Thursday, February 6, 2014

A couple of thoughts from Jerry and John

The Lean Startup

The Lean Startup by Eric Ries released in 2011has done extraordinarily well. It is an entirely different way at looking at entrepreneurship, and big company innovation than the traditional model.

Here is the gist of principle: "The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop."

Rather than working on a product or service for years before getting feedback; this concept is about constant experimentation to test one's hypotheses, and assumptions and then to quickly adapt and experiment again. 

In the concept of the Lean Startup, the entrepreneur finds ways to conduct experiments to test his/her major hypothesizes about a new business idea. The “traditional” way that it was done years ago was that a startup would spend months to build the perfect model and then find out then roll it out. If their basic assumptions were flawed and nobody cared or was willing to pay for their offering, they experienced a big loss of time, money and effort.

I come from a trading background. We have the same mindset about valuing options (the right but not the obligation to buy/sell or do something). The more time an option encompasses, the more expensive it is. The more volatile the market, the more expensive it is. Startups face great volatility and uncertainty and since time is so priceless the Lean Startup process reduces risk, and the cost of the investment. The Lean Startup is an inexpensive option - a far lower cost way to develop a product combined with a much higher likelihood of being wanted in the marketplace once it has evolved.

The opposite of the Lean Startup would be the introduction of a trillion dollar healthcare program. A group of legislators would spend a few months specifying exactly what they wanted. Then they would hand over $500 million to a new IT staff and tell them to build the web system for customers to sign up. The politicians would instruct the staff to do it right the first time – no need to experiment along the way. The system analysts and programmers would be given 3+ years for the project and instructed not to do any customer tests along the way. 

And here would be the crowning achievement – the ultimate system would not only fail to collect real time data as customers finally started to use the system, the administrators and politicians would shy away from even looking at the numbers. Why would the politicians want to know how well the website was performing? Why would the administrators want to know if the healthcare data was getting accurately and securely conveyed to the insurance companies? And the last thing that the politicians would want to know is if some customers were being dropped from coverage accidently when the data got processed. That would be bad news and the politicians don’t want to hear any bad news about “their baby”.

The Lean Startup system is all about fast feedback and fast adaption. It frequently results in startups deciding that they were completely wrong about what the market wanted – so they adapt and occasionally move onto another promising concept (with a minimum of waste along the way).

The big new health care law is the result of something I call the stupidity lag.


Do the right thing!

Consider that when politicians/people/groups advocate some type of government intervention that those politicians/people/group rarely or possibly never provide information about what incentives the government has to do the right thing.

Proceeding from standard economic thinking, we show that cretin incentives in the private sector leads 'people' to sub-optimal results [which is bad] and once showing the 'badness' then it is concluded that 'the government' should 'step-in'. The question is never asked or answered 'why would government do the right thing?' and 'What incentives does the government have?' 


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