Buying Your Way into Entrepreneurship

Buying Your Way into Entrepreneurship

Many aspiring leaders take conventional routes to the top in business: They get on a C-suite track at a large company, climb the ladder to partnership at a consulting or investment firm, or launch their own start-up. But there is another career path that has become increasingly popular in recent years: buying and running an existing operation—or what we call acquisition entrepreneurship. A record number of such transactions occurred in the United States during the first three quarters of 2016, according to BizBuySell, an online small-business marketplace.

Every year, we teach a course at Harvard Business School on this kind of entrepreneurship, which dozens of students—and others—pursue. Among them are Tony Bautista, who did stints in investment management and business development before taking the helm of Fail Safe Testing, a company that tests equipment for local fire departments; Greg Ambrosia, who served as a U.S. Army officer before acquiring and leading City Wide Building Services, a commercial property window-cleaning specialist in the Dallas/Fort Worth area; and Jennifer Braus, an engineer-turned-MBA who now owns and runs Systems Design West, which manages billing for ambulances and other emergency service providers near Seattle. (Full disclosure: We are investors in and directors of all three companies.) Other students of ours have gone into home health care, exotic travel, musical instrument rental, specialized software, and manufacturing.

Whether acquisition entrepreneurship is right for you depends on your preferences and temperament. But most of the individuals we’ve taught, advised, and tracked have found it to be personally, professionally, and financially rewarding.

Perhaps the biggest benefit is instant impact. Instead of navigating a corporate bureaucracy or toiling away on business plans and prototypes, you’re immediately in charge of a living, breathing organization and making decisions that have consequence. That was appealing to Braus. “I’m someone who craves responsibility,” she says, “so I didn’t really like being a worker bee. I saw where I wanted to go in terms of leadership, and now I’m there.”

Another plus is having a more flexible lifestyle than might be possible at a fledgling start-up or a large firm. When you’re running a stable operation, you rarely need to work nights and weekends, and as the boss, you set the rules: If you want to leave early for a family or community commitment, you can.

But small-business acquisition and management is not without its challenges. That’s why you need to make sure you’re suited to it and then approach your search, deal negotiation, and transition to leadership in a systematic way. Through our research on multiple companies and their buyers, we’ve developed a road map for tackling all of these steps.

Reflection

To succeed at acquisition entrepreneurship, you of course need basic management skills: an understanding of finance, a knack for leading and managing others, and an aptitude for decision making. But you need other attributes, too.

Confidence and persuasive ability are key; the job requires you to reach out and project optimism to people you don’t know—business brokers, investors, sellers, and the employees and customers you inherit. City Wide’s Ambrosia says he felt instantly comfortable with that part of the role, thanks to his military experience, which involved leading different groups of soldiers (including many who were older than he was) on combat missions in Afghanistan.

Acquisition entrepreneurship means instant impact. You’re immediately in charge.

Persistence—what Bautista describes as “thick skin and grit”—is crucial, too. When seeking a business to buy, you might find a great prospect, reach agreement with the owner on price and terms, and work for months to close the deal—only to have it fall apart at the last minute. You need the fortitude to bounce back. And once you’re an owner, it will be up to you to drive the company forward and ensure that it recovers from setbacks.

Additionally, and perhaps most importantly, you should be an enthusiastic learner. Throughout your search, you’ll have to quickly get up to speed on unfamiliar industries, sectors, and companies. When you find an interesting target, you’ll need to become knowledgeable about the business. And as an owner and CEO, you must be able to develop expertise across functional areas, stay curious, and recognize that you can and should grow into the job. “Nothing can prepare you for owning a company other than owning a company,” Bautista comments. “No day is boring.”

It’s also important to reflect on the trade-offs that all entrepreneurs make in choosing to go out on their own: Do you value what you’ll gain more than what you’ll lose? For example, you’ll have professional independence and the ability to make unilateral decisions, but that comes with a great deal more pressure. You’ll be giving up the comfort of working in a larger, more structured organization where you have greater access to capital, a better-known brand in which to take pride, and the support of peers, bosses, and functional groups such as HR and R&D. Yes, your pay will be directly linked to your performance, with every positive move you and your employees make benefiting you and your investors. But there is a negative flip side: Inevitable mistakes and down cycles will hit you harder than they would if you were a cog in a corporate machine.

“You and the company become one, so you take both the good and the bad,” Bautista says. Ambrosia describes the job as “exhilarating” but also “stressful”—sometimes even more so than his time in the army. Leading troops, he alternated between periods of extreme challenge and rest, he explains. But in his role as CEO, that “feeling of responsibility to get it right”—for customers, employees, and investors—“doesn’t stop.”

So carefully consider what you’re in for. If, after all this thinking, you determine that you have the skills and the appetite to become a small-business owner, you’re ready to begin your search.

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The Search

Although would-be entrepreneurs often worry about making mistakes once they take over a business, it’s actually much earlier that many falter. According to research by a team at Stanford University, about a quarter of acquisition searches end without a successful purchase. In other cases, people let emotion or a desire for expediency lead them into buying bad businesses (or the wrong ones for them) or overpaying. We’ve focused on avoiding these outcomes in our work advising former students and in making investments ourselves. Here’s what we suggest.

Whether you’re working alone or with a partner, you need to commit to searching full-time for six months to two years. This may sound extreme, but an extended period is necessary to raise funds from investors, identify potential acquisition prospects, thoroughly vet the best of them, negotiate with sellers, and, eventually, find one that agrees to sell at a reasonable price. Then it will take at least three more months to perform due diligence and complete the transaction.

Establishing a search fund is the most popular way to raise enough capital for out-of-pocket expenses and your cost of living during this time. The process involves approaching potential backers (wealthy individuals in your network or those in the small-business-acquisition community) and offering them a first look at investing in an eventual acquisition at favorable terms. Bautista, Ambrosia, and Braus all went about their searches this way. Their aim was to acquire not just money but also advisers who could help them through the deal process, since none of them had M&A experience.

An alternative is to self-finance. To make this realistic, you should try to keep expenses down—one of our students spent only $25,000 over his 14-month search, in part because he was able to live with his in-laws—and limit the number of prospects you consider. The advantage of this route is that you can strike a better deal with investors when you raise money at the acquisition stage.

The search begins by sourcing and filtering prospects. We recommend focusing on companies with annual revenues of $5 million to $15 million and annual cash flows of $750,000 to $3 million. In this range, there are high-quality small businesses available for prices low enough that you and your investors can earn an excellent return even if the business grows only slowly. Forget rapidly evolving start-ups and risky turnaround opportunities; you should look for steady (often unglamorous) enterprises that are profitable year after year and likely to remain so—what we call enduringly profitable. While these are strong businesses, you can still add a lot of value by applying best management practices that the current owners might not know about or have the energy to pursue.

In a typical search you’ll encounter acquisition prospects every day—through referrals from your network or brokers or through your own direct outreach to business owners. These prospects might total in the thousands over a year or two, so you will need to dismiss most of them very quickly. We recommend that you evaluate each using five criteria:

  • Is it profitable?
  • Is it an established business?
  • Are its revenues and cash flows in the desired range?
  • Do you have the skills to manage it?
  • Does it suit your lifestyle (location, hours, need for travel, and so on)?

