run your business effectively if you are unable to predict the outcomes of your actions. We’ve mostly talked about this in the context of becoming data-driven: the raison d'etre for using data is to gain knowledge, and the purpose of knowledge is so that you may make better, more accurate predictions when running your business.

This is a companion discussion topic for the original entry at https://commoncog.com/when-action-beats-prediction/
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While I agree that early stages require more effectuation, and that action beats analysis, there’s also a point where it’s so early, action is … pointless or outright counterproductive.

2 examples:

1. the one by Eugene Wei where he talks about being outside the OODA loop

Here’s Eugene talking about being outside your competitors’ OODA loop

i quote

I come not to bury that advice, but to look at a variant, almost its opposite. Sometimes you can win by having a slower OODA loop if it just endures longer.

There can be many reasons for this. One, and it’s difficult to stress this enough, timing is critical to so much of Silicon Valley success. The same ideas are tried over and over again, failing time and again, until one day, for a variety of reasons, the stars align, the environment is conducive, and suddenly an idea takes off. It happened for online commerce and streaming video, and someday it will happen for VR and self-driving cars and cryptocurrency. The problem is that if you’re too early on something, having a faster OODA loop just means you burn through your investor’s money and implode more quickly.

2. the one where Steve Jobs says to wait for something big to turn up

Ok, this one is from memory and i will be grateful for anyone to provide the source. Cannot remember who wrote this but when someone interviewed Steve Jobs who came back as interim CEO of apple , and this was just after he stopped Apple from going bankrupt but before iPod, he was asked so what will he do next to return Apple to greatness.

Update : thanks to @roman i found the excerpt at The Shape of a Technological Window - Commoncog and Jobs's Second Act at Apple - The Next Big Thing - Commoncog Case Library

In the summer of 1998, I got an opportunity to talk with Jobs again. I said, “Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?”

He did not attack my argument. He didn’t agree with it, either. He just smiled and said, “I am going to wait for the next big thing

Most people will bluster and say something vague and grandiose.

Jobs said something a long the lines, I don’t know what it is exactly but something big will turn up in technology and we will wait for that window of opportunity.

Is Apple at that time early stage? actually, no. But i guess this whole thing is probably fractal.

you can be mature company but stll be early in the next paradigm of whatever in your industry.

So effectuation can still apply.

But if I think if we boil effectuation down to simply action beats analysis or prediction, i think we will miss out on the crucial timing lessons that Jobs and Wei allude to.

Indulge me as I summarize this point along with Ced’s into the following alliteration:

  1. Abide (as in hang tough)
  2. Action (as in effectuation to generate feedback via actions)
  3. Analysis (as in the typical prediction based left brained stuff that formal education prizes so much)

the lower the tier, the more teachable, effable.

the higher the tier, the harder to teach per se, the more “Art” it is.

The ultimate level is to see how they all mix and interact with one another in a kind of dance. For example, Jobs didn’t passively wait per se. He was also trying to do something while keeping an eye out for the next big thing to show up.

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I believe the Jobs anecdote came up in The Shape of a Technological Window - Commoncog!

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Oh yeah thank you @roman

Indeed and it’s also in jobs second act

I’ll paste the key passage here

In the summer of 1998, I got an opportunity to talk with Jobs again. I said, “Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?”

He did not attack my argument. He didn’t agree with it, either. He just smiled and said, “I am going to wait for the next big thing

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The annotated paper on the KV website is so hilarious. I have to wonder who the annotations are from. I’m guessing someone pretty senior e.g. Khosla.

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@kimsia Thanks for bringing this up! You’re right in saying that often entrepreneurs lose out on market timing, perhaps because your stab at it was too early, or you were in the wrong place at the wrong time. But I don’t think it’s right to say that action isn’t justified. If you’re too early you just pivot out, or you go and do something that later turns out not to be the biggest winner from that opportunity. Something something when life gives you lemons, you make lemonade — which seems to be the case with these expert entrepreneurs.

I remember naively thinking this was quite counter-intuitive and sad (surely you don’t want to ‘waste’ years of your life on a ‘suboptimal’ company?) … but I think Sarasvathy got it right in saying that you can’t do any better than taking your best shot, since startups are just fundamentally uncertain and impossible to predict. In a podcast interview Keith Rabois (of Square and PayPal fame) had this to say, which I found so unusual and odd at the time that it took me awhile to realise he was actually inhabiting the effectual worldview:

