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160. Laura and Derek Cabrera: Systems Thinking For Business

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Entrepreneurs can realize their goal to think better, think Austrian by taking a systems thinking approach. We can ditch linearity and hierarchies in favor of distributed networks and webs of causality and create better knowledge – more aligned with the real world — and better mental models. Professors Laura and Derek Cabrera of Cabrera Research Lab and Cornell University — leading authorities on systems thinking — speak to Economic For Business on the application of systems thinking for entrepreneurs, and everyone.

Key Takeaways and Actionable Insights

There’s a crisis in thinking in the business world.

Laura and Derek Cabrera have conducted deep research in the field of business thinking, and they’ve identified both the problems and the solution. The problems include reductionism (we’re taught to think about parts of systems instead of the system as a whole); hierarchical organization of thinking (versus complex distributed networks); thinking in categories versus breaking down part-whole groupings; thinking in terms of liner cause-and-effect versus webs of causality; and the prevalence of bivalent logic (right/wrong, black/white) rather than the multi-valent logic of many right answers.

This way of thinking is not well-aligned with the realities around us. The solution is systems thinking — the thinking of complex adaptive systems.

Systems thinking aligns with how the real world works.

Our mantra at Economics for Business is Think Better, Think Austrian. Systems thinking is better thinking (and Austrian economics fully embraces complex adaptive thinking — what Mises called constant flux and Hayek called spontaneous order and Lachmann called the market as a process of combination and recombination).

Systems thinking defines complex adaptive systems in this way:

Autonomous agents follow simple rules based on what’s happening locally around them, the collective dynamics of which lead to the emergence of the complex dynamics we see.

This description is actually a mental model of a complex adaptive system. The products of systems thinking are mental models. None are perfect representations of reality, but they help us when they are better representations of reality.

Four simple rules of systems thinking produce better mental models.

By following 4 simple rules, over and over again, anyone can become a practiced and adept systems thinker. The rules are captured in the acronym DSRP.

D is for Distinctions. Systems thinkers make distinctions between different things and different ideas. We can make distinctions between different customers, different costs, different sales channels, different suppliers, different employees. We identify boundaries, what’s inside and what’s outside. We differentiate, compare, and contrast.

S is for organizing ideas into systems of parts and wholes. Everything is a system because it contains parts. Every e-mail contains words that contain letters made up of pixels. We construct meaning when we organize different ideas into part-whole configurations. We split things up or lump them together in systems of context. We group, we sort, we classify, we assemble.

R is for identifying relationships between and among ideas. We can’t understand much about anything without understanding the relationships between or among the ideas or components. Relationships include causal, correlation, feedback, inputs/outputs, influence, etc. Fundamentally, relationships are action and reaction. We live in an infinite network of interactions, including between our own thoughts, feelings, and motivations. We connect, interconnect, associate and join.

P is for looking at things from different perspectives. When we make a distinction or identify parts and wholes or identify a relationship, we are always doing so from one particular perspective, made up of the point from which we are viewing and the thing or things in view. Being aware of the perspectives we take is paramount to understanding ourselves and the world around us. If we change the way we look at things, the things we look at change. We frame, we interpret, we empathize, and we negotiate from a perspective.

Systems thinking is not a set of steps but a set of rules, and from the interplay of these rules emerges the dynamics of systemic thought.

There are four types of action for systems thinkers applying the DSRP rules.

1) See Information and structure.

To construct meaning and mental models, we take in information and structure it. It’s important to recognize the difference between the information and how we structure it. A good way to do this is visualization: use whiteboards or sticky notes or software to map out systems and parts (e.g., boxes within boxes on a chart) and relationships (lines between the boxes). This physical manifestation of a system can help create new knowledge and point to solutions.

Laura and Derek told the story of a large conglomerate business that, by visualizing its divisions and functions and the information flows between them, was able to identify redundancies, see where communications and information was lacking or blocked off, and design a new and improved structure.

2) Use common patterns in the structure of mental models.

Laura and Derek use the term cognitive jigs: forms of information structuring that can be used again and again. A list is one type of cognitive jig. It can be used to order priorities or structure wholes into parts. Similes and metaphors are jigs. There’s another called a relationship distinction system (RDS) that can help solve silo problems in organizational design by identifying required relationships and the people responsible for them, and the resources required to operate the relationship. Excel spreadsheets and tables are jigs. Look for useful cognitive jigs and use them over and over again. They increase the efficiency and speed of thought.

3) Make structural predictions.

Austrians are wary of predictions because we know the future is uncertain. Here, we are not talking about predicting the future, but predicting the possibility of new knowledge existing after restructuring information. For example, a new relationship opportunity could emerge if we change our perspective. A new understanding could emerge if we break something that we were treating as a whole into its parts. We can identify gaps in our current thinking and make a bet that there’s something positive in changing that thinking. We can create new knowledge.

4) Embrace the logic of and/both.