If you can answer yes to all of the above, ask two additional questions that take a bit more time to investigate:

  • How enduringly profitable is the business?
  • Is the owner serious about selling it?

Markers of enduring profitability include a steady, loyal customer base; a strong reputation; deep integration with customers’ systems; large switching costs; and few or no competitors. Examine the financials carefully and look for strong margins and low customer churn. (For more details, see our HBR Guide to Buying a Small Business.)

Over a 12-month period, Ambrosia considered approximately 7,500 businesses, from a slaughterhouse to a confectionary company. He indicated interest in 26 and received favorable responses from two before he entered into exclusive negotiations with the seller from whom he eventually purchased his company. Bautista looked at hundreds of prospects (often pestering brokers for details on promising ones), created a short list of 15, and visited five or six before settling on his target. As for Braus, she acknowledges that she “came across a lot of garbage” before finding one candidate that “stood out.”

If a business owner has engaged a broker, it’s a good sign that he or she is ready to sell. But it’s not uncommon for people to back out at the last minute. To counter this risk, spend time with potential sellers as early as possible to investigate their motives. Are they retiring? Have they had a life change that requires them to give up the business? Are they just testing the waters? Consider their expectations: What price do they want? Are they just looking to turn a big profit—or perhaps get rid of a bad apple? And be sure that you’ve talked to all the owners; someone else with a share may be less interested in selling than the person with whom you’ve been dealing. Even as you dig more deeply into businesses that make it past your initial filters, you should continue to review new prospects in case your desired deal falls through.

Negotiating a Deal

You may have spent only a day or so on the prospect thus far, but if it’s still of interest, you should now devote substantially more time to preliminary due diligence: a focused period of rapid learning in preparation for making an offer. This is when you’ll test the seller’s initial claims and verify the information that has made the business appealing to you. You believe the company has many devoted customers because it reported a low churn rate—but are those customer businesses themselves healthy? You think cash flows are steady—but what did the books look like during the last recession? And how sound are the company’s current business practices (regarding quality control, billing, refunds, pay, and benefits)? You’re looking for any reason that you might not want to acquire this business.

Use the company’s historical financial data to project future earnings and your return on investment. These calculations will allow you to value the firm as accurately as possible—and thus to arrive at an offer price, typically between three and five times the current EBITDA. Visit banks and approach your investor network to raise money for the acquisition. You should be prepared to provide information about the business and its industry, details on the due diligence that you’ve done, your financial projections, and the deal terms that you are proposing.

Especially if you’re competing against other interested parties, this is also the time to persuade the seller that you are the right buyer. Bautista was up against private equity funds willing to spend more money on Fail Safe than he and his investors were, but he won out by emphasizing that he really cared about the business and would continue the owner’s legacy.

If your offer is accepted—or accepted after negotiations—you’ll enter a period of confirmatory due diligence in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags. (It’s a good idea to wait until this stage before bringing in these outside professionals so that you don’t have to pay them should the deal fail, as is more likely earlier in the process.) This can be an extremely nerve-racking time for both the buyer and the seller, so it’s important to be patient and calm.

“I was always trying to communicate that progress was being made,” Ambrosia recalls. Braus’s seller threatened to back out when the company signed a big new client 10 days before their deal was scheduled to close, but she and her investors pulled the seller back by renegotiating some of the terms. “Living with the uncertainty during that period was a difficult thing to do,” she says, “but we weren’t willing to lose the business over it.”

Transitioning into Leadership

After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone, and taking control of your cash flow.

The most common trouble for small firms under new owners is running out of cash.

As you meet your new colleagues, reassure them that they won’t see any immediate changes. Instead, share your overarching goals for the company—for example, excellent customer service, commitment to quality, a satisfying work environment—and encourage people to stay focused on their work. Also give them an opportunity to ask you questions, but don’t feel as if you should have definitive answers for everything: “I want to learn more about that issue before I make a decision” is a fine response.

On the day Ambrosia announced his purchase of City Wide, he stood up in front of his 50 or so employees and delivered a three-part message: He’d bought the business because it was already a great one, everyone’s job was secure, and he looked forward to learning from them. He then met with his managers, laying out his expectations for them (mainly codifying existing responsibilities) and telling them what to expect from him. He also made sure to “lead from the front” in his first few weeks—rolling up his sleeves to clean windows with both day and night crews.

You’ll need to take the same proactive approach with customers, suppliers, and your new community. All these stakeholders will want to meet the new boss, and many will offer useful ideas about how to improve your offerings. Two other acquisition entrepreneurs we know made a point of visiting every major customer as soon as they could; they told us that all their new product and service ideas in the subsequent months came out of those early meetings.

If you have a management transition arrangement with the former owner, be clear with both employees and customers about how it will work. Explain how decisions are now going to be made and whom to approach with certain types of questions or requests.

Along with relationships, cash flow should be a top priority. The most common trouble for small firms under new owners is running out of cash; after all, they are likely to have acquisition debt to service. So set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. You should also implement a 90-day rolling cash-flow forecast.

The weeks after closing will be exciting, busy, and filled with learning. You’ll be pulled in more directions than even an extended business day can accommodate. “It’s a shock to everyone,” Bautista explains. “You’re afraid all your employees are going to quit, and they’re all worried you’re going to fire them. And you’re responsible for everything right away. I remember thinking ‘I’m a 28-year-old now running a 50-person company.’”

Ambrosia and Braus also admit to unexpected early challenges. In the first few months of their tenures, both senior and junior employees left, voluntarily and not, in part because the new owners were bringing more discipline and accountability to their companies. Bautista says he had to drop a few longtime customers that were not actually profitable, and the company experienced a payroll snafu that upset both him and his staff.

But these types of growing pains are inevitable. If you have approached the acquisition process thoughtfully and begun to apply good management, things will soon settle down. And then you’ll be able to focus on growing your small business into a successful medium-sized—or even large—one.

A version of this article appeared in the January–February 2017 issue (pp.149–153) of Harvard Business Review.

Richard S. Ruback is a professor at Harvard Business School and a coauthor with Royce Yudkoff of the HBR Guide to Buying a Small Business (Harvard Business Review Press, 2017).


Royce Yudkoff is a professor at Harvard Business School and a coauthor with Richard S. Ruback of the HBR Guide to Buying a Small Business (Harvard Business Review Press, 2017).


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5 Things You Need To Know To Successfully Sell Your Business

5 Things You Need To Know To Successfully Sell Your Business

Someday, you might sell your business.

You may have planned for this all along, using a business sale as your exit strategy or wealth building plan. In other cases, the prospect of selling your business can be a surprising or even emotional issue.

If you’re in business, you’ve done plenty of selling. You’ve sold widgets. You’ve sold your services. You’ve sold potential employees on the idea of your company. You’ve sold investors on the potential of your business.

