Entrepreneurs Exploit Errors in Conventional Wisdom

Four excerpts on how entrepreneurs exploit errors in conventional wisdom. The first two are from a Feb-8-2001 public forum that was part of BusinessWeek’s “Captains of Industry” series, where Oracle Corp. CEO Lawrence J. Ellison sat down with Editor-in-Chief Stephen B. Shepard. The last two are from Peter Thiel’s CS183 class lecture on secrets.

Entrepreneurs Exploit Errors in Conventional Wisdom

Stephen B. Shephard: You were a so-so student in high school. You didn’t finish college. How come?

Larry Ellison: The very things that caused me to fail in school have made me successful in life. I have always had difficulty with conventional wisdom. So teachers would say certain things–and I wouldn’t necessarily believe what they had to say. Just because they said it, and they were experts, and they were in authority did not automatically mean they were right.

It created problems between me and my parents at times. And between me and my teachers, and me and my peers. But in the end, when you go out into the real world, it’s when you find errors in conventional wisdom–when everyone says A is true, and A is not true–that you gain your competitive advantage. Only a few times do you have to find errors in conventional wisdom to make a living.

I think this is good very good advice: probe for the limits of what’s generally accepted as true and the limits of current expert knowledge. Experts can become very committed to a world view that is fraying around the edges or even obsolete because to let go of their expertise (or recognize that it’s obsolete) means regressing to a journeyman or even novice status.  Most conventional wisdom was true for some time in some situations and you need to understand how your plans to “violate” conventional wisdom can explain why it’s worked in other situations but is not true in the arena you are planning to operate in.

Conventional Ignorance

I would make a distinction between “conventional ignorance” where a cause for an event is only held tentatively and “conventional wisdom” where there is a widely held theory that is wrong, or at least wrong in some crucial aspects, details, or domains. Two examples of conventional ignorance: what causes Alzheimer’s and what causes cancer–and this latter question assumes “cancer” is one disease and not 500 or 1,000. Two examples of conventional wisdom getting overturned: that ulcers were caused by an infectious agent–H. Pylori–and not stress, and that hygiene, in particular hand washing as proposed by Semmelweis, could have a dramatic impact on infant mortality.

Confusing Effort with Results

Larry Ellison: I’ve got very strong feelings about philanthropy. For one thing, it’s measured entirely the wrong way. Let me posit the following question: Mr. A, sitting over there, has given $10 billion to cure cancer. Mr. B, sitting over here, has given $10,000 to cure cancer. Mr. B cures cancer. Mr. A does not. Who is the bigger philanthropist?

We measure philanthropy by how much money you waste. We measure the size of your donation, not results. I’ve given a lot of money to infectious diseases–malaria, and schistosomiasis and tuberculosis–and I have a medical foundation that’s working on it. I don’t think it’s terribly interesting how much money I gave. If you ask me, I’ll tell you. I don’t think it’s terribly interesting because we haven’t solved any problems yet.

Confusing spending money with outcomes–or more broadly effort with results–is a common fallacy and often an instance of conventional wisdom that’s wrong: of course we are having an impact on the problem, look how much we are spending. This applies to commercial, government, and non-profit efforts and entities. I can remember a remark John Morgridge made after a 1992 visit by a national politician to Cisco headquarters: “They have a funny way of talking about problems. They confuse spending money on a problem with solving it. For example: job training was ‘solved’ because we spent five billion on that last year.” The good news for entrepreneurs is that if you can see a path to a solution you should not be deterred by the amount other firms have already spent to solve the problem, but by the quality of their solution and its fit with your target customer’s needs.

Peter Thiel: Secrets Violate Conventional Wisdom

Peter Thiel restated Ellison’s insights in his CS183 lectures and in “Zero to One.” Here are two examples, first from “Peter Thiel’s CS183: Startup – Class 1 Notes Essay” by Blake Masters

The intellectual rephrasing of these questions is: What important truth do very few people agree with you on?
The business version is: What valuable company is nobody building?

And second from “Peter Thiel’s CS183: Startup – Class 11 Notes Essay” by Blake Masters.

Back in class one, we identified a very key question that you should continually ask yourself: what important truth do very few people agree with you on? To a first approximation, the correct answer is going to be a secret. Secrets are unpopular or unconventional truths. So if you come up with a good answer, that’s your secret.  […]

How hard it is to obtain the truth is a key factor to consider when thinking about secrets. Easy truths are simply accepted conventions. Pretty much everybody knows them. On the other side of the spectrum are things that are impossible to figure out. These are mysteries, not secrets. Take superstring theory in physics, for instance. You can’t really design experiments to test it. The big criticism is that no one could ever actually figure it out. But is it just really hard? Or is it a fool’s errand? This distinction is important. Intermediate, difficult things are at least possible. Impossible things are not. Knowing the difference is the difference between pursuing lucrative ventures and guaranteed failure. […]

Secrets are hard but solvable problems and we should talk about them. It’s hard to work toward a radically better future if you don’t believe in secrets. If you believe something is hard, you might still think you can do it. You’ll try things, and maybe you’ll succeed. But if you think something is impossible, you won’t even try.

Related Blog Posts

• Challenges in Analysing Market Structure and Competitive Landscape
• Few-If Any-Silicon Valley Secrets: at least those offered breathlessly for sale at “Startup Fantasy Camp.”
• Cecily Drucker’s Startup Secrets
• Information That’s Not Written Down
• Stay Tuned! We Are Being Purposefully Vague Right Now
• Howard Marks: Dare to be Great Conventional strategies yield conventional results, only the unconventional is above average–or below. Place small bets early to explore widely and create options.
• Knowledge That’s Not Written Down, Yet

Dorai Thodla’s insights from Zero to One

Dorai Thodla had already blogged about Zero to One and offered  A Few of my Favorite Quotes from Peter Thiel’s Zero to One.  Here are some insights he extracted I found particularly useful for bootstrappers:

• Network effects businesses must start with especially small markets. Successful ones are rarely started by MBAs because the initial markets are so small that they often don’t even appear to be business opportunities at all.
• The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
• A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.
• An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale.
• The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete. They’ll ask: how can computers help humans solve hard problems?

Dorai also suggested http://www.slideshare.net/getnuggetapp/nugget-collection-zero-to-one-by-petter-thiel