We are taught bivalent logic: there’s right and wrong, there’s black and white, there’s X and Y. There’s an alternative: multivalent logic. There can be more than one right answer. There can be a continuum rather than fixed points.

One example of multivalent logic applies in the analysis of what customers want. They have a variety of preferences, ordered in different ways at different times and in different contexts. They are continuously learning what to want, and always making trade-offs. Bivalent logic won’t help entrepreneurs understand customers’ choices or decision-making processes.

Another example of bivalent versus multivalent logic is cause and effect compared to a web of causality. We tend to think of cause and effect as neighbors on a timeline. The cue ball of cause strikes the colored ball of effect and moves it in a designated direction. But it’s more realistic to think of the events of our lives or our business having multiple causal factors. There are so many mediating factors and external and internal variables that lead us to be more systematic in our thinking about them. Purposely look for webs of causality rather than shoehorn observed phenomena into a linear causal model that doesn’t match the reality of the world.

Systems thinking includes the recognition of individual subjective purpose and intent.

The perspective of methodological individualism leads Austrians to worry about whether systems thinking is well-aligned with Austrian thinking. I asked Laura and Derek this question. The response: “I would say that’s precisely what systems thinking entails — the notion that each individual agent is following simple interaction rules with other agents, and that those interaction rules are leading to the system and its emergent properties.

An example of an interaction rule from Austrian economics: humans act in order to improve their circumstances. Another is that they use their own subjective value system to determine what is an improvement. The action axiom, subjective value, opportunity cost in choosing between alternatives, profit and loss and the context of constant change are the simple rules of Austrian economics.

Practice, practice, practice.

Systems thinking is something everyone should be able to do. It can be practiced. Our brains are already building mental models about the world. It’s already in us and so it pays to be aware of it. 

It’s like any exercise: more reps make us stronger. Look at anything through the DSRP lens when you are feeding your dogs or driving down the highway observing billboard advertisements. Make the neuronal pathways of DSRP second nature.

This can occur at the level of individual learning or of organizational learning. In episode #152 (Mises.org/E4B_152), we discussed the organizational model of VMCL — an organization using learning to acquire the capacity to do its mission every day to achieve its vision.

Additional Resources

“How to Become A Systems Thinker” (PDF): Mises.org/E4B_160_PDF1

“Practical Systems Thinking Actions and Behaviors” (PDF): Mises.org/E4B_160_PDF2

Systems Thinking Made Simple: New Hope for Solving Wicked Problems by Derek and Laura Cabrera: Mises.org/E4B_160_Book

Cabrera Research Lab: CabreraResearch.org

159. Rory Sutherland: An Austrian School of Marketing

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Rory Sutherland, Vice-Chairman Ogilvy UK, is a peerless marketing authority, revered throughout the business world. He published a blogpost with the title Wanted — an Austrian School of Marketing. In praxeology, subjective value theory, customer sovereignty, and ordinal value stacks, he identified the building blocks of a marketing approach for our digital age. We talk about it in Economics For Business #159.

Key Takeaways and Actionable Insights

Mainstream economics has the wrong narrative about capitalism and, consequently, a misconception about marketing.

Mainstream economics fetishizes efficiency, and regards marketing as a cost and an add-on business activity rather than fundamental and essential. There are multiple erroneous assumptions about consumer behavior such as adhering consistently to transitive preferences, perfect trust, and knowing to the penny how much utility will be derived from every transaction. Utility is defined in a circular fashion (consumers act to maximize utility / how do economists know what utility is / it’s the value that consumers try to maximize).

The influence of mainstream economics on business is to favor a focus on what Rory terms “instrumental objective means of business growth”, such as lower prices, and wider distribution. Business becomes obsessed with quantification, and, because value is not quantifiable, looks for other outcomes that can be quantified and used to justify investments. This approach misses the key point: that the marketing tournament is played out not in the objective arena, but in the subjectivity of the consumer’s mind.

Ludwig von Mises developed the science of understanding human behavior, and provided a unique economic underpinning for marketing.

Mises introduced the new method of praxeology, making Austrian economics an entirely different science than mathematics-based economics. It’s the science of human behavior, of action, and can be combined with psychology and evolutionary biology in the development of a superior mental template for understanding business.

For marketers, the most telling understanding from praxeology is the consumer’s drive to relieve uneasiness. Mises phrases it: “The incentive that impels a man to act is always some uneasiness.” Note the terms “impels” and “always”. These are powerful insights for marketers. But more is required for action: “the expectation that purposeful behavior has the power to remove ….the felt uneasiness”. This is the task of marketing: to create such an expectation.

The relief of unease is the consumer’s primary drive, and therefore the proper focus of marketing.

There is no need, as Rory phrases it, for marketers to “ladle on the positives” in their communications. Removal of unease works differently. It creates the expectation that uneasiness can be removed by actions the consumer takes.