But are you prepared to successfully sell your business? Here are some things that you should be aware of as you prepare to sell your business.

1. Know your business value.

If you don’t know your business value, you’re going to go into the sales process blindsided.

The first logical step for selling a business is figuring out what buyers are looking at when they consider purchasing a business. There are three main approaches to determining a business’s valuation.

  • Asset Approach – Add up all your business assets and liabilities. What number are you left with? This is the asset valuation of your business.
  • Income Approach – The income approach to valuing a business is a simple assessment of the net present value of the business’s income stream. There are technical methods for determining this sum, but they are not necessary to calculate at early stage.
  • Market Approach – The market approach of a company involves analyzing similar companies to see how much they’re worth and/or their selling price.

Select whichever of the above methods gives you the best (highest) valuation. When you have a ballpark figure of your business’s value, you’re ready to go to market.

Even though you’ve got a rough idea of your business valuation, this is only a number to guide you in your consideration. You’ll still need to get an accurate valuation in order to  enter the market.

2.  Know the best brokers in the business.

Unless you’re an expert business broker or M&A advisor, I advise hiring a broker to help you sell the business. A broker is especially valuable in the later stages of a purchase process — negotiation, due diligence, and the final sale.

3.  Know your why.

Potential buyers are going to have a lot of questions when they entertain the idea of purchasing your business.

They’ll want to know the size of the business, the history of the business, the valuation of the business, and legion other details that you are prepared to answer.

But one question that always comes up is why. Why are you selling your business?

The way in which you answer this question can make or break the deal. The why question is an invitation for you to pitch the value and appeal of your business.

You’ve got to know exactly why you’re selling your business, and be able to articulate this reason. If the reasons are “personal” (e.g. a divorce) or obvious (retirement), then you can simply say so. Even so, you should provide a motivating angle that will sustain the buyer’s interest.

4. Know the perfect time.

Selling a business is all about timing.

The difference between selling your business at the right time and selling it at the perfect time is the difference between a major loss a life changing windfall.

What’s the “perfect time?” As unsatisfying as this answer is, it all just depends on the ebb and flow of your particular industry and the economy as a whole. Just as real estate and commerce has its seasonal trends, so the business acquisition industry has its highs and lows.

Here are some times you shouldn’t sell your business:

  • When you’re burned out. Burnout is part of the entrepreneurial game. Don’t sell your business during a personal low. You’ll lack the energy and determination to fight for a fair price, and will end up regretting the sale later.
  • When the company faces a catastrophe or disaster. Some buyers are eager to scoop up distressed companies, but generally speaking, this isn’t the best for sale strategy.
  • When you just want a huge lump of cash. Lump sum buyouts are an appealing part of any purchase, but this shouldn’t be the driving motivation for selling your business.

Here are some times you should consider selling your business.

  • When you are ready for a lifestyle change — retiring, spending more time with your family, enjoying independence, etc.
  • You’re enjoying expert management. Business buyers aren’t just buying a soulless entity. They are buying people. The more capable your management team, the more appealing the purchase.
  • During an upswing. If you’re on an upward trajectory, your business will be far more compelling to purchasers. Three years of profit is a great rule of thumb.
  • When the economy is good. A great performing stock market and low interest rates are the easiest way to tell if the “economy is good.”
  • When the company is performing well within an underperforming industry.

Conclusion

Selling a business is a big deal. It involves major life changes, huge sums of money, and a whole lot of time.

The final feature to keep in mind is that a business sale will radically change your life. Whether or not you remain as an active participant in the business, there will still be significant shifts in the way that you view the business and function in it.

In some cases, you may receive a huge sum of money from the sale of the business. Large sums of money force you to decide what you’re going to do with your life (not to mention what to do with the money). Before you sell — before you even think about selling — consider your goals and visions for your future.

5 Things You Need To Know To Successfully Sell Your Business

Leading Clever People

Leading Clever People

Franz Humer, the CEO and chairman of the Swiss pharmaceutical giant Roche, knows how difficult it is to find good ideas. “In my business of research, economies of scale don’t exist,” he says. “Globally today we spend $4 billion on R&D every year. In research there aren’t economies of scale, there are economies of ideas.”

For a growing number of companies, according to Humer, competitive advantage lies in the ability to create an economy driven not by cost efficiencies but by ideas and intellectual know-how. In practice this means that leaders have to create an environment in which what we call “clever people” can thrive. These people are the handful of employees whose ideas, knowledge, and skills give them the potential to produce disproportionate value from the resources their organizations make available to them. Think, for example, of the software programmer who creates a new piece of code or the pharmaceutical researcher who formulates a new drug. Their single innovations may bankroll an entire company for a decade.

Top executives today nearly all recognize the importance of having extremely smart and highly creative people on staff. But attracting them is only half the battle. As Martin Sorrell, the chief executive of WPP, one of the world’s largest communications services companies, told us recently, “One of the biggest challenges is that there are diseconomies of scale in creative industries. If you double the number of creative people, it doesn’t mean you will be twice as creative.” You must not only attract talent but also foster an environment in which your clever people are inspired to achieve their fullest potential in a way that produces wealth and value for all your stakeholders.

That’s tough. If clever people have one defining characteristic, it is that they do not want to be led. This clearly creates a problem for you as a leader. The challenge has only become greater with globalization. Clever people are more mobile than ever before; they are as likely to be based in Bangalore or Beijing as in Boston. That means they have more opportunities: They’re not waiting around for their pensions; they know their value, and they expect you to know it too.

If clever people have one defining characteristic, it is that they do not want to be led. This clearly creates a problem for you as a leader.

We have spent the past 20 years studying the issue of leadership—in particular, what followers want from their leaders. Our methods are sociological, and our data come from case studies rather than anonymous random surveys. Our predominant method consists of loosely structured interviews, and our work draws primarily from five contexts: science-based businesses, marketing services, professional services, the media, and financial services. For this article, we spoke with more than 100 leaders and their clever people at leading organizations such as PricewaterhouseCoopers, Electronic Arts, Cisco Systems, Credit Suisse, Novartis, KPMG, the British Broadcasting Corporation (BBC), WPP, and Roche.

The more we talked to these people, the clearer it became that the psychological relationship leaders have with their clever people is very different from the one they have with traditional followers. Clever people want a high degree of organizational protection and recognition that their ideas are important. They also demand the freedom to explore and fail. They expect their leaders to be intellectually on their plane—but they do not want a leader’s talent and skills to outshine their own. That’s not to say that all clever people are alike, or that they follow a single path. They do, however, share a number of defining characteristics. Let’s take a look at some of those now.

Understanding Clever People

Contrary to what we have been led to believe in recent years, CEOs are not utterly at the mercy of their highly creative and extremely smart people. Of course, some very talented individuals—artists, musicians, and other free agents—can produce remarkable results on their own. In most cases, however, clever people need the organization as much as it needs them. They cannot function effectively without the resources it provides. The classical musician needs an orchestra; the research scientist needs funding and the facilities of a first-class laboratory. They need more than just resources, however; as the head of development for a global accounting firm put it, your clever people “can be sources of great ideas, but unless they have systems and discipline they may deliver very little.”

