NCPA - National Center for Policy Analysis

FAILURE HAPPENS

April 24, 2006

Paul Ormerod, an unorthodox free-market economist in the tradition of Friedrich Hayek, made a surprising discovery a few years ago when he compared the failure rate of business with the extinction rate of species, says BusinessWeek. In both cases, instead of an even flow, there were long stretches with few extinctions, interrupted by huge spikes in the failure rate.

According to Ormerod:

  • In bell-curve economics, equilibrium is the norm; but he found that mass extinctions of companies and species are not all that unusual.
  • He was stunned first by the spiky patterns and second by the strong resemblance between species and companies; corporate executives constantly plan how to cope with the changing business environment while plants and animals mostly don't plan at all.
  • He says the reason that companies are almost as likely to be blindsided as dodo birds is that the world is simply too complex and nonlinear for anyone to predict more than a short while ahead; in addition, the complex webs of relationships in networks -- some competing, some cooperating -- can breed chaotic outcomes.

What does this mean for the average overstressed CEO? Ormerod suggests that businesses keep trying to predict the future because, "Even a tiny bit of genuine knowledge goes a very long way." Second, keep experimenting, because eventually something is bound to work.

Source: Peter Coy, "Failure Happens," Business Week, March 6, 2006.

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