Reputation, for example, is a reassurance to customers that they won’t be disappointed, and that promises made can, with some confidence, be expected to be kept.

A strong brand is a special form of such reputational reassurance.

Investment in a costly advertising campaign with high production quality can remove unease about the credibility of a seller — someone willing to invest in advertising must be confident that there will be widespread acceptance of what they’re offering, giving the buyer a corresponding confidence of not only quality but also social endorsement.

Guarantees, samples, and easy return policies are examples of widely used and effective unease-reducing marketing initiatives.

In fact, anything that reduces the work that customers need to do to enjoy the product or service (such as, for example, home delivery) can relieve unease and increase the value experience. Economists might call this reduced opportunity cost or transaction cost. Whatever the terminology, the unease-reduction approach is the most powerful marketing method.

One example Rory cited was that of zoom. While the technology has been well-established for some time, zoom was bedeviled by the problem of social unease in the early phases of its establishment. Is an electronic meeting as effective as an in-person meeting? Will a client think less of a service provider who doesn’t fly to see them, irrespective of the quality of the remote, technology-enhanced communication?

The analysis of unease — especially the socially-contextual unease inherent in a service like zoom — is a really important element in the understanding of value generation through marketing. Austrian school marketers can develop a special understanding by asking more questions about how best to reduce unease rather than how to increase desirability. Rory used the example of range anxiety for potential buyers of electric vehicles. Their anxiety about possibly running out of power before finding a charging station might be irrational based on their physical environment and infrastructure, but the anxiety nevertheless governs purchase and usage and demands relief.

Marketing is built on an Austrian understanding of customers and their subjective heuristics of value perception.

Customers’ perception of the potential for the relief of unease is subjective and emotional. The appreciation of goods and services is not merely a product of their objective characteristics. Value for consumers can be created through psychology, not just through production. Value is a consumer experience, an emotional response driven by a subjective sense of what matters to them, embedded in context, story and meaning.

Changing consumer behavior is not a function of the objective reality of product and price. Marketers who focus just on these elements are “playing with a limited deck”, in Rory’s words. The presentation of a good or service to customers is fundamental to the value proposition. It’s not an add-on or an optional extra for business. Marketing can change customer’s minds through reframing, through changing the social context, or through any one of many, many more ways to change how they look at things.

Consumers evaluate through heuristics rather than rational calculations of economic benefits and costs. The marketing power of brand or reputation is a customer heuristic: a firm that has invested in its reputation through quality and service, reliability, and consistency in keeping its marketing promises, as well as cultivating its online ratings, will be rewarded in the marketplace. Customer disappointment — resulting from a failure to consistently keep promises — will be punished. Reputation and disappointment, of course, are subjectively perceived.

Austrian marketers thrive on the feedback loops.

As Rory puts it, some people like plain white bread and some will pay $10 for a sourdough olive focaccia loaf. Marketers explore all the possibilities in a market — they embrace the messiness of customer preferences and the whimsy of their choices. Perfect competition deprives customers of these whimsical choices; it commodifies what’s offered by suppliers.

If markets were designed by suppliers there’d be less variance but also less resilience (fewer options). Markets are designed by consumers and value is created in customer-initiated experiences, facilitated by suppliers who listen and respond well. Consumers get what they want via feedback loops, sending signals back to the marketer about what they want and don’t want, and what they’ll buy and won’t buy.

Brands especially welcome market feedback so that they can align more and more tightly with consumer preferences, and customize the branded experience to an ever-greater extent, reinforcing the brand-consumer bond. It is the consumer feedback loop that drives innovation. Marketing is the listening and alignment function. It’s essential to the workings of capitalism. It is the tool for synthesis of value through the imaginative redefinition of what people value, based on their signals.

It is the Austrian perspective that deals so well with the unpredictability of marketing successes.

Another limitation of conventional economics and quantification-obsessed businesses is the search for one right answer. Such restricted models of reality are dangerous. What capitalism and marketing are good at is coming up with multiple answers — increasing the potential solution space for problems, and increasing the number of ways to relieve unease.

The answer to any customer demand is never one thing, it’s multiple options for different value-uncertain customers to choose from. Sometimes there are what Rory calls “opposite things” (Red Bull and Coca-Cola) or sometimes multiple different things (a wide range of single serve beverages for a wide range of consumers in a wide range of situations).

Rory is an expert on unpredictable marketing successes. In his book Alchemy, he describes the “magic” of marketing and some of its unpredictable outcomes. One of the notable ones was the success of Red bull, a beverage brand that, according to research among its own consumers, “tastes kind of disgusting”. The testing agency had never seen a worse reaction to any new product. Why is there such unpredictability? As Rory puts it:

Models of human behavior devised and promoted by (mainstream) economists and other conventionally rational people are wholly inadequate at predicting human behavior.