That’s the good news. The bad news is that all the resources and systems in the world are useless unless you have clever people to make the most of them. Worse, they know very well that you must employ them to get their knowledge and skills. If an organization could capture the knowledge embedded in clever people’s minds and networks, all it would need is a better knowledge-management system. The failure of such systems to capture tacit knowledge is one of the great disappointments of knowledge-management initiatives to date.

The attitudes that clever people display toward their organizations reflect their sense of self-worth. We’ve found most of them to be scornful of the language of hierarchy. Although they are acutely aware of the salaries and bonuses attached to their work, they often treat promotions with indifference or even contempt. So don’t expect to lure or retain them with fancy job titles and new responsibilities. They will want to stay close to the “real work,” often to the detriment of relationships with the people they are supposed to be managing. This doesn’t mean they don’t care about status—they do, often passionately. The same researcher who affects not to know his job title may insist on being called “doctor” or “professor.” The point is that clever people feel they are part of an external professional community that renders the organizational chart meaningless. Not only do they gain career benefits from networking, but they construct their sense of self from the feedback generated by these extra-organizational connections.

This indifference to hierarchy and bureaucracy does not make clever people politically naive or disconnected. The chairman of a major news organization told us about a globally famous journalist—an exemplar of the very clever and skeptical people driving the news business—who in the newsroom appears deeply suspicious of everything the “suits” are doing. But in reality he is astute about how the company is being led and what strategic direction it is taking. While publicly expressing disdain for the business side, he privately asks penetrating questions about the organization’s growth prospects and relationships with important customers. He is also an outspoken champion of the organization in its dealings with politicians, media colleagues, and customers. You wouldn’t invite him to a strategy meeting with a 60-slide PowerPoint presentation, but you would be wise to keep him informed of key developments in the business.

Like the famous journalist, most clever people are quick to recognize insincerity and respond badly to it. David Gardner, the COO of worldwide studios for Electronic Arts (EA), knows this because he oversees a lot of clever people. EA has 7,200 employees worldwide developing interactive entertainment software derived from FIFA Soccer, The Sims, The Lord of the Rings, and Harry Potter, among others. “If I look back at our failures,” Gardner told us, “they have been when there were too many rah-rahs and not enough content in our dealings with our people. People are not fooled. So when there are issues or things that need to be worked out, straightforward dialogue is important, out of respect for their intellectual capabilities.”

Managing Organizational “Rain”

Given their mind-set, clever people see an organization’s administrative machinery as a distraction from their key value-adding activities. So they need to be protected from what we call organizational “rain”—the rules and politics associated with any big-budget activity. When leaders get this right, they can establish exactly the productive relationship with clever people that they want. In an academic environment, this is the dean freeing her star professor from the burden of departmental administration; at a newspaper, it is the editor allowing the investigative reporter to skip editorial meetings; in a fast-moving multinational consumer goods company, it is the leader filtering requests for information from the head office so the consumer profiler is free to experiment with a new marketing plan.

Organizational rain is a big issue in the pharmaceutical business. Drug development is hugely expensive—industry-wide, the average cost of bringing a drug to market is about $800 million—and not every drug can go the distance. As a result, the politics surrounding a decision can be ferocious. Unless the CEO provides cover, promising projects may be permanently derailed, and the people involved may lose confidence in the organization’s ability to support them.

The protective role is one that Arthur D. Levinson, Genentech’s CEO and a talented scientist in his own right, knows how to play. When the drug Avastin failed in Phase III clinical trials in 2002, Genentech’s share price dropped by 10% overnight. Faced with that kind of pressure, some leaders would have pulled the plug on Avastin. Not Levinson: He believes in letting his clever people decide. Once or twice a year, research scientists have to defend their work to Genentech’s Research Review Committee, a group of 13 PhDs who decide how to allocate the research budget and whether to terminate projects. This gives rise to a rigorous debate among the clever people over the science and the direction of research. It also insulates Levinson from accusations of favoritism or short-termism. And if the RRC should kill a project, the researchers are not only not fired, they are asked what they want to work on next.

Roche owns 56% of Genentech, and Franz Humer stands foursquare behind Levinson. Leading clever people, Humer told us, is especially difficult in hard times. “You can look at Genentech now and say what a great company,” he said, “but for ten years Genentech had no new products and spent between $500 million and $800 million on research every year. The pressure on me to close it down or change the culture was enormous.” Avastin was eventually approved in February 2004; in 2005 it had sales of $1.13 billion.

Having a leader who’s prepared to protect his clever people from organizational rain is necessary but not sufficient. It’s also important to minimize the rain by creating an atmosphere in which rules and norms are simple and universally accepted. These are often called “representative rules,” from the classic Patterns of Industrial Bureaucracy, by the sociologist Alvin Gouldner, who distinguished among environments where rules are ignored by all (mock bureaucracy), environments where rules are imposed by one group on another (punishment-centered bureaucracy), and environments where rules are accepted by all (representative bureaucracy). Representative rules, including risk rules in banks, sabbatical rules in academic institutions, and integrity rules in professional services firms, are precisely the ones that clever people respond to best.

Savvy leaders take steps to streamline rules and to promote a culture that values simplicity. A well-known example is Herb Kelleher, the CEO of Southwest Airlines, who threw the company’s rule book out the window. Another is Greg Dyke, who when he was the director general of the BBC discovered a mass of bureaucratic rules, often contradictory, which produced an infuriating organizational immobilisme. Nothing could be better calculated to discourage the clever people on whom the reputation and future success of the BBC depended. Dyke launched an irreverent “cut the crap” program, liberating creative energy while exposing those who had been blaming the rules for their own inadequacies. He creatively engaged employees in the campaign—for example, suggesting that they pull out a yellow card (used to caution players in soccer games) whenever they encountered a dysfunctional rule.

Letting a Million Flowers Bloom

Companies whose success depends on clever people don’t place all their bets on a single horse. For a large company like Roche, that simple notion drives big decisions about corporate control and M&A. That’s why Humer decided to sell off a large stake in Genentech. “I insisted on selling 40% on the stock market,” he told us. “Why? Because I wanted to preserve the company’s different culture. I believe in diversity: diversity of culture, diversity of origin, diversity of behavior, and diversity of view.”

For similar reasons, Roche limits its ownership of the Japanese pharmaceutical company Chugai to 51%. By keeping the clever people in all three companies at arm’s length, Humer can be confident that they will advance different goals: “My people in the Roche research organization decide on what they think is right and wrong. I hear debates where the Genentech researchers say, ‘This program you’re running will never lead to a product. You are on the wrong target. This is the wrong chemical structure—it will prove to be toxic.’ And my guys say, ‘No, we don’t think so.’ And the two views never meet. So I say to Genentech, ‘You do what you want, and we will do what we want at Roche, and in five years’ time we will know. Sometimes you will be right and sometimes we will be right.’” Maintaining that diversity is Humer’s most challenging task; there is always pressure within a large organization to unify and to direct from above.

