The Path Dependence of Startups Part 2: Sugarscape
Posted on October 12, 2009
Filed Under Business, Crowd Stupidity | 8 Comments
How do economies begin? That was something that Joshua Epstein and Robert Axtell wanted to know. So they built a simulation of an economy that they called Sugarscape. They built a virtual landscape that was overlaid with a 50×50 grid. The landscape was endowed with sugar in various locations, and with two large sugar mountains. Then they built agents to inhabit the landscape. (Beinhocker 2007)
Each virtual person, or “agent”, is an independent computer program that takes in information from the Sugarscape environment, cunrches that information through its code, and then makes decisions and takes actions. In the most basic version of the simulation, each agent on Sugarscape can only do three things: look for sugar, move, and eat sugar. That’s it. In order to find food, each agent has the ability to move toward this source of energy. Each agent also has a metabolism for digesting sugar…… each agent has a “genetic endowment” for its vision and metabolism. In other words, associated with each agent is a bit of computer code, a computer DNA, that describes on many squares ahead the agent can see and how much sugar it burns each round. An agent with very good vision can see guars six squares ahead, while an agent with poor vision can only see one square ahead. Likewise, an agent with a slow (good) metabolism needs only one unit of sugar per turn of the game to survive, versus an agent with a fast (bad) metabolism, which requires four. Vision and metabolism of agents is heterogeneous (meaning that not all agents are alike). Some agents have poor vision, but great metabolisms; others have great vision and poor metabolisms, while somre are well endowed with both, and the genetically unlucky are poor on both.
There were 250 agents dropped randomly on Sugarscape, and then Epstein and Axtell analyzed what happened over various simulation periods and you know what they found? Inequality. Agents could store any sugar they found that they did not need, and at the beginning, the sugar distribution was pretty egalitarian. Over time though, super-rich sugar agents evolved, just like in the real economy.
This was interesting, so they looked deeper into it. Was it genes that caused the inequality? No. It wasn’t all the agents with great sight and slow metabolisms that got rich. Then it must have been birthplace, right? Surely the agents lucky enough to be born on sugar mountains were rich and the others were poor. No. That was wrong too. What they found is that the skewed wealth distribution was driven by complexity, and was an emergent property of the system. That means that the wealth in Sugarscape was path dependent.
Sugarscape had something that is supposed to be prohibited in mainstream economics - horizontal inequality. It means that agents with similar skills and similar levels of sugar wealth at birth should end up roughly equal. But they don’t. Take the example of two agents born with similar levels of vision and slow metabolisms. They are born right next to each other on the Sugarscape board. Neither can see any sugar, so one randomly goes north and the other randomly goes south. One turns out to be heading towards a sugar mountain, the other is doomed to starvation in a valley with no sugar. Same genes. Same birthplace. Only the path they each randomly took determined where they ended up. This doesn’t mean genes don’t matter, or birth place doesn’t matter… it just means that random choices have just as much to do with guiding our fate as our skills and work ethic.
What does this mean for startups? The good news is that hard work pays off. Working hard increases your chances of startup success. The wealth distribution in Sugarscape wasn’t random, it just wasn’t a simple meritocracy either. Overall, better agents fared better.
The bad news is that you can never guarantee success because some small random event could make the difference between a $100 million exit and a total fire sale failure. And you may have no way of knowing at the time that the event is that significant.
What does this mean in practice?
1. Don’t listen too much to one-hit wonders and self-appointed entrepreneur gurus. Their advice needs to stand on it’s own two feet, and not be taken as gospel just because they had one nice exit (or none, in the case of some so-called gurus).
2. Improve your chances of finding the right path by always learning and always improving your skills.
3. Get as close to you can to a sugar mountain. Marc Andreesen has always said that you will have the best chances if you are located at the geographic center of your industry.
4. Try as much as possible. If paths matter, take a lot of them.
Frozen Accidents And The Path Dependence of Startups: Part 1
Posted on October 7, 2009
Filed Under Business, Decision Making | 1 Comment
“Shallow men believe in luck. Strong men believe in cause and effect.” - Ralph Waldo Emerson
One of the things I have struggled with for years is the role of luck in business. I have seen plenty of smart entrepreneurs fail because of seemingly random events. But like most others, I want to believe that the world is a meritocracy.
Is Bill Gates the richest man in the world because of luck? I’ve read quotes from many people who have met him saying he is the smartest person they have ever known. Surely that intelligence has played some role in his success. On the flip side, you have probably heard about the day Gary Kildall went flying and wondered if he hadn’t made that mistake, would Bill Gates still be a billionaire?