Red Bull “hacks the human unconscious”. It has potent associations with risk taking behavior, with myths about the power of caffeine and taurine, with perceived signaling effects, and with several more psychological placebos. These have nothing to do with product and price, and make the success of Red Bull unpredictable.

Another way to say this is to call Red Bull’s success an emergent property. The future is unpredictable, but so is the past (we can’t really explain Red Bull’s success), even though we attempt to post-rationalize. It’s just one of several possible outcomes and we don’t truly know the story and how it happened.

Austrians’ embrace of emergent outcomes in free markets with freedom of choice makes marketers perfectly comfortable with unpredicted outcomes.

Much of business success is luck, instantiated by entrepreneurship and enabled by marketing.

As a consequence of this unpredictability, extraordinary business success is a function of luck and timing. Business outcomes are largely probabilistic rather than deterministic. Sadly, 80% of the effort in business is applied to pretending that it is deterministic — in the form of planning and strategy activities for example.

The time and place of “take off” for new innovations and marketing campaigns is entirely unpredictable. There are two influences that can bring a little more certainty. One is the role of the entrepreneur, who is likely to be more single-mindedly focused and more persistent in betting on a single innovation than a larger corporation that has a portfolio and a risk-averse bureaucracy.

The second is marketing, which has the capability to change customer psychology and change their frame of reference, transforming a bleeding edge concept into something inevitable and compelling. Early-stage adopters are often seen as somewhat crazy (i.e., there is limited socially contextual acceptance for the innovation), and marketing can accelerate the adoption curve by reducing or eliminating the value uncertainty of more customers more quickly.

Importantly for marketers, Austrian economics takes a process view of markets, in which people and their preferences and their individual and social behavior are constantly changing. This “constant flux”, as Mises worded it, gives energy to marketing as a stimulus for innovation, improvement, and promises of better alternatives.

Additional Resources

“The Austrian School Of Marketing” (PDF): Mises.org/E4B_159_PDF

Rory Sutherland’s blog post: “Wanted — an Austrian School Of Marketing”: Mises.org/E4B_159_Blog

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life: Mises.org/E4B_159_Book

Rory Sutherland on YouTube: “Praxeology: Time To Rediscover A Lost Science” (There’s a special frame at 8:10): Mises.org/E4B_159_Video

158. Mark Romera’s Globally Orchestrated Entrepreneurial Design Journey

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Entrepreneurship-as-design is brought to life in a wonderful conversation with Mark Romera, who conceived, designed and brought to market a values-driven vision of kids having fun playing in their backyards, via an impeccably crafted brand named Spimbey.

Key Takeaways and Actionable Insights.

Entrepreneurs can identify innovation opportunities even in the most established fundamental routines of everyday family life.

What’s more basic than kids playing with physical toys in the family back yard, running round, having fun, connecting with others? It’s fundamental to family life in the neighborhood. Yet, kids don’t get that experience so much these days. How to bring it back? That’s an entrepreneurial question that Mark Romera answered with Spimbey, a brand new playset product he designed and launched though his company, Spimba.

First, choose your customer.

Mark chose Mom. Kids are users, but Mom’s the customer. She’s part of a family with target-age kids and some backyard space. She wants her kids to have fun, play safely outside, play with others, and develop themselves physically and mentally. She worries about how much time kids spend on their digital screens, and how that affects their development.

How does an entrepreneur develop the requisite deep knowledge about Mom? Talk to her; engage her in conversation. Go where the play takes place — the back yard.

Distill a complex need into a simple solution.

Already, there’s a lot of complexity. Mom, kids, families, playthings and the materials they’re made with. This brings in safety considerations and regulations, as well as design and manufacturing needs and marketing and distribution needs. The best way to get started is work backwards from the simple solution — the concept of a finished playset, easily assembled by Mom or Dad in a suburban backyard. It needs to be simple for Mom to understand and picture in her mind, and all her questions (like safety and ease of assembly and sustainability) must have simple answers.

From this simple vision, entrepreneurs work backwards in a disassembly process to identify everything they’ll need and the network design to bring it all together.

Design and assemble a flexibly networked internal and external team.

Mark was a sole founder. First, he assembled his team in answer to the questions, who can help me with this journey? He also had flexibility for when and where he needed team members. For the “internal” team (not necessarily employees but performing functional management roles) he looked for process development, product development, brand development and web development. He made careful decisions about types of people, level of experience and the ability to take responsibility in an agile process. Most important was brand alignment — a premium, high quality, high integrity brand presentation requires team members of an appropriate caliber who understand reputation building and high consumer trust.

Next, he focused on assembling the external support team: design, safety experts, materials experts, testing labs and safety certifiers aligned with the appropriate regulatory regimes, manufacturing partners, external sales and customer service experts, logistics, freight and delivery partners. The entire value network must be linked, and scheduled for the right inputs at the right time, all working backwards in the calendar from the critical date, which is the high season for retail sales of playsets. Co-ordination of value network nodes and information flows with process inputs, sequences and handoffs is a complex exercise which must be programmed before any work commences.