Companies that value diversity are not afraid of failure. Like venture capitalists, they know that for every successful new pharmaceutical product, dozens have failed; for every hit record, hundreds are duds. The assumption, obviously, is that the successes will more than recover the costs of the failures. Take the case of the drinks giant Diageo. Detailed analysis of customer data indicated an opening in the market for an alcoholic beverage with particular appeal to younger consumers. Diageo experimented with many potential products—beginning with predictable combinations like rum and coke, rum and blackcurrant juice, gin and tonic, vodka and fruit juice. None of them seemed to work. After almost a dozen tries, Diageo’s clever people tried something riskier: citrus-flavored vodka. Smirnoff Ice was born—a product that has contributed to a fundamental change in its market sector.

It’s easy to accept the necessity of failure in theory, but each failure represents a setback for the clever people who gambled on it. Smart leaders will help their clever people to live with their failures. Some years ago, when three of Glaxo’s high-tech antibiotics all failed in the final stages of clinical trial, Richard Sykes—who went on to become chairman of Glaxo Wellcome and later of GlaxoSmithKline—sent letters of congratulation to the team leaders, thanking them for their hard work but also for killing the drugs, and encouraging them to move on to the next challenge. EA’s David Gardner, too, recognizes that his business is “hit driven,” but he realizes that not even his most gifted game developers will always produce winners. He sees his job as supporting his successful people—providing them with space and helping them move on from failed projects to new and better work.

Smart leaders also recognize that the best ideas don’t always come from company projects. They enable their clever people to pursue private efforts because they know there will be payoffs for the company, some direct (new business opportunities) and some indirect (ideas that can be applied in the workplace).This tradition originated in organizations like 3M and Lockheed, which allowed employees to pursue pet projects on company time. Google is the most recent example: Reflecting the entrepreneurial spirit of its founders, Sergey Brin and Larry Page, employees may spend one day a week on their own start-up ideas, called Googlettes. This is known as the “20% time.” (Genentech has a similar policy.) The result is innovation at a speed that puts large bureaucratic organizations to shame. The Google-affiliated social-networking Web site Orkut is just one project that began as a Googlette.

Establishing Credibility

Although it’s important to make your clever people feel independent and special, it’s equally important to make sure they recognize their interdependence: You and other people in the organization can do things that they can’t. Laura Tyson, who served in the Clinton administration and has been the dean of London Business School since 2002, says, “You must help clever people realize that their cleverness doesn’t mean they can do other things. They may overestimate their cleverness in other areas, so you must show that you are competent to help them.” To do this you must clearly demonstrate that you are an expert in your own right.

Depending on what industry you are in, your expertise will be either supplementary (in the same field) or complementary (in a different field) to your clever people’s expertise. At a law firm, the emphasis is on certification as a prerequisite for practice; at an advertising agency, it’s originality of ideas. It would be hard to lead a law firm without credentials. You can lead an advertising agency with complementary skills—handling commercial relationships with clients, for instance, while your clever people write great copy.

A man we’ll call Tom Nelson, who was the marketing director of a major British brewer, is a good example of a leader with complementary skills. Nelson was no expert on traditional brewing techniques or real ales. But he was known throughout the organization as “Numbers Nelson” for his grasp of the firm’s sales and marketing performance, and was widely respected. Nelson had an almost uncanny ability to quote, say, how many barrels of the company’s beer had been sold the previous day in a given part of the country. His clear mastery of the business side gave him both authority and credibility, so the brewers took his opinions about product development seriously. For example, Nelson’s reading of market tastes led to the company’s development of low-alcohol beers.

If you try to push your clever people, you will end up driving them away. As many leaders of highly creative people have learned, you need to be a benevolent guardian rather than a traditional boss.

Leaders with supplementary expertise are perhaps more commonplace: Microsoft’s Bill Gates emphasizes his abilities as a programmer. Michael Critelli, the CEO of Pitney Bowes, holds a number of patents in his own name. Richard Sykes insisted on being called Dr. Sykes. The title gave him respect within the professional community to which his clever people belonged—in a way that being the chairman of a multinational pharmaceutical company did not.

But credentials—especially if they are supplementary—are not enough to win acceptance from clever people. Leaders must exercise great care in displaying them so as not to demotivate their clever employees. A former national soccer coach for England, Glenn Hoddle, asked his star player, David Beckham, to practice a particular maneuver. When Beckham couldn’t do it, Hoddle—once a brilliant international player himself—said, “Here, I’ll show you how.” He performed the maneuver flawlessly, but in the process he lost the support of his team: The other players saw his move as a public humiliation of Beckham, and they wanted no part of that. The same dynamic has played out many times in business; the experience of William Shockley is perhaps the most dramatic, and tragic, example (see the sidebar “The Traitorous Eight”). How do you avoid this kind of situation? One highly effective way is to identify and relate to an informed insider among your clever people—someone willing to serve as a sort of anthropologist, interpreting the culture and sympathizing with those who seek to understand it. This is especially important for newly recruited leaders. Parachuting in at the top and accurately reading an organization is hard work. One leader we spoke to admitted that he initially found the winks, nudges, and silences of his new employees completely baffling. It took an interpreter—someone who had worked among the clever people for years—to explain the subtle nuances.• • •

Martin Sorrell likes to claim that he uses reverse psychology to lead his “creatives” at WPP: “If you want them to turn right, tell them to turn left.” His comment reveals an important truth about managing clever people. If you try to push them, you will end up driving them away. As many leaders of extremely smart and highly creative people have learned, you need to be a benevolent guardian rather than a traditional boss. You need to create a safe environment for your clever employees; encourage them to experiment and play and even fail; and quietly demonstrate your expertise and authority all the while. You may sometimes begrudge the time you have to devote to managing them, but if you learn how to protect them while giving them the space they need to be productive, the reward of watching your clever people flourish and your organization accomplish its mission will make the effort worthwhile.

Leading Clever People

18 Habits That Will Make You Smarter

18 Habits That Will Make You Smarter

Cultivating smart habits is the key to unlocking your potential.

To be smart is great, but it doesn’t happen overnight. If you want to become smarter, you have to create habits that will groom your intelligence and nourish your mind.

Some people are born smart, but most smart people do daily rituals to maintain their smartness. Whether they do it in leadership, business, the arts, or a different field, they push and challenge themselves daily.

Here are 18 habits that can help you become your smartest self:

1. Question everything. Don’t assume anything or subscribe unthinkingly to the conventional wisdom. Keep your eyes and mind wide open. The greatest enemy of knowledge is not ignorance but the illusion of knowledge–and questioning and curiosity are the key to overcoming it.

2. Read as much as you can. Many years ago, I started the habit of reading a book a day, and the wealth of knowledge I accumulate every week is priceless. Make reading a habit–serious reading, not celebrity gossip and lists on the web. Even if it’s just part of a chapter each day, stick to your reading schedule and your intellect will be enriched.

3. Discover what motivates you. Find a topic that keeps you interested and dive in. It’s easier to stay engaged with a topic you find stimulating. Find a format that stimulates your mind, too, whether it’s a podcast or a newspaper. Feed your mind well with things it will enjoy.

