Not Too Tight, Not Too Loose

November 14, 2018

 

To hear two of its sharpest observers, the media industry is pretty screwed. In a recent conversation, Vox's Ezra Klein and NYU's Jay Rosen spoke about the increasing homogeneity of the news, and the lacunae which are developing as a result. As the profitability of journalism has withered, news sources are less eager to risk unconventional approaches. An extremely competitive landscape has also created a kind of myopia, where news sources simply try to report the same stories better. Klein lamented the situation, recalling what fellow journalist Felix Salmon wrote when Jeff Bezos purchased The Washington Post. Afraid that Bezos would bring Amazon's hyper-efficient model to The Post, Salmon wrote, "while you can achieve better profits by cutting here and maximizing there, you can never achieve long-term greatness that way. Greatness emerges mysteriously from the slack in the system, from source lunches and newsroom cross-pollination and expensive editorial whims. It emerges, ultimately, from the ability to give people time and space and money, in the certain knowledge that most of that time and space and money will end up being wasted, and embracing that waste as a good and ultimately necessary thing." 

 

This is a familiar story. In the investment management industry, for example, herding has probably eroded the alpha (i.e. excess returns) from most strategies. Many equity managers appear to be engaged in the financial equivalent of an arms race, trying to find ever more detailed real-time data to earn an edge over competitors. This is a tough game to win. I'm reminded of George Soros's words: "I do not play according to a given set of rules; I look for changes in the rules of the game." Describing his firm's success in predicting the British pound's exit from the European Exchange Rate Mechanism, he said, "I was prepared for a regime change, whereas other people were acting within a prevailing regime."

 

It's obvious that most organizations aren't set up to support the slack needed to exploit regime changes, rendering them susceptible to disruptive change. But it would be crazy to suggest that more slack is unequivocally better. With too much slack, you end up with bloated, unfocused organizations that are doomed to unprofitability. Clearly, there is an optimal amount of slack.

 

A fable from Buddhism comes to mind. A sitar player, discouraged with his meditation practice, went to the Buddha to ask some advice:

 

"What happens when you tune your instrument too tightly?" the Buddha asked. "The strings break," the musician replied. "And what happens when you string it too loosely?" "When it's too loose, no sound comes out," the musician answered. "The string that produces a tuneful sound is not too loose and not too tight." "That," said the Buddha, "is how to practice: not too tight and not too loose."

 

Not too tight and not too loose - or, put another way, just the right amount of slack. This is far easier said than done, of course. It's precisely why news organizations struggle with their current business model. It's also why the returns to venture capital (a proxy for innovation) follow a power law - many companies fail, and a very small number achieve stratospheric success. I don't think it's realistic to expect established companies, or people in their daily lives, to accept VC-like rates of failure in their portfolio of experiments. It seems more appropriate to try and emulate large, innovative companies - Google, for example - where an established engine is surrounded by pockets of experimentation. Again, easier said than done. But as far as managing change and shooting for greatness go, "not too tight, not too loose" seems a worthwhile mantra. 

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