The design process is a combination of creativity, rigor, networking and collaborative integration.

As we’ve learned, much of entrepreneurship is a design process, to get from a concept that’s generated internally to a completed product or project that can meet the rigorous demands of the external world, including Mom and the safety regulators, and the guardians of the distribution channels.

The design concept must take a form that everyone involved in the design process can see and understand in an appropriate way, without contradictions or misunderstandings. Then the appropriate design parameters must be assigned: safety, durability, ease of assembly and ease of use, manufacturability, regulatory compliance, freight and packaging constraints. Many of these design inputs must be outsourced — to computer design shops, materials specialists, manufacturers who can impose their own restrictions, warehousers and freight carriers who have specific requirements.

There is a lot of iteration, adjustment, change management and process orchestration to be managed as the design concept advances towards the market and becomes more and more solid, complete and comprehensively detailed. Mark emphasizes meticulous planning, and a calm demeanor with clear communications to keep the network aligned and on the same page.

Branding is a critical element.

The product is physical, but the benefits are psychological. This includes the sense of fun and easiness for the kids, and the feeling of satisfaction and safety for parents. These psychic benefits must be captured in the brand presentation, both online and in physical elements like design and color and packaging. For Mark, his brand is his philosophy, captured in communication, presentation, design, production and delivery.

Mark Romera’s personal entrepreneurial journey passed through various business roles and experiences before branching into entrepreneurship.

Mark worked in growth marketing, business intelligence, new business development and as an independent consultant solving strategic problems for business clients. As his responsibilities increased, he often felt like an entrepreneur inside the corporation. In growth marketing, he learned the power of testing supported by data. Test everything, without waiting for too much discussion about the pros and cons of an idea or concept. If it works, scale it up, if it doesn’t, try to understand why based on the data you’ve collected. Testing and experimentation produce data, and data reduces uncertainty. The data cycle requires speed for success, and not conventional structures or decision-making processes that slow things down.

Entrepreneurship brings unique psychic rewards.

With his growth hacking and exploit-and-expand experience, Mark felt ready and eager to step into entrepreneurship. He told us he wanted something more, because something was missing. He wanted the freedom to develop his own ideas from scratch and to create something new and cool. The psychic reward from entrepreneurship is special. It combines the challenge of immediate implementation and a successful sales season with the long term vision of building a global brand, extending a product line, and gaining acceptance in markets worldwide.

The entrepreneurial journey for Mark is immediately highly rewarding with the long term prospect of increasing achievement and success.

Additional Resources

Mark Romera’s “Entrepreneurial Journey as a Design Process” (PDF): Download Now

See the completion of the journey: Spimbey.com

Seven Business Secrets Of Austrian Economics.

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There’s a brand of economics that goes by the name, in academic circles, of Austrian economics. If I was the brand manager, I would re-brand it, in much the same way that Chrysler (now part of Stellantis) rebranded their truck line from Dodge To RAM. The RAM name is far more communicative of important core attributes like sturdy engineering, power, reliability, and assertiveness than is Dodge. RAM sales have been robust, and so, while we wouldn’t claim to know cause and effect, we might assume that the brand name did not hurt and may have helped.

Austrian economics got its name way back in economic history when the rival, incumbent brand of German economics got annoyed at the disruptive thinking of some young economists from the University of Vienna, and dismissed their ideas as merely “Austrian”. To the Germans, Austrian meant a smaller, subsidiary, irrelevant group that had no place on the world stage.

The disruptive body of thought stuck, however, and made great strides, because it’s more useful to real people than conventional academic economics. It provides better mental models to work with. For producers, Austrian economics is the economics of entrepreneurship and value generation. For consumers, Austrian economics is the economics of individual satisfaction.

From the point of view of entrepreneurial business, of any size from single practitioner to start-up to mid-size to mega-size, here are seven secrets of Austrian economics that can be usefully applied for the achievement of business success.

Understanding Subjective Value

The purpose of business is to generate value. Austrian economics enables businesses to understand value in a new way, and, consequently to generate more of it. Curt Carlson, the authority on value creation, weaves wonderful value stories. in one of them, he imagines the iPack, a wheeled robotic suitcase that will follow you through the airport without effort on your part, via its electronic tether to your iPhone. He goes further, to imagine the iPack understanding your calendar well enough to ship itself to Singapore to your hotel to await your arrival. 

Where is the value? It’s not the physical case, and it’s not even its functionality, beneficial though it will undoubtedly be. The value is the feeling that’s created in the mind of the customer, both in the form of anticipation of relief of a travel hassle (“What a great value that will be! I’ll gladly pay for it”) and in the after-evaluation of the experience (“That was the most convenient trip ever!). Curt writes:

It is the space in the minds of potential customers. It is important to them because they have an imagination and an expectation for continuous betterment. The white space for iPack is future travel, which customers can imagine (going to Singapore through Hong Kong – what a hassle) and they have expectations for betterment (wouldn’t it be great if somehow I didn’t have to carry my bag).