4. Think of new ways to do old things. To be innovative means making creativity more important than the fear of being wrong. Even in the things you do every day, you can be inventive and experimental. When you take risks, make mistakes, and have fun instead of slogging through the same routine. You’ll have a daily reminder that imagination and creativity can change the world.

5. Hang out with people who are smarter than you. Smart people have interesting things to talk about. They know how to expand their mind and feed their brain, so spending time with them is good for you on multiple levels. Seek them out at work, in service organizations, and socially.

6. Remember that every expert was once a beginner. When you have an opportunity to learn something new, you become smarter. Make a point of continuously and consistently acquiring new skills, because life will never stop teaching if you’re willing to learn.

7. Make time to reflect. We’re all so distracted, it’s easy to dash from one thing to another without pausing to consider what it means. Make time to pause and reflect–reflection is an important part of the learning process.

8. Exercise your body. As you’re caring for your mind don’t neglect your body. Build discipline in doing what you need to do in terms of diet, exercise, and sleep.

9. Push yourself to become more productive. Being busy and being productive are two different things. The future you want is created by what you do. Smart people make the most of today.

10. Come up with new ideas daily. Carry a journal to jot down ideas when they come to you. Push yourself to be creative and to think in new ways. Review your ideas weekly and edit them as you go.

11. Do something that scares you. Facing your fears makes you braver, smarter, and better able to withstand what life throws at you. Sometimes the greatest rewards in life come from doing the things that scare you the most.

12. Replace TV with online learning. Devote your break time to something more productive than social media or binge watching TV. The internet is filled with awesome learning tools. It’s a small habit but a big win if you can nourish your brain and advance your career and life at the same time.

13. Be mindful of what you are absorbing. Everything you take part in is either uplifting or detrimental to your mind. It’s important to silence inner and outer negativity–once you do, you begin to play a role in shaping your mindsets and beliefs, which in turn guide your actions.

14. Read something you normally wouldn’t. Every day, look online and in other media for topics, interests, or other sources that fall off your usual path. When you do, you absorb wisdom you would never have been able to access otherwise.

15. Share what you know. Learning something new is important, but sharing that knowledge makes what you’ve learned actionable and meaningful.

16. Apply your new knowledge. There really is no point in learning something if it doesn’t make you smarter or inspire you to improve. The smartest people apply what they know not to become a person of success but rather to become a person of value.

17. Keep a journal. It turns out that journaling is an important way to become smarter. Taking a few minutes each day to reflect in writing has been shown to boost your brain power. Smart happens when you learn from your experiences.

18. Be selective. Intelligent people tend to have fewer friends than the average person–at least in part because the smarter you are, the more selective you become. Who you spend time with reflects who you are.

Start building smart habits today and see what happens to your thinking tomorrow.

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18 Habits That Will Make You Smarter

This Type of Exercise Can Make Your Brain Healthier

This Type of Exercise Can Make Your Brain Healthier

Even more proof that exercise is beneficial

Researchers from the Wake Forest School of Medicine found that aerobic exercise appears to boost thinking skills and brain volume in adults diagnosed with mild cognitive impairment, a condition that sits in between normal age-related memory decline and more serious dementia. Stretching routines also increased brain volume over a six-month period, but had no noticeable impact on brain function.

The study was presented today at an annual meeting of radiologists in Chicago, and hasn’t yet been peer-reviewed or published.

Researchers used a new MRI technique to measure both volume and shape changes in specific areas of the brain, which are both important indicators for tracking the development of dementia.

At the start of the study, the researchers performed MRI scans on 35 people with mild cognitive impairment, which is a risk factor for Alzheimer’s disease. The participants were then divided into two groups and assigned to four weekly sessions of either stretching exercises or aerobic activity—walking on a treadmill, cycling on a stationary bike, or training on an elliptical machine. After six months, the researchers did a second MRI scan and compared the two sets of scans.

Health.com: 7 Ways to Protect Your Memory

Both groups showed increases in most gray matter regions of the brain, including the temporal lobe, which supports short-term memory. But those increases were greater in the group that walked, pedaled, or spent time on the elliptical.

“Even over a short period of time, we saw aerobic exercise lead to a remarkable change in the brain,” said lead investigator Laura D. Baker, PhD, associate professor of gerontology and geriatric medicine at Wake Forest, in a press release.

People in the stretching group had less total brain volume increase, and their brain scans also showed signs of “directional deformation”—shape changes possibly related to volume loss—within the brain’s white matter. The researchers believe these hard-to-detect signs could be early indicators of dementia. “Directional changes in the brain without local volume changes could be a novel biomarker for neurological disease,” co-author Jeongchul Kim, PhD, said in a press release.

In an abstract presented at the conference, the researchers concluded that aerobic exercise “could preserve or possibly even improve brain volumes” in people with early cognitive problems.

What’s more, the researchers also reported that over a six-month period, participants in the aerobic exercise group improved in tests that measure executive function—a set of thinking processes that include working memory, reasoning, and problem solving—while the stretching group showed no change.

Health.com: 15 Ways Exercise Makes You Look and Feel Younger

That doesn’t mean stretching didn’t help in some way, the authors say, especially when compared to completely sedentary behavior. It does suggest, however, that aerobic activity may be a better bet for overall brain functioning.

Plenty of previous research has tied exercise to better brain outcomes in older adults; a 2014 Canadian study, for example, found that brisk walking (but not resistance training, balance exercises, or muscle toning) was associated with enlargement of the hippocampus. Aerobic exercise may have some competition when it comes to brain health, however. Last month, an Australian study found that women who lifted weights regularly had better cognitive function than those who did regular stretching and calisthenics.

This newest study, although small and preliminary, is in line with previous research suggesting that “any type of exercise can be beneficial,” said Kim—good news for older adults who perhaps can’t get out and walk, ride, or otherwise break a sweat. However, he added, “If possible, aerobic activity may create potential benefits for higher cognitive functioning.”

This Type of Exercise Can Make Your Brain Healthier

Bubble Indemnity

Bubble Indemnity

When Silicon Valley venture capitalists get themselves into image trouble, it’s usually because they’ve been too candid with their low estimate of other people’s intelligence. For example, after India recently prevented Facebook from offering free Internet service there, Marc Andreessen suggested in a tweet that the subcontinent might be better off had it remained under colonial administration. It’s much less common for V.C.s to soil their own nests in public. So it came as something of a surprise when Chamath Palihapitiya — Sri Lankan war refugee, early Facebook employee, investor in Slack and Box, part owner of the Golden State Warriors — told Vanity Fair in March that if we are in fact in the early stages of a second tech collapse, venture capitalists have only their own mediocre, clubby selves to blame. They should, he said, “focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven’t done enough of that, and the result is that most of the things we’ve funded are mostly crap and largely worthless.”