To me, there’s no such thing as a mistimed company. I think the founder’s job is to triangulate to what’s possible. So to me when a founder says “I was wrong about the timing” or “I missed the timing” it just means you didn’t do your job. You need to plan for what’s possible today, and figure out hacks. So for example, Square started out with a card reader, a hardware device that you plugged into your phone, just your phone, whether Android or iOS, and Jack (Dorsey) always thought this was a temporary hack. That ultimately, Square would not require hardware, and certainly wouldn’t depend on hardware on your phone. Which has proven to be the case. It’s now eight years later, and Square Cash is the engine of the company, which has nothing to do with hardware. Square mobile payments — a huge fraction, I haven’t looked at the latest earning calls numbers — but the majority of transactions must be running off an iPad, not a phone. But Jack was obviously an extraordinary and stellar entrepreneur, and he knew his job was to shepherd the product into the market with what was possible to do at the time, and not wait for massive inflections in consumer behaviour. That’s what a good entrepreneur does … is, triangulates how do I get to where I need to get to, where I want to get to, with what is possible to do today, with hacks and bridges, not sitting back and whining.

Source clip: https://twitter.com/ejames_c/status/1663407893536997377?s=20

@uma I’m like 99% sure it’s Khosla!

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Huh interesting that Keith Rabois recommended effectual thinking

I recall he was against lean Startup and saw founders more like an auteur with a clear vision

I guess in his view lean startup != effectual thinking

:thinking:

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I loved this article @cedric ! Somehow the entrepreneurial difference finally clicked. I have not thought of myself as being ‘entrepreneurial’, but in reading this I realised I did inhabit the effectual worldview when I was starting my business (big focus on affordable loss, strategic partnerships with customers, and moving forward from existing resources not back from a goal). Looking back, all three were precisely my thought process as I iterated forward, and they were all a bit unnatural (but highly effective) vs my usual causal approach to things.

I loved your closing line Cedric “Which makes entrepreneurship a lot less mysterious — and a lot more accessible — than you might think.” :green_heart:

This is quite empowering!

How do you think causal vs. effectual thinking works for investing?

An equity investor is sharing in the risks but has less control with which to effectuate.

Large cap investors in mature businesses can probably lean a lot more on causal analysis, whereas high-growth investing is closer to the crap shoot that entrepreneurs themselves face. However an outside investor has a lot less control over the company’s actions. Particularly if we are talking about a public market investor in an earlier stage / high-growth business.

Thinking out loud:
The principle of affordable loss seems to map well - the investor can use bet sizing and focussing on avoiding large permanent capital loss.

Strategic partnerships seems like it kind of maps to partnering with the CEO i.e. even though you are more of an outsider than a VC would be, a public market investor that has one-on-one meetings with management can build some more connection than waiting for the annual report. Although it’s not perfect.

Leveraging contingencies seems the hardest. If your investment gets socked with a lemon to the face, you could advise them on what to do in response, but (even if they would listen) you are an uninformed outsider so likely can’t effectuate the way forward.

I’d love to hear any further thoughts on applying effectual thinking to investing, and once again, a really great article!

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His comment from 2011(!) is very effectual flavored:

“I don’t believe in lean startup nonsense at all. You start with a vision and you WILL it into reality.”
https://twitter.com/rabois/status/54420192582844416

Effectual thinking would say that entrepreneurs are not discovering reality, but creating it.

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Like others have said, amazing article. I had been exposed to effectual thinking before, but this is the first time it seems to make practical sense. I’ll be coming back to this one over and over. And I’ve been finding myself applying this lens to many things in life now.

Interestingly, it appears many things can be interpreted in either effectual or causal ways.

For example, with OKRs. These represent an extremely causal mindset. The idea of “start with what business objective do we want to achieve in 3 months; establish how will we measure our progress; and then by hook or by crook get it done” is very causal. However, a way to interpret it more effectually would be to look at your resources & interests, come up with potential objectives based on that, and begin acting. The quarterly framework then becomes more of a guide to prevent you from waffling on plans too much in the effectual mode.

In my own career of product management, and previously software engineering, a similar thought comes up. I could think causally about what our customers need, set up product requirements to meet that need, carve out an MVP, and then break it into tickets for our engineers to make. But if I were to look around at what engineering resources do we have, what’s ready at hand, what would be an interesting product experiment, I might take a similar approach at the end of the day: describe it, break it down, and start building. Or maybe effectual thinking would say “build a rapid prototype, see how interesting it is, throw it at reality a bit, and only then put process around it?”

I guess the main thing here, which is clearer when we look at the cooking example, is to start with what ingredients I have instead of what dish do I want to make. I love the creative freedom of “what are my ingredients.” And it makes partnerships with other people/customers based more on “what would adding this ingredient to my pantry unlock” instead of “what ingredients do I fundamentally need for carbonara.” There’s expertise/tacit knowledge in both of these approaches.