Understanding value as a feeling, as the expectation of delight and the evaluation of that delight, unleashes the value generation process. 

Customer Sovereignty

In the value generation process, the customer is the boss. What the customer says, goes. If a business is unable to conjure the anticipation of delight, new products and services will not be adopted; they’ll never get off the ground. If the business does conjure the anticipation of delight but does not deliver, resulting in disappointment, the customer will not only walk away, they might even destroy the business’s reputation with negative word of mouth. The customer truly decides what is produced, and what succeeds in the marketplace. They decide on prices by establishing their willingness to pay – there’s no point in setting a price that’s higher than this level.

The full acceptance of customer sovereignty changes completely the traditional way of thinking about business. It is typical to think of business as production, as a sequence of steps from conceptualizing a future value, through designing a way of delivering that value, to realize it through exchange in the marketplace. It’s a forward-facing sequence of producer-driven action. 

But the opposite mindset is the right one. The true nature of business is working backwards from the customer experience, which is where value originates. If there were no customer experience, there’d be no value.

Entrepreneurship

Who creates value and how do they do it? Obviously, customers are key to value, because they are the ones who experience it. They need a partner because they can’t conjure up value by themselves. They need a producer. That’s the role of the entrepreneur. The entrepreneur – or the entrepreneurial process when it takes place in companies and corporations – performs the function of sensing what consumers and customers want, doing the hard work of designing and producing it, and presenting it to the customer as an option for them, a new choice, a better alternative. There’s uncertainty on both sides. The customer doesn’t know what to want (they couldn’t have designed an iPhone before Apple made one, they just knew they wanted a better phone experience). And the entrepreneur doesn’t know for certain that what they design will align perfectly with what the customer wants. This coming together in eventual alignment is the beauty of entrepreneurship and also its risk.

Entrepreneurship requires a very special empathy between producer and customer, and when this empathy results in what economists call exchange – willing buyer, willing seller, both happy – there is progress, and the world is a better place.

The entrepreneur doesn’t exist in conventional economic textbooks or theory. Entrepreneurship is at the very heart of Austrian economics. Austrians see that entrepreneurship creates betterment, economic growth, happiness, and satisfaction.

Action

Entrepreneurship is difficult, sheathed in multiple challenges. It has typically been portrayed as high-risk. Entrepreneurship might result in failure. Look at all the projects that are started and don’t succeed.

An entire tradition in business schools has been developed to purport to eliminate these risks. Business school professors sell their courses and lectures and books and presentations to present and future business managers on the promise of control and prediction. You can control the future with good planning and strategy, according to the professors, and predict the future outcomes.

Austrian entrepreneurship takes an opposite approach. The future is unpredictable, so the task is to find out what it will be, not to control and predict it. The axiom of entrepreneurship is action. Act, don’t strategize, and don’t plan. Action takes the form of experiments and explorations: try this, what about that? The entrepreneur reads the feedback data from the experiments (did the customer react positively or not?) and adapts to it, making changes and adjustments, or abandoning that experiment and trying another. This is the culture of the start-up as well as that of the agile management method. Fast, tight feedback loops replace the strategic planning process and the 100-page business plan.

Imagination / expectation

Conventional economics favors numbers and mathematical models. At the core of Austrian economics are imagination and expectation. Customers imagine a future that’s better in some way than today, but they’re not sure how it will come about. All they can communicate is their expectations. Entrepreneurs sense this, and imagine the kinds of new solutions and new services, and new products they can offer to meet consumer expectations.

Imagination is a robustly powerful business tool. Entrepreneurs can imagine new services that don’t exist, new processes that have never been used, new lines of code that might unlock some new functionality, and new organizations and structures that might unleash creativity. Their expectation is that, if they act, they’ll learn something positive and identify a future benefit.

Imagination is human, creative, and expansive. It’s about possibilities. Conventional economics tend to focus on scarcity, but entrepreneurial economics is much more focused on abundant possibilities.

Co-generation / value learning

Who produces value and who consumes it? That’s the kind of bi-valent logic that leads to restrictive thinking. Value generation is a collaboration. Customers need to be creative enough to imagine a better future, and to seek improvements in the status quo. Entrepreneurs need to be alert enough to understand customers’ yearnings and creative enough to think of new ideas that can potentially fulfill them.

There is a learning process for both customers and entrepreneurs. Customers are learning what to want, and entrepreneurs are learning what to offer them. They both learn by experience. The customer tries something new, experiences the usage of it, then stands back and evaluates that experience. That’s where value arises: in the customer’s evaluation. The entrepreneur observes and monitors that evaluation, seeking feedback from which to learn. Co-generation of value and shared value learning are the characteristics of Austrian economics at the level of the individual and the firm.