It was a striking admission. This “largely worthless” start-up scene, according to the research firm CB Insights, has raised an estimated $238 billion over the last five years — a remarkable bull run in private technology stocks. Forbes reports that there are now close to 200 “unicorns,” to use the Valley term of art for private companies worth more than a billion dollars on paper. Since the financial crisis, these companies, along with their more established public predecessors, have been seen by many Americans as the last redoubt of confidence and productivity in an otherwise uneven recovery. V.C.s have spent years dismissing speculation about a private-equity bubble as merely an expression, by know-nothing spectators, of resentment and alarmism; media onlookers, they argue, should talk instead about the triumphal progress of the genuinely great start-ups as they try to solve our most difficult problems. Over the past year, however, as allegations of mismanagement and unsustainability have grown — Square went public for approximately half its last private valuation; Fidelity and other large mutual funds wrote down their positions in Dropbox, MongoDB, and Snapchat; and both Zenefits and Theranos were accused of deceptive practices — that confidence has come to look more like hubris.

Venture capital increasingly represents a closed system — a system where it is no longer so easy to distinguish good money from bad.

This past January, after a long autumn of minor misfortune left the market in a stall, I spent a week loitering in the command concourse of American V.C., Sand Hill Road in Menlo Park, Calif., where the soft, spruce-filtered sunlight falls through plate glass into quiet offices of beige on beige. There was some selection bias at work, as all my introductions were brokered by a smart and thoughtful friend, but not a single investor I talked to fit the description of the supercilious techno-optimist — and most, in private, didn’t hesitate to concede Palihapitiya’s point. Of course they believed private valuations had become preposterous; of course the run in private tech stocks couldn’t possibly last; and of course, many start-ups, especially those of the “Uber for garden-gnome rearrangement” variety, are in fact largely worthless.

Where they differed from the naysayers, however, was in their rating of the ­causes­ and consequences; the fault, they said, didn’t belong to the technological elite but to everybody else: What has driven inflated valuations, in a time of extremely low interest rates and meager returns elsewhere, is “dumb money,” all the alien capital that has flowed into the Valley in recent years. Dumb money is a hedge-funder who’s jealous of a V.C. Dumb money is sovereign wealth. Dumb money is an Emirati home office. Dumb money is a Facebook millionaire in a Maserati who wants to look like a player. Dumb money wants to get in on tech because it’s a box to check off. Dumb money isn’t in it for the long run. Dumb money doesn’t actually care about the technology. Dumb money doesn’t create value. Dumb money thinks what you lose on the margin you’ll make up for in volume. Dumb money wants to get in on Uber at any price, and will accept a “limited-edition private offer” to join the scarce ranks in a “special purpose vehicle” that bears all the risks of one company with none of the hedging benefits of a portfolio. Dumb money is those pinkish guys with bull necks in Zegna suits. The weird thing about dumb money, unfortunately, is that it can act with fiendish intelligence, insisting on stipulations that guarantee returns at the expense of founders, employees and other investors.

Luckily for the American economy, the dumb money this time around is no longer a mob of deluded pensioners waist-deep in Webvan. (It’s also, the V.C.s noted, a lot less money in total, and at least in theory it’s coming from people who can afford the losses; the last dot-com crash erased an estimated $6.2 trillion in household wealth.) So the coming correction will allow the smart money to roll up its brushed-microfiber sleeves and get back to basics. A lot of $10 billion companies will become $1 billion companies, and $1 billion companies will be acquired for $100 million, and the dumb money will slink away. Operating expenses and burn rates will come way down, and companies that didn’t worry about profitability or unit economics will. There will be layoffs, sure, but the only serious effects will be that the traffic on I-280 will no longer back up three exits, it’ll be easier to get a table at the Village Pub and engineers three minutes out of Stanford will no longer expect $150,000 a year and backlit fountains of complimentary fruit water.

Credit Illustration by Andrew Rae

The main thing that has changed since January is that very little seems to have changed. V.C. investment over the first quarter of the year has remained flat, at about $12 billion, from the final quarter of 2015, though a flight to perceived quality has caused both a drop in the total number of deals and a concentration at the top. The total number of tech I.P.O.s, however, was zero. Yet the flood of money to the Valley has not abated: according to The Wall Street Journal, this has been the single biggest fund-raising quarter for venture capital since the (in retrospect) ominous year 2000.

Bill Gurley, a partner in the firm Benchmark Capital, recently published a blog post in which he reminded his colleagues, in a tone of exaggerated mildness, that table stakes in the industry have perhaps become too high. “Loose capital allows the less qualified to participate in each market. This less qualified player brings more reckless execution, which drags even the best entrepreneur onto an especially sloppy playing field.” Despite warnings like these, companies and V.C. firms have continued to court as much of that loose capital as they still can; almost a decade of aggressive growth strategy, by even the most prudent, demands it. With an utterly dead I.P.O. market, and no appetite among the big public tech companies to acquire companies with bad balance sheets, venture capital is less liquid than ever, and thus increasingly represents a closed system — a system where it is no longer so easy to distinguish good money from bad.

Defenders of that system argue that all they really need are the expected half-dozen mega-I.P.O.s (Slack, Palantir, Snapchat, Uber, Airbnb) to make enough cash returns to offset the losses. But that fantasy math holds for only a tiny cohort of V.C. firms. It also overlooks the well-being of tens of thousands of employees, especially support staff, who have worked for years for a share in the wealth they’ve created. Perhaps worst of all, it betrays a callow belief that the genuinely transformative long-term endeavors that V.C.s have come to support — erstwhile academic research into artificial intelligence, bioengineering and sustainable energy — will be somehow insulated from an industry downturn. An exploded bubble could very well mean that those “totally audacious” bets will go unfunded entirely. That might seem like a satisfying comeuppance for the imperious Valley, but it’s not something to be smug about. Smart money convinces itself of its highly differentiated intelligence at what might prove to be all of our expense.

Bubble Indemnity

The Simple Economics of Machine Intelligence

The Simple Economics of Machine Intelligence

The year 1995 was heralded as the beginning of the “New Economy.” Digital communication was set to upend markets and change everything. But economists by and large didn’t buy into the hype. It wasn’t that we didn’t recognize that something changed. It was that we recognized that the old economics lens remained useful for looking at the changes taking place. The economics of the “New Economy” could be described at a high level: Digital technology would cause a reduction in the cost of search and communication. This would lead to more search, more communication, and more activities that go together with search and communication. That’s essentially what happened.

Today we are seeing similar hype about machine intelligence. But once again, as economists, we believe some simple rules apply. Technological revolutions tend to involve some important activity becoming cheap, like the cost of communication or finding information. Machine intelligence is, in its essence, a prediction technology, so the economic shift will center around a drop in the cost of prediction.

The first effect of machine intelligence will be to lower the cost of goods and services that rely on prediction. This matters because prediction is an input to a host of activities including transportation, agriculture, healthcare, energy manufacturing, and retail.

When the cost of any input falls so precipitously, there are two other well-established economic implications. First, we will start using prediction to perform tasks where we previously didn’t. Second, the value of other things that complement prediction will rise.

