I would have enjoyed mathematics more at school if I’d known what the real value was. The benefit of studying maths isn’t numeracy at all: it’s creativity – a kind of benign neuro-diversity. A new set of eyes through which to see the world, and the priceless lesson that the best way to solve a problem is to redefine it.
Many of the most interesting people I’ve met have been mathematicians. Nassim Taleb taught me a whole new way to look at statistical variance. And, in a chance meeting with Stephen Wolfram, I heard something which at first surprised me, but which has needled me ever since.
When I joined the advertising industry in the 1980s, it was like the Galapagos Islands. Now it’s more like a Kansas cornfield
What he said was this: ‘The reason evolution works is that it has quite a loose fitness function.’
This is at first a strange claim. We are taught to believe that evolution is a kind of brutal, efficiency-optimising elimination game, red in tooth and claw. But in a way it’s incredibly relaxed. Provided you can (a) find an ecological niche in which you can (b) survive long enough to (c) reproduce, you get to stay in the game. It doesn’t matter whether you are a shark, a tree, a mushroom or a bonobo, if you can satisfy a, b and c, you stay in business. Some stromatolite bacteria in western Australia have continuously ticked all three boxes for three-and-a-half billion years.
Immense wealth in variety emerges from this looseness. Contrastingly, if you optimise for a tight fitness function, your short-term efficiency gains come at the price of shrinking the overall solution-space. You are trapped in a local maximum where you exploit a bit more but discover a lot less. In truth, a whole branch of economics could form around Wolfram’s insight. It explains why control-economies work so badly. But it also suggests our current financial system may be unwittingly destroying far more value than it creates.
This isn’t a problem with private investors themselves, who are a diverse bunch. It is the problem with financial reporting, which requires every business to pursue the same narrow set of targets within the same arbitrary time frame. These measures were not devised for the creation of wealth, but for ease of comparison. They exist not to enable financial institutions to make good decisions, but for the purposes of self-justification. The data is used ‘as a drunk uses a lamppost – for support rather than illumination’.
What this leads to is something called ‘corporate isomorphism’. This is a phenomenon in biology. Old-world and new-world vultures look very similar because both have been optimised for the same narrow fitness measure. They are wholly unrelated: the former are descended from hawks, the latter from cranes. In the same way, different businesses that pursue identical arbitrary metrics end up more and more alike. Investors suffer, since homogenous categories are less valuable overall, businesses suffer because they are engaged in a head-to-head race to the bottom, and customers suffer because they have less choice.
I’ve experienced this at first hand. When I joined the advertising industry in the 1980s, it was like the Galapagos Islands. Now it’s more like a Kansas cornfield. Three barely distinguishable holding companies in thrall to the same narrow efficiency measures, largely devised so some witless tosser in procurement can get a bonus.
The majority of interesting or innovative businesses, in the UK or abroad, are overwhelmingly family-owned or founder-led. Such companies are focused on pleasing their customers (which demands a loose fitness function) rather than on pandering to investors by fixating on the same narrow, artificial and self-serving proxy metrics as everyone else. Efficiency creates small but measurable gains. Sameness creates huge but unmeasurable costs.
Comments