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As Entrepreneurs Keep Reminding Us, They Lied To Us In Econ. 101

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Can theoretical, scientific study of complex systems inform the hardscrabble world of start-ups?


To see how, meet the Santa Fe Institute (SFI). [1] Founded 30 years ago in Santa Fe, NM by Nobel laureates in physics and economics, SFI is the worldwide epicenter of complexity science. SFI first recognized that the environment, the human brain, the economy, and other complex systems have much in common:

  • Order in them emerges not from top-down command and control but bottom-up from the interactions of large numbers of interconnected elements. These elements may be individual species creating sustainable ecosystems; neurons creating thought patterns; or buyers and sellers creating business cycles and wage and price levels.

  • Those interconnected elements also form feedback loops that can produce unpredictable and often extreme results (e.g., peacocks’ tails, fads, best-sellers, cancer).

  • Diversity tends to grow with the number of combinations of elements, that is, exponentially with the number of elements (e.g., the Cambrian explosion and the Industrial Revolution). Diversity tends to enhance robustness (e.g., genetically similar crops are more vulnerable to parasites; identical PC operating systems, to viruses).

  • Unintended consequences arise if you try to control such systems top down (e.g., drug wars foster organized crime; draining of wetlands cause flash floods and droughts; rent control reduces the quantity and quality of housing and thus may drive up rents).

  • The systems are dynamic and never at equilibrium.

So what do complex systems and SFI tell us about entrepreneurship?

1) Passion and perseverance form a feedback loop. Whenever you see results or performance that is far above the norm – in entrepreneurship, sports, the arts, science, innovation, business, or investing – passion (an attitude) and perseverance (a behavior) are most likely positively reinforcing each other.

Designing sailboats, calling on customers, or writing specifications until you are so good that you grow to love that activity are examples of perseverance driving passion. As you improve, you more and more enjoy that activity, driving you to greater proficiency and further building your perseverance. Similarly, being so deeply engaged in fashion, aviation, or mastering Python that you become unaware of the passage of time are examples of passion driving perseverance. As you spend time in the activity, you refine your skills and deepen your knowledge, further building your passion. For someone to be willing to spend 10,000 hours in a discretionary activity, a figure often cited as a threshold to achieve exceptional performance, a combination of passion and perseverance is almost certainly at work.

2) Opportunities grow with every new product or service on the market. Occasionally I hear it said that all the best opportunities have already been addressed. Nonsense. Just the opposite: every new solution introduced creates new opportunities – new needs – in at least three ways:

  1. The solutions themselves can be improved upon (e.g., laptops and smart phones can be made smaller, lighter, and more powerful; software can be made faster, easier to use, and more reliable)

  2. The providers of those solutions have needs (e.g., sales, marketing, accounting, software, equipment, customer and competitive intelligence)

  3. New solutions create new needs (e.g., cars need navigation systems, back-up cameras, and keyless entry systems; video games need virtual money; electric vehicles need re-charging stations; smart phones need bandwidth).

Think of solutions as combinatorial: every new one can be combined with all others that already exist to address potential new opportunities.[2] As technology advances at an ever-increasing pace, new opportunities are being created and addressed ever faster. For some of these opportunities, you are almost certainly the best person in the world to satisfy them. The reason: the number of opportunities exceeds by many orders of magnitude the number of people in the world. Successful entrepreneurship is in large part a task of finding the opportunities that you are best suited to satisfy.

3) Seek novel combinations of technologies. To find opportunities, my business partner and Chief Technology Officer Dickey Singh and I make lists of the new technologies either he or I know about. Examples might include GPS, natural language processing, 3D printing, fluid mechanics, polymerase chain reactions, image processing, and computer graphics. Then we list all of the pairs of those technologies and look for novel combinations. If I know three technologies and Dickey knows seven we have ten total, of which there will be 45 unique pairs. Is any combination novel, say GPS and 3D printing? If so, it might enable new solutions that no one has considered before.

The total number of combinations grows exponentially with the number of technologies. If you consider all combinations in this example, including groups of three, four, and five technologies and so on up to ten, there are over a thousand combinations. The vast majority of these will not be useful today. But a few of them almost certainly will be.

4) Cognitive diversity trumps ability. Diversity in how members think about problems and make decisions makes a team stronger. Some people are abstract thinkers, others are concrete; some are high risk-reward oriented, others risk averse; some are more relationship-oriented, others are more transactional when interacting with others. Scott Page, professor of complex systems at the University of Michigan, reports that teams with diverse problem-solving perspectives and heuristics outperform more skilled teams who rely on homogeneous perspectives and heuristics.[3] For each team member who thinks much the same way you do, the value of adding someone who thinks differently increases.[4]

5) Culture is emergent. As CEO, you hugely influence company culture by how you treat people and make decisions, and many in your company will look to your behavior and copy or adapt it. But you cannot control culture: it emerges from the actions of everyone in the company. The first few team members that you hire are critical; after you, they most influence norms and behaviors of those who come after them. If your and others’ actions demonstrate a belief that employees are important, for example, employees will recognize, appreciate, and respond to that; if not, they are likely to resent and rebel against you, no matter what you officially announce or promulgate. Influencing culture is more akin to tending orchids than running machinery: trying to control it top down leads to unintended consequences.

6) Keep your options open. Customer needs, your resources, and competition are always changing. Just as your product becomes a market hit, customer needs may shift, your advantage disappears, and you suddenly have to find a new market. Or you may be automating manufacturing when new, improved components induce you to re-design products and processes.

Fine-tuning your resources too closely to current circumstances leaves you vulnerable. Options that are unattractive in an up market suddenly become more attractive than going out of business in a down market. Those less-attractive options can also help you leverage more desirable ones, if potential acquirers or customers know you have multiple options. Despite its long and lofty role in strategy, optimization is the enemy of resilience. Keep some of your resources re-assignable to take advantage of unexpected changes and opportunities.

Products and services are continually being introduced to and retired from the market; people are constantly entering and leaving the workforce; and competition and regulations are constantly changing. They lied to us in Econ 101. The truth is that nothing in business or the economy is ever at equilibrium.

[1] I have served as trustee of SFI since 2010.

[2] See W. Brian Arthur, The Nature of Technology (Simon & Schuster, 2009).

[3] Scott E. Page, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies (Princeton University Press, 2007). Page shows that physical and identity diversity (gender, age, race) mainly drive team performance only to the limited extent that they indicate cognitive diversity.

[4] See also Tom Kelley and Jonathan Littman, The Ten Faces of Innovation (Doubleday, 2005), which describes ten roles such as anthropologist, experimenter, and cross-pollinator that have fostered innovation at Ideo.

This article originally appeared in Forbes.