A friend of mine who co-founded a company that recently made the Inc 500 has said that they started just because his brother in-law needed some customer support help and his wife happened to be on maternity leave so she had some time to help him out. Not exactly a grand vision. The first time I ever met Andy Swan, who sold his first company in his late 20s, he told me there wasn’t any noble vision in starting it. He and his brother just didn’t want to get real jobs.
What does it all mean? Is success random luck? Is success a product of skill and hard work? Is success some combination of the two? I think the answer is that success is path dependent. The path you take has an effect on where you end up, but it isn’t the sold driver of your success.
I recently finished Eric Beinhocker’s excellent book “The Origin of Wealth,” and his take on path dependence and the nonlinear dynamic aspects of the economy has heavily influenced my thinking on the topic. Actually that’s wrong. A better description is to say that he painted a detailed picture of something I had come to believe but didn’t fully realize, so that when I read the book, I found myself nodding in agreement as if someone had revealed some truth to me that deep down I already knew but had never verbalized.
In the book, Beinhocker tells the story of Annie Oakley, Keiser Wilhelm, and how a “frozen accident” could have changed the course of history. Since there is no link to that page of the book, I’ll share the story with you via this post, which repeats it.
In the late 1800s, Buffalo Bill’s Wild West Show was a dazzling display of horsemanship, gunplay and other cowboy skills. One of its acts involved the sharpshooting of the great Annie Oakley. Dubbed “Little Sure Shot,” Oakley had an amazing routine – she would shoot out lit candles, for example, and the corks of wine bottles.For her grand finale, she would shoot out the lit end of a cigarette held in a man’s mouth at a certain distance. For this, she would ask for volunteers from the audience. As no one ever volunteered, she had her husband planted among the spectators. He would “volunteer” and they would complete the dangerous trick together.
Well, during one swing through Europe, Oakley was setting up her finale and she asked for volunteers. To her shock – and the surprise of everyone involved with the show – she got a real volunteer.
The proud young Prince (soon to be Kaiser) Wilhelm bravely stepped down from among the spectators, strode into the ring and stuck a lit cigarette in his mouth.
Reportedly out late the night before enjoying the local beer gardens, the unexpected appearance of this famous volunteer unnerved her. But the show must go on.
She took aim and fired… putting out the cigarette, much to Wilhelm’s amusement.
Thus, she also created one of historians’ favorite “what if” moments. What if her bullet went through the future Kaiser’s left ear? Would World War I have happened? Would the lives of 9 million soldiers and 6.6 million civilians have been spared? Would Hitler have risen from the ashes of defeated Germany? All sorts of questions come to mind…
Scientists call these kinds of episodes “frozen accidents” – points in time when small changes would have led to dramatic consequences.
Now backup a minute and think about your startup. What if you were on a flight to San Francisco and something came up that caused you to move the flight by one day. As a result, you get to sit next to the CEO of a company that is in a similar business. You strike up a conversation which turns into a working relationship with turns into a $20 million exit for you. Or what if the reverse happens and instead of sitting next to that guy you set next to someone who has nothing in common with you and your business and that CEO ends up buying another company. You don’t get that good working relationship that really made your business take off and as a result you have a fire sale of your assets in 2 years instead. Could that kind of small thing really have such large consequences?
I’ll talk more on Friday, in part 2, about what this all means. For now though, I will give you a little bit of an explanation of how I think about this issue. It’s complex. Hard work, a good understanding of business, intelligence, connections… all those things matter. But. Luck, or more appropriately randomness, plays a significant role. Depending on the kind of business you are in, randomness may play a larger or smaller role.
Take Bill Gates as an example. If you ran a monte carlo simulation of the world and tweaked all kinds of variables, he would probably have been wealthy no matter what path he took in life. But in most of those scenarios he probably would not have been the richest man in the world, or even a billionaire.
So it doesn’t mean that you shouldn’t try. Actually, there are some ways to tweak the system to maximize your chances of ending up in a good spot. But I’ll save those for part 2 which will look at a fascinating research project called Sugarscape and what it says about path dependence.
Free Tweet Backup
Posted on October 6, 2009
Filed Under Business | Leave a Comment
It’s been too long since I have written something and part of that reason is that all my time outside of my day job goes to Lifestreambackup. I promise I will get back to it soon when things slow down.
For now I just wanted to point out that we decided to offer Free Twitter Backup at Lifestreambackup. We basically ran an analysis of our user storage patterns and saw that most Twitter users only use about 1.5Mb, so it’s a cheap loss leader to let people try out the service.
Why backup your tweets? Because twitter will only show you the most recent 3200. Beyond that, you can’t access them. Why choose our twitter backup? Because we are the only free service that, in addition to backup up tweets, backs up direct messages, friends list, followers list, and will soon support some other features that no other twitter backup software is supporting.
So hop over to the site, start backing up your tweets, and let me know what you think.
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