We don’t get randomness. We ascribe explanations to developments when none are required, instead regression to the mean was at play. Italy is out of the World Cup, it has fallen to regression to the mean. It’s a curse that may ultimately claim Apple’s crown as biggest company in the world. It also explains why entrepreneurs fail.
30th July 1966, England win the World Cup. October 17th, 1973, England don’t to qualify for the World Cup finals, after they fail to beat Poland at Wembley. Such do the mighty fall.
3rd May 2016, Leicester wins the Premier League. A year later they finish a lowly 12th.
Stuff happens and it can follow the rules of probability. Napoleon was once briefed on the credentials of a general. To which he replied “yes, but is he lucky?” The Emperor failed to grasp the concept of regression to the mean, a curse which eventually caught up with him at Waterloo.
On average, in the long run, we are average. We toss a coin 1,000 times and we will get heads around 500 times. But in all likelihood, at some point during these 1,000 tosses, we will get heads nine or ten times in a row. And during the midst of this run, we may assume that the coin is weighted, predisposed to falling heads pointing upwards. In fact, we are seeing randomness at play, but think we have spotted a non-existent pattern.
Homo sapiens are good at spotting patterns, but sometimes we confuse randomness. Such errors give rise to superstition and maybe a sense of entitlement.
We all know that the winner of the lottery got lucky. But what about in business? As any venture capitalist will tell you, identifying the next Google or Facebook is nigh on impossible - that’s why they invest in lots of companies. They will also tell you that sometimes they invest in companies that tick all the boxes, great idea, great management team, fully committed, and yet things don’t work out. In such examples, randomness worked against the business.
In 2007, Apple revealed a smart phone to the world and in so doing sparked off a chain of events that led it to becoming the world’s biggest company. But it has no god given right to always be the pioneer that sparks off revolutions. One day someone else will launch a product to change the world, Apple will be an ‘also ran’, struck by regression to the mean.
Italy, the nation that has won the World Cup four times, the most recent occasion in 2006, has failed to qualify for the finals. But the laws of randomness say that sometimes a great footballing nation will create outstanding players that will catapult it to victory, sometimes it will get struck by regression to the mean.
Venture capitalists avoid the curse by spreading their investments. Large companies can attempt to avoid the curse by creating an internal entrepreneurial culture, by experimenting, trying lots of ideas.
Entrepreneurs can avoid regression to the mean by testing, testing and testing and applying concepts such as the lean start-up, test an idea as soon as possible, if it works expand on it some more.
Regression to the mean is why entrepreneurs pivot, drop one idea and try another.
But sometimes, just as happened with Italy, despite all our efforts, we fall to regression to the mean. That is why sometimes entrepreneurs fail. Such failure should not be celebrated, but we should not read too much into it, either.