Sunday, December 6, 2009

When ½ + ½ ≠1, a lesson from decision theory

This advice comes from James Stein’s book The Right Decision (McGraw-Hill, 2010). The book is a primer in the basics of decision theory—more appropriate for the business school type trying to learn how to make decisions than for someone interested in decision theory per se.

The book proceeds by way of case studies. Here’s one that caught my eye because it addresses one of my own flaws.

Thomas Edison has to make a decision. He has some seed money with which to start his own company, but it’s a modest amount. He wants to give his business the best chance of becoming prosperous. He currently has two inventions at the top of his “to do” list: a stock quotations printer and an electric light. He has three choices in Stein’s matrix. (1) Develop the printer first because there’s an immediate demand for it although the market is small. And, I would add, it’s a natural extension of Edison’s work in telegraphy. (2) Develop the electric light first because the potential market is huge (although, as we know, it turned out to be a daunting project). (3) Share work on both projects initially and then concentrate on whichever project is coming along best.

Stein opts for choice (1). “The first order of business is to stay in business. To do that, you need money. This may not make you a fortune, but it’s quick money.” The worst choice is (3). “It is important that you realize that by choosing this action you may run out of money before you have a marketable product because the arithmetic of inventions is that two half-inventions do not make a whole.” (p. 23)

Stein continues: “The arithmetic of projects is very similar to the arithmetic of inventions. One nearly finished project plus one half-finished project plus one project in development equals no completed projects.”

And: “Many projects require a critical mass of ideas in order to explode in fully developed glory. Think of all the storefronts you’ve seen empty because the tenants ran out of money before the store could become operational.” (p. 24)

I don’t know whether this resonates with you, but it may just form the basis of a New Year’s resolution for me.

No comments:

Post a Comment