As to the earlier paragraph talked about how most business stories are non-linear, I found this article from 1st Round Review describing Labelbox’s finding of product-market-fit. It sounds pretty linear to me: see a problem at work, do “Mom Test” validation before building, create and launch a prototype, scrounge up users, and away you go.

I wonder if folks would consider that approach more effectual or causal?

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Thanks for referencing the article. My read is that, the founders got started based on “whom they know” (i.e each other). Given the relationship and history that they had, they thought that they wanted to do something together (very effectual).

“Fast forward to 2017, when I was working at my second startup in the Bay Area, a satellite imaging company Planet. I reached out to Brian, who was still at Boeing. We both had a realization around this time that the next stage for our careers would involve working on interesting problems together,” Sharma says. “We made an agreement with each other that no matter what, we were going to quit our jobs and build a company.”

That problem turned out to be something that one of the founders came across just because he was in a startup that faced that challenge. (also seems effectual - almost accidental).

“There was a ton of interest at this time around how AI could be used in novel, groundbreaking ways like self-driving cars,” Sharma says “But one of the interesting things that was happening around me at Planet was the intention to build computer vision applications based on the large batches of data we would collect every day from 300-400 daily satellite images. The way our engineering teams would go about building these applications was by exploring what data they should even be using. There was this idea around labeling and it was a very new concept.”

This piqued his interest and he started to gather more information about the problem directly from the company he was working at. (a bit causal - he has a hypothesis that this is an interesting problem and this is validating it).

This realization was enough to spark the seed idea of a new business to pursue. Sharma started to use his days at Planet soaking up all of the information he could around this problem space, taking notes on how internally the team was exploring ways to go about building an ML infrastructure and scaling AI.

Then they kinda went out and, in a very lean startup manner, talked to a bunch of AI experts in the field who were dealing with this problem. These conversations helped them widen their perspective and solidify their understanding of the problem space. This is causal thinking, I think. Very deliberate efforts to validate their problem hypothesis.

So maybe it’s a mixture of both in this case.

It reminds me of Paul Graham’s article How to Get Startup Ideas where he said

Paul Buchheit says that people at the leading edge of a rapidly changing field “live in the future.” Combine that with Pirsig and you get:
Live in the future, then build what’s missing.

Labelbox seems to fit into this idea, the founders were living on the cutting edge, they noticed something that was missing (a good data labeling system) and built something around it.

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That’s a great analysis, Thomas. I do agree that it seems to be a bit of both. It’s effectual in the sense that they first look at their resources (i.e. potential co-founders and exposure to problems/customers) and see what they could pursue. But after they get an idea, they work backwards from that and use a lean startup approach to solving the problem (validate idea → build a small piece → validate again → another small piece → oh no, pivot! → revalidate the pivot → build a small piece → get many users → keep building → company).

I’m trying to square that with Keith Rabois from above trashing the lean startup method, and instead saying you start with a vision and fumble your way towards it.

Every founder, even if they were causal-minded, would argue that they start with a vision. But I see a lot of company visions are set by predicting their future out from their present instead of pulling their present into a desired future. In other words, most companies say “we have traction with this product. Now let’s guess where this product would be and what the world would look like 10 years from now if we were wildly successful. Brainstorm time! Now that’s our vision.” Instead of “the world will be like this in 10 years. We don’t know how we’ll get there from here, but we’re pretty sure this is the best first step. Let’s see if we’re right.”

The nuance there is very different, but very important. But then again, isn’t determining to accomplish a vision a form of starting with an end in mind and trying to figure out what causal steps will get there?

So maybe @cedric you see some areas where my thinking is breaking down or shaky? Why do I find the line hard to distinguish?

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I just realized I took some notes on the paper What makes entrepreneurs entrepreneurial by Sarasvathy a long time ago. No wonder when I read the article I found myself weirdly recalling that I came across these ideas elsewhere.

Then when browsing through my Obsidian vault trying to find relevant ideas to connect, I thought to myself “Entrepreneurs start with who they are, what they know and whom they know - huh, so basically you must start where you are”. Then I immediately recall a note in my Obsidian called “Start where you are” from the book Designing your life which is about applying design thinking to career development and creating your own ideal life.

The book said that to start designing your life, you first start where you are - knowing your situation across dimensions such as Work, Play, Love, Health. Then build the compass - what is your guiding values in work and life. These values serve as a compass to reorient yourself whenever you’re changing your situation. Then do way-finding by noticing what energizes you, what makes you engaged, what makes you fall into the flow state. Then the book suggests techniques that help you design your ideal life around these information (such as Odyssey planning, prototyping, etc).

