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Does mistaking social changes lead to major business failures? Entrepreneurs should believe in "vision" and "exponential growth" in Corona
Does mistaking social changes lead to major business failures? Entrepreneurs should believe in "vision" and "exponential growth" in Corona

Entrepreneurship Education A series focusing on "failure" based on papers and cases related to entrepreneurship with Babson College, the No. 1 in the United States. Entrepreneurship "Failure Studies".
This time, I would like to introduce useful information for entrepreneurs and those who aspire to start a business, focusing on the two points of "exponential change" and "psychological bias".

Smartphones, Netflix ... Society can change at a speed far beyond our imagination

2020 will be a year in which we will strongly feel the changes in society due to the effects of the new coronavirus, and the beginning of 2021 will be very different from the usual year. Isn't it a rare event in life to experience such a big change in society? How do you feel that our lives, our business and our society have changed over the last decade? Here, I would like to look back on what kind of changes have occurred in society during the 10 years from 2010 to 2020.

For example, smartphones that many people now take for granted. Ten years ago, the overwhelming majority of people did not have it yet, and the composition was the exact opposite of what it is now. "People who don't have a smartphone now" and "People who had a smartphone in 2010" have the same composition ratio. It is most surprising that smartphones have become so popular in society in just 10 years, and I think not many people could have predicted this situation in 2010. In this way, society often changes drastically at a speed far beyond our imagination.

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Major changes in society are directly linked to business. Blockbuster, America's largest video and DVD rental chain, is just one example of this misunderstanding. In 1997, when Netflix was created, Blockbuster was unaware of the appeal of its flat-rate online video distribution service. Finally, in 2004, we started online distribution, and once the sales increased significantly.

But to Netflix, the CEO at the time said, "You're frankly confused about lifting Netflix .... Netflix isn't doing what we can't do, we've already done it. I'm just doing that. "I didn't feel threatened by the flat-rate online video distribution service. In addition, Blockbuster had the opportunity to buy Netflix for $ 50 million, even categorically rejecting it. Netflix has grown exponentially, driving Blockbuster into bankruptcy in 2012. In this way, more business changes can occur than we can imagine.

While it is possible to seize big business opportunities by capturing these social changes, if these changes are misunderstood, existing businesses may not be able to survive. This misunderstanding is strongly linked to failure to challenge, failure to misunderstand market potential, and failure to change direction.

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Humans underestimate the unpredictable future and cannot read exponential growth

So why do people tend to underestimate this change in society in the first place? There are two main factors in this.

One is "asymmetry of perception of the future and the past." According to a study by Professor of Psychology Dan Gilbert of Harvard University, "people have an asymmetry of perceptions of the future and the past," which means that "even with the same amount and equivalent changes, the perceptions of the past and the future are different. I found that "getting". To look back on the past, you only have to "remember" your memory, but to think of the future, you need to "imagine." It's very difficult to imagine, and it's even harder to imagine the future ahead of rapid change. With this psychological bias, we underestimate future changes.

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Another reason is our "linear thinking". This is a straight-line instinct that appears in Hans Rosling's "Factfulness." We think linearly when we think about things. But many things happen exponentially. This is considered an anciently recognized psychological bias. Here's one famous Indian anecdote.

One day in India in the 13th century, a person named Sissa Ben Dahir made a beautiful chess board. When I gave it to the King, he liked it so much that he told Sissa Ben Dahir that he would do whatever he wanted. In response, Sissa Ben Dahir said: "Then, one wheat in the first square, two wheats in the second square, four wheats in the third square, eight wheats in the fourth square. This is 64 squares. I want you to. " The King agreed, but realized that the 41st square had more than 1 trillion wheat, and it was not enough to collect wheat from all over the world. He praised Sissa Ben Dahir for saying, "It's more talented to come up with this proposal than to be talented to make this chessboard."

As you can see from this anecdote, humans are always hard to perceive exponential growth as a sensation, and in reality the numbers can grow much larger than we think.

Next, let's take a look at the case of a car.

When you have the following two options, which do you think will improve fuel efficiency when you run a certain distance?

A. Replace a 10km / L car with a 20km / L car
B. Replace a 20km / L car with a 50km / L car

I think there are many people who intuitively want to choose B. But the answer is A. Did you think of this figure in your head when you first saw this problem?

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Many people think of such a linear graph, but when you actually solve it with mathematics, fuel consumption and consumption are actually an exponential relationship. In other words, the relationship is as shown in the figure below.

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Humans find it very difficult to perceive such exponential changes sensuously, which is called Exponential Growth Bias. In many events, it is first necessary to accurately capture whether it is an exponential change or a linear change. At the same time, even if it can be understood numerically that there is an exponential change, there are further hurdles to grasp it sensuously.

An example of exponential changes over the last 10 years

Now, let's look back on the case of actually following the exponential change. Perhaps the market you are entering now has the potential to undergo these changes.

Failure study # 02_6.jpg

This is the online usage time per person per day in the last 10 years. For mobile devices, the growth rate for the first three years was less than 5 minutes, but the rate of increase has accelerated and has continued to increase by more than 10 minutes every year since 2016.

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Here are the number of electric vehicles running in the United States and the price of battery packs over the last 10 years. There is an exponential change in the number of units.

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Exponential change isn't just in the business world. The same is true in the academic world. The graph above shows the annual number of documents related to Cas9 (genome editing technology). In 2012, there was only one paper, but now more than 3,000 papers are written annually. As of 2012, I think there weren't many people who could expect such a rapid increase.

Failure study # 02_9.jpg

The new coronavirus that changed the world is one of these events. Up until a week ago, there were several infected people, but in a few days it exploded, and the digits changed one after another. Of course, there was also a movement to suppress such exponential changes as much as possible by taking measures, and there was a time when the increase in the number of infected people in Japan actually increased linearly.

Indeed, it was 2020 when it was difficult for us to accurately capture such exponential changes.

Entrepreneurs want to challenge by believing in exponential growth in the "future" rather than the "current"

Exponential changes can be rapid at first, or much later than others would expect.

There is no change now, it is only a niche industry now, and I wonder if the company will grow in the future, and I do not want entrepreneurs to give up on business growth with that feeling. The future can change a lot more than you think. There is no doubt that society will change dramatically in 2030, more than we can imagine.

As mentioned earlier, humans tend to underestimate change. So, even if you're thinking of a business that you believe will be exponentially successful in the future, it's possible that not many people will understand it "at this point." However, if you have a strong feeling or conviction that "this market / business will change drastically in the near future", you should believe in your vision without being bound by such psychological bias. I think it's okay to take on the challenge of realizing it.

Comment from Professor Yamakawa of Babson College

Psychological biases such as cognitive asymmetry and linear instinct for the future and the past are biases that occur not only in life but also in business. Nowadays, even small changes and growth often accelerate rapidly in a short amount of time. You often hear the news that the future of the market or business is linearly grasped and underestimated, and in the meantime, another business operator is ahead of the game and misses the race. Such failures may come from these psychological biases rather than negligence.

At the same time, this bias is an opportunity for entry. "Live in the future to get to the future." Create your own future by paying attention to trends in the world, especially the sudden movements that occur while people are not aware of it, or by living and imagining the future. can do. If you have a strong sense of the future of your business, it may be a good idea to exponentially grasp the changes in the current situation and proceed with confidence.