The Flow

An important underpinning to Austrian economic thought is to view markets and value and customer relationships as flows. The world, the economy, life, and business are in constant flux. There are so many actions and interactions that they can never be understood or captured in snapshots, such as today’s price or today’s market share, or today’s sales, or this month’s GDP figures. Snapshot thinking is static. Austrian entrepreneurs see the market and their business and the mind of the customer as flows. Always changing, never still. Perhaps a trend or a pattern can be detected, but these tend to be imagined by looking backwards then projecting the past into the future and this is dangerous. The flow is not predictable or projectable. The best entrepreneurs embrace the flow, keep the pace of their experiments high, make continuous adjustments and adaptations and revel in the unrestricted wonders of adaptation to complexity.

These are just seven of the ways in which Austrian economics is applied in creative and innovative businesses. More and more entrepreneurs – both inside and outside corporations – are adopting the principles of Austrian economics.

157. Luca Dellanna on the Power of Adaptation: Managing Complexity Every Day

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The terminology of complex adaptive systems sounds academic and abstruse, but the subject is not: it’s about the real-life, in-your-face problems and challenges that face a business every day. The secret to solving the challenges of complexity is adaptation. Luca Dellanna, a business expert on the subject, joined Economics For Business to explain how any firm and all management teams can harness the power of adaptation.

Key Takeaways And Actionable Insights

Complex systems are a business’s everyday environment, and every business behavior is an adaptation.

Every action a manager or leader takes should be aimed not just at its direct outcome but also for the adaptations triggered in your team, i.e. the longer term, second order future behaviors that are made more likely as a consequence of the immediate action. Take motivation as an example. Motivation results less from direct efforts (such as a “motivational speech”) but rather from the establishment of an environment in which good effort is recognized and rewarded. Your system action could be as simple as checking back with employees regarding assignments very quicky and providing feedback. This shows that their behavior is observed, appreciated and valued – a motivational environment to which they will adapt positively. A different environment can be demotivating, with negative long term consequences.

Fast, tight feedback loops are the engines of adaptive systems.

Feedback is the energy of adaptive systems, and Luca urges that the feedback loops must be fast and tight. After-action feedback should be as close to immediate as possible, so that there is no uncertainty about whether action is praiseworthy or not. Dashboards and end-of-period bonuses are too delayed for motivational purposes. Similarly, feedback should be highly specific to the action in question, as opposed to a general – and, even worse, vague or unclear – evaluation. These “motivational moments” or “mission moments” can contribute to the sense of a shared mission and vision.

The opposite case can generate “motivational losses”.

When a team member or colleague shifts from motivated and engaged to unmotivated and disengaged – ready to quit perhaps – it’s a motivational loss. These can be avoided. Treat these occasions as incidents, to be investigated and addressed. Usually, the best solution is productive clarity, because motivational losses usually occur in the event of unclear objectives or unclear directions. The solution to lack of clarity is to make it impossible to be misunderstood, and to do so from the very outset, so that there is never a need to be remedial.

People have mental contracts, and it’s important to understand and empathize with them.

We all have two contracts, the one we sign, and the one in our mind which includes a host of intangibles that are unexpressed in the written contract. We might expect to receive promotion after an appropriate period of hard work, even though there’s nothing in the written contract to that effect, nor has anyone made us that promise. It’s an implicit contract. It’s important to identify and understand these mental contracts, and to end, through clear communications that can’t be misunderstood, all misconceptions that can lead to unfulfilled expectations.

Signaling must be clear and costly.

Leadership behaviors act as signals to the rest of the organization. The signals must be clear and unambiguous. Words can be misunderstood or can be perceived as self-contradicting when there is inconsistency. Behaviors can be more clear and more consistent. Luca gave a safety example: instead of instructing individuals to wear helmets in unsafe areas, managers should go to wear the work is being done, and demonstrate the behavior. The more “costly” the signaling behavior to the manager, the more clear the signal. Luca gave the example of the founder of the Dupont explosives businesses living with his family at the factory where explosives were made. He put “skin in the game” to demonstrate the importance of safety in a notoriously unsafe industry – a costly signal, and one that had the desired effect.

How to become a systems thinker: practice adaptive thinking and apply it to yourself.

Adaptive thinking can be practiced. It can become an expertise. Think through every reality to determine how other individuals are adapting to behaviors of others that concern them or affect their work. How do people adapt to the words that are spoken to them, or the instructions that are given to them? What are the likely second and third order effects? Always ask yourself, how is the system adapting?

Then apply adaptive principles to yourself. Fashion tight and specific feedback loops for yourself so that your actions generate immediate feedback. How are people adapting to your actions? Make sure you are using the right mental models. Check your assumptions.