Lots of tasks will be reframed as prediction problems

As machine intelligence lowers the cost of prediction, we will begin to use it as an input for things for which we never previously did. As a historical example, consider semiconductors, an area of technological advance that caused a significant drop in the cost of a different input: arithmetic. With semiconductors we could calculate cheaply, so activities for which arithmetic was a key input, such as data analysis and accounting, became much cheaper. However, we also started using the newly cheap arithmetic to solve problems that were not historically arithmetic problems. An example is photography. We shifted from a film-oriented, chemistry-based approach to a digital-oriented, arithmetic-based approach. Other new applications for cheap arithmetic include communications, music, and drug discovery.

The same goes for machine intelligence and prediction. As the cost of prediction falls, not only will activities that were historically prediction-oriented become cheaper — like inventory management and demand forecasting — but we will also use prediction to tackle other problems for which prediction was not historically an input.

Consider navigation. Until recently, autonomous driving was limited to highly controlled environments such as warehouses and factories where programmers could anticipate the range of scenarios a vehicle may encounter, and could program if-then-else-type decision algorithms accordingly (e.g., “If an object approaches the vehicle, then slowdown”). It was inconceivable to put an autonomous vehicle on a city street because the number of possible scenarios in such an uncontrolled environment would require programming an almost infinite number of if-then-else statements.

Inconceivable, that is, until recently. Once prediction became cheap, innovators reframed driving as a prediction problem. Rather than programing endless if-then-else statements, they instead simply asked the AI to predict: “What would a human driver do?” They outfitted vehicles with a variety of sensors – cameras, lidar, radar, etc. – and then collected millions of miles of human driving data. By linking the incoming environmental data from sensors on the outside of the car to the driving decisions made by the human inside the car (steering, braking, accelerating), the AI learned to predict how humans would react to each second of incoming data about their environment. Thus, prediction is now a major component of the solution to a problem that was previously not considered a prediction problem.

Judgment will become more valuable

When the cost of a foundational input plummets, it often affects the value of other inputs. The value goes up for complements and down for substitutes. In the case of photography, the value of the hardware and software components associated with digital cameras went up as the cost of arithmetic dropped because demand increased – we wanted more of them. These components were complements to arithmetic; they were used together. In contrast, the value of film-related chemicals fell – we wanted less of them.

All human activities can be described by five high-level components: data, prediction, judgment, action, and outcomes. For example, a visit to the doctor in response to pain leads to: 1) x-rays, blood tests, monitoring (data), 2) diagnosis of the problem, such as “if we administer treatment A, then we predict outcome X, but if we administer treatment B, then we predict outcome Y” (prediction), 3) weighing options: “given your age, lifestyle, and family status, I think you might be best with treatment A; let’s discuss how you feel about the risks and side effects” (judgment); 4) administering treatment A (action), and 5) full recovery with minor side effects (outcome).

As machine intelligence improves, the value of human prediction skills will decrease because machine prediction will provide a cheaper and better substitute for human prediction, just as machines did for arithmetic. However, this does not spell doom for human jobs, as many experts suggest. That’s because the value of human judgment skills will increase. Using the language of economics, judgment is a complement to prediction and therefore when the cost of prediction falls demand for judgment rises. We’ll want more human judgment.

For example, when prediction is cheap, diagnosis will be more frequent and convenient, and thus we’ll detect many more early-stage, treatable conditions. This will mean more decisions will be made about medical treatment, which means greater demand for the application of ethics, and for emotional support, which are provided by humans. The line between judgment and prediction isn’t clear cut – some judgment tasks will even be reframed as a series of predictions. Yet, overall the value of prediction-related human skills will fall, and the value of judgment-related skills will rise.

Interpreting the rise of machine intelligence as a drop in the cost of prediction doesn’t offer an answer to every specific question of how the technology will play out. But it yields two key implications: 1) an expanded role of prediction as an input to more goods and services, and 2) a change in the value of other inputs, driven by the extent to which they are complements to or substitutes for prediction. These changes are coming. The speed and extent to which managers should invest in judgment-related capabilities will depend on the how fast the changes arrive.

The Simple Economics of Machine Intelligence

1 Simple Trick That Will Make Almost Anything in Life Easier

1 Simple Trick That Will Make Almost Anything in Life Easier

There are so many ways to do this every day.

The easiest and most powerful one-minute life hack I’ve learned, and have been using more and more on a daily basis is: counting.

There are many ways to use this super simple but surprisingly powerful hack in daily life. Try it yourself – some hacks just fit.

1. Count the number of times you chew when eating, to slow down and enjoy every single bit of hidden flavor.

For example, if you chew a piece of plain bun or bread long enough (like 20 or 30 times), you will find a hidden sweet taste. This taste is realized because the starch is broken down into glucose right there on your tongue. A unique, light sweetness indeed. Try.

Plus, it is well known that chewing more times with each bite is good for your health for a couple of reasons. First, further breaking down and grinding foods with your teeth will ease the burden on the digestive system. Second, the chewing activity itself, plus the longer time the food is lingering in your mouth, will send stronger signals to the brain and generate a greater feeling of satiation. Naturally, you’ll need less food to feel satisfied.

So count the times you chew. Try 20 instead of 10. And foods (whatever they are) will start tasting better: Half of that cheesecake will for sure feel more satisfying if it’s chewed more times.

2. When you feel like you’ve reached your limit and cannot hang on for even another second, it helps to start counting. Counting is a conscious activity that involves abstract concepts. As easy as it sounds, it helps to strengthen the cortex activity and make you much more rational and reasonable. In this way, the finish line is much closer than it feels, which is the reality anyway. It’s just that when the emotional center hijacks the brain, the truth is usually distorted.

So whether it is the last mile of jogging or another half hour of work, break the rest into small numbers and count your signs of progress. Much easier to hang on.

3. When feeling angry or upset, count some breaths before speaking/or doing anything.Focusing on your breathing will naturally help you to slow down, engage the parasympathetic system, and relax your nerves. It will help you to get through the initial surge of hormones, a.k.a. strong emotions.

Then the reasoning will come back/kick in, and you won’t regret doing/saying things that just skipped the cortex.

4. Count your blessings. Easy and powerful. People often say “count your blessings.” And there is a scientific reason for that. Again, counting, as simple as it is, activates a different area of the brain other than the areas activated by just the thoughts of blessings.

So “Count” + “Your blessings” can generate a synergistic effect that further boosts the positive attitude.

Reminder: the power of counting can also be hijacked, though, so be aware of it. For example, if you count someone’s mistakes or mishaps, it will also amplify negative feelings for the same reasons. So don’t put the problems of you or your loved ones in numbers. It will only cause more damage.

5. To fix procrastination, count the number of actions (or the time) needed. If you are like me, and always have problems staying on schedule, then this simple method may help. Around the time I should move on to the next task, I will start counting. Sometimes it’s the number of actions needed to get the next thing started, sometimes it’s the time left. By doing so I’m at least able to stay close to on-schedule.

So 1, 2, 3, let’s count and just do it!

1 Simple Trick That Will Make Almost Anything in Life Easier