What struck me as interesting was that the book’s framework is more effectual than causal. It’s not like "Start with what you want, and then work backward, but “Look at where you are, what you have and your own patterns, then figure out the compass, then use them to build forward a future that’s aligned within those constraints”. I wonder if effectual thinking is the common thread between design thinking and entrepreneurship.

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@paul I actually think you’ve hit the nail on the head with your observation that various things in business can be viewed both effectually and causally — and often at the same time. Yes, it’s possible to just improv your way to a working business, with full effectual thinking (and there are founding stories that are clear examples of this), and it is also possible to use causal reasoning to get to a working company (and there are founding stories that seem like good examples of that). But there are also stories with various shades of in between. For instance, Dorsey clearly had a vision in mind; he just improv-ed his way to get to that vision. So that seems like a mix of working backwards from a causal vision, but with an effectual path.

(When I talked about this with a business mentor, he pointed out: “clearly in most cases you just have to do both?” which … point taken).

And on that note I think the valuable thing with Sarasvathy’s work isn’t “oh, entrepreneurs think 100% effectually or managers think 100% causally” but instead “there is a form of thinking that is just as valid as causal thinking and this is what it looks like.” We are so used to causal thinking in business that it can become difficult to justify this alternative form of reasoning. I mean, it doesn’t seem particularly rational, right? But Sarasvathy’s research gives us a logical basis on which to stand: effectual thinking is simply a cognitive adaptation to uncertainty.

So I think it’s not that important to clearly distinguish the lines between the two types of thinking? Perhaps it’s ok to just go “right now, which I am doing?” and remind yourself that it’s ok to think effectually, even if it seems ‘suboptimal’.

I’m not sure I 100% believe that last statement, but I’m just throwing it out there first. Opening this up to everyone else: what do you all think? Is it important to clearly delineate when you’re thinking effectually vs when you’re thinking causally?

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I think this is a super interesting connection, Thomas. You remind me of a number of self-helpy maxims which all say something like “don’t pick specific goals or even specific careers, instead work forwards and generate information by sampling lots of things to figure out what you like. Oh, and leap on opportunities.” (I guess one example of this sort of advice is Marc Andreessen’s career guide.)

I never thought of this as effectual thinking, yet clearly this is the same sort of thinking. There’s also trace elements of it in the ‘divergent thinking’ phase of IDEO’s design thinking process:

image

But I guess that’s a very obvious link to make given your observation about design thinking!

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Ahh, somehow I forgot to respond to this!

I’m nearly 100% sure that investing is causal thinking, with little-to-no place for effectuation.

And I suspect this is why investors tend to struggle when it comes to operating businesses. As I’ve alluded to in various other threads — I think the worldview difference between operating and investing are just diametrically opposed. So decision making frameworks that are optimised for one don’t apply as cleanly to the other.

This is quite significant. For instance, it’s worth asking how much Annie Duke’s Thinking in Bets applies to operating environments.

To take a step back:

  • Investors can and should think in terms of expected return
  • Investors can hedge and size bets; capital is inherently leveragable, time is not.
  • Investors can create a portfolio of various bets; entrepreneurs often cannot (to be clear: if you sit atop a large org, you can take many bets simultaneously, but if you’re the one executing on the bet, you are doing so sequentially and paying with your time).
  • Investors can afford to not do ‘resulting’ — that is, you can make the right decision and get the wrong outcome; entrepreneurs cannot afford to think like this.

Even ‘control investors’ (such as from PE) and late stage VCs think more causally than effectually.

Take, as an example, the Benchmark style of investing. In such a situation, the VC that becomes a board member is so hands-on that portfolio companies often describe taking on a Benchmark investment as ‘taking on a new co-founder’. Sebastian Mallaby has a number of chapters in The Power Law on how various VCs (Sequoia, Accel, Benchmark, etc) can be actively involved in changing company outcomes. This seems pretty ‘action generates information’ type of effectual thinking. But even then, many of these VC actions are after the startup has found product-market fit, so are often more causal than effectual in nature — their actions tend to be focused on around helping with hiring, putting in place best practices, doing good board governance things, and helping with subsequent fund raising rounds. You do get some VCs pushing operators to make certain new bets, and you could say that’s effectual thinking in action, but I think this is the exception not the norm.

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Hey Cedric,

Another great article. While reading it I kept being drawn to parallels with Nassim Taleb’s book https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219 on randomness which talks about the survival of stock market traders and many of the biases they have which are used to justify decisions in that field. I would recommend his book should you find the time, I think it would be worth the read.

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Funnily enough I’ve been working my way through Howard Marks’s The Most Important Thing, and as the book progresses he quotes Taleb more and more.

Time for a reread, me thinks. Thanks for the recommendation!

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