Additional Resources

Luca’s website: https://www.luca-dellanna.com

Managing Adaptive Systems – Our E4B Knowledge Graphic

The Power Of Adaptation by Luca Dellana

Teams Are Adaptive Systems by Luca Dellanna

Antifragile by Nassim Nicholas Taleb

156. Yousif Almoayyed: How Austrian Economics Helps Me Make Best Use of All My Business Knowledge

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Business success is a function of knowledge — the right knowledge at the right time applied in the right way. But knowledge is always scarce and incomplete and sometimes wrong. It is best to regard knowledge as a process: continually gathering changing knowledge from a wide range of sources to integrate into decision-making and action. Austrian economics can provide that integration, helping businesspeople with sense-making in a complex, ever-changing world of knowledge. Yousif Almoayyed joins Economics For Business to share his knowledge journey and the ways in which Austrian Economics provided him with the required integrating theory.

Key Takeaways & Actionable Insights

Business knowledge is gathered from multiple sources and multiple disciplines.

Gathering knowledge that’s relevant for business success is a process, a journey, and an exploration. It’s not limited to business subjects. A rounded businessperson studies economics, of course, but also history, psychology, languages, culture, computer science, political science. Why are these all relevant? Because business is a social science, concerned with how people think and perceive and interact, and how they adapt to new knowledge and changes in context and changes in choices. All the knowledge disciplines impact business.

There’s an exploratory phase in every knowledge journey, where we cast our knowledge net wide.

Yousif Almoayyed describes how his early years of schooling included multiple schools both in his native Bahrain and in the US and other countries. He started to gather comparative knowledge of different countries and cultures. He decided to continue the process by traveling to and studying in China. He developed an elevated capacity for the critical business skill of empathy: seeing things as others see them, through others’ eyes, or rather, through others’ mental models. People who grow up with a different cultural and philosophical and religious and linguistic and institutional background develop different mental models. The facility to discern, analyze and understand those mental models helps businesspeople in their interactions with customers, competitors, employees, partners, and suppliers.

The exploratory phase of knowledge gathering doesn’t require us to think about applying that knowledge in business at the time of gathering. It’s building up a knowledge inventory.

Different fields of knowledge can yield different business skills.

Yousif told us how he studied computer science and developed a deeper understanding of the clarifying explanatory power of logic. Via the discipline of computer programming, which requires efficient navigation to an answer that is both right and elegant, he was able to gather principles of logical reasoning that are highly applicable across disciplines.

He studied history and — by combining these studies with empirical observations in China and Cambodia and Africa as well as the Middle East — he was able to develop his skills in causal reasoning. What causes can be credibly and realistically and logically linked to what outcomes? What he observed on the ground did not always comport with what is taught in history books, since historians may use flawed or biased logic or incomplete knowledge. Best to construct your own reasoning chain and your own web of causality. This skill is highly applicable in business.

Linguistics helps with understanding the meaning that people intend when they speak. It helps with nuance and idiom, and with assessing people through their spoken words — another critical business skill.

Austrian economics is the system of thought and logic and insight that can integrate all this knowledge into a cogent way of understanding and explaining the business world.

Yousif felt that, even with his wide range of multidisciplinary knowledge and multicultural experiences, he still did not understand people and their decision making sufficiently for business. Yousif discovered Austrian economics by reading its definitive treatise, Human Action by Ludwig von Mises.

He told us that he found the insights in Human Action, derived from theory, were highly confirmable in the real world via observation. Anyone can make the same discovery. Over time, for example, you will be able to build more and more confidence in your understanding of how people make their decisions, as well as in your own decision-making about the future. By understanding how individuals’ value systems drive economic decision making, you will be able to interpret and anticipate their economic choices. You’ll deduce the theories or mental models through which people see the world, and analyze their actions that way.

Value systems are at work in firms, also. When a firm has a value system of trust and collaboration, there will be an alignment of interests among everyone who works there, and with suppliers and partners. If you take such a firm as a customer, you can apply the same values-based approach to building a strong business relationship.

Running your own business is an original and customized application of principles of Austrian economics.

You can’t read a book about how to run your own business, Yousif told us. Your analysis, using the principles, must be original. He gave the example of applying price theory in his domestic market of Bahrain. It’s an island, so it’s possible to track price fluctuations in inbound commodities — a special economic case. There are unique seasonal business patterns. Trading in oil has a disproportionate effect on economic conditions, and the oil industry is government controlled, so oil prices affect government spending. Boom and bust cycles are very real, and there is observable monetary distortion of firm-level accounts.

Yousif is able to plug these real and highly specialized data into his command of Austrian price theory to arrive at not only price decisions, but a wider range of decisions about when to build inventory and when to deplete it, and when and how to refresh his capital base, replacing older high-maintenance machines with new high-reliability upgrades. Theory is applied in practice in a very real way and in very real decisions. The results have been impressive: a turnaround of a firm to become a growth business and a market leader.

This is our aim at Economics for Business: applying economic principles to help you to improve and accelerate your business.