Have you ever wondered why so many similar businesses seem to cluster together? Right next to their competition, surely this makes no sense. We see this in filing stations, coffee shops, burger joints, often with restaurants and many other retail shops. It begs the question, Why?

So a quick thought experiment. Imagine there is a long sandy beach, and you spot a business opportunity, to open an ice cream stall. The beach is exactly a mile long with easy access from either end, and let’s assume some cliffs, so no other access points.  So where to set up your new business? Right at the halfway point seems best, with no potential customer being more than half a mile away.

All goes well, then a competitor arrives, let’s call him Harold, and he sets about creating his own stall, selling a range almost the same as yours. So, what to do? Ok you negotiate with him and explain the best strategy is co-operation and that you should both now move your locations, you to the ¼ mile mark and Harold at the ¾ mile mark. That way you both get an equal share of customers. Also it’s a plus for the beach goers as they are never more than a ¼ mile from a stall. This outcome is known as being a socially optimal solution.

Unfortunately, after a couple of days Harold breaks your agreement and moves his stall closer to the halfway line, expanding his territory and encroaching on the area over the halfway point, and thus threatening your potential sales area. How do you react? Well naturally you are annoyed and in retaliation move your stall, to seek to gain business, towards the halfway line, and closer to his stall. This is now war, as you both compete to gain business territory from the other, and eventually you will both end up next to one another at the half mile point – pretty much a stalemate. Or in game theory terms you have both found the point at which neither of you can maximise further business without jeopardising some existing customer base – a so called Nash Equilibrium.

This makes sense for you and Harold, now your arch competitor, but some of the customers will be disadvantaged, particularly those at the extremes ends of beach, who now have to trudge up to ½ mile for that ice cream.

Many thoughts flow from this experiment know as the Hotelling Theory of Spacial Competition (named after Professor Harold Hotelling, whose name I have pinched here). Like all such thought experiments it may be rather oversimplistic (our old friend ceteris paribus looms large here), in that in the real world there could well be more than two players in the marketplace, and no doubt they will all look to develop different marketing and different product offerings. Additionally competitive pricing now comes to the fore after the geographic location battle has hit an equilibrium, and here again a price clustering effect (punctuated by short term price wars) starts to take hold.

One further observation, imagine loads of stalls start crowding on the beach, at some point some of the stalls will be unprofitable and will likely withdraw from the business. This leads to the conclusion that any cluster has a natural limit, with the least profitable player just about clinging on, and others less successful being driven out of business This marginal pricing phenomena is also often seen in the property market where people claim properties are unaffordable – whereas in fact the market price will likely settle at the point of the marginal affordability of the last available prospective purchaser. (Often, we hear people calculate how much they can borrow before looking at houses – we seem drawn to maximising this factor to the limit).

So businesses clustering together is often a very sensible strategy, and its quite amazing how this seems to seen throughout free market economies across a range of products. All of this may be blunted a great deal (if not negated) by the provision of virtual services, but in physical goods Harold Hotelling seems to rule.

For more on Harold Hoteling and his work see https://en.wikipedia.org/wiki/Harold_Hotelling

And for more on the Nash Equilibrium see https://www.britannica.com/science/Nash-equilibrium

Every Spring, from the Rocky mountains in Colorado and Wyoming, the melting snow feeds the River Platte down into Nebraska, where earlier settlers described it as “a mile wide and an inch deep”. Not entirely accurate but nonetheless a vivid image. Nowadays the description is often used as a disparaging remark of someone’s knowledge. I have certainly heard it used about a lot of journalists. We might term this as a form of horizontal learning. Fair or not?

Equally a similar opposite term is often used about academics, in that they know “more and more about less and less”.  A form of an inch wide and a mile deep, so now a vertical format rather than a horizontal one. True or brutal?

One could argue that both journalists and academics are fitting a type or pattern of behaviour and activity that makes sense for their respective professions. There are of course some specialist journalists, and also academics that adopt a multi-disciplinary approach. So, which is best?

Ideally some of both perhaps? This may be the allure of big data and machine learning that seems to create the best of both worlds. Increasingly the immensely powerful combination of deep data and highly powerful computing is generating far more “results”. It is clearly helping a wide field of activities from medical diagnosis to more efficient use of networks, but to my mind it will always have one major constraint – it seems unlikely to ever really generate creativity.

The world seems enamoured by various party tricks that can be done by software such as ChatGPT (for example it would be v easy to turn this blog into Shakespeare Sonnets, or perhaps rewrite it in the style of a Dickens novel!). But this is not being creative, its merely fantastic machine learning routines that slice and dice past data into existing patterns – so it is both clever but also extremely stupid, or perhaps more fairly blind and unknowing.

So can we expect future machines and software to develop “artificial creativity”? My sense is certainly not now, and who knows if ever? This is why I cavil against the term Artificial Intelligence, because to be truly “intelligent” I think it has to demonstrate creativity, no be just gigantic pattern seeking and puzzle solving machines.

Where does this lead us as humans in terms of being creative and dare one suggest in being able to make better decisions? I think it is instructive that most of us however modest or fantastic our future success, we normally start learning more and more about something. (Of course, this could be a physical skill or talent not just pure mental work). Then perhaps depending on our interest and work rate we climb up a thin knowledge path and then increasingly want to branch out to look at other fields, so perhaps our creativity comes from building this letter “T” of a narrow start that blossoms out into wider ideas.

Here we are combining the vertical and horizontal approaches, and from this we start to make more creative ideas and plans, and it is this that is keeping us ahead of the data crunching machines and their dual world of clever/stupid answers. Some will argue that eventually the computing power will genuinely generate creativity – but I for one remain a little sceptical.

In an 1854 lecture at the University of Lille, French chemist and microbiologist Louis Pasteur famously remarked that, “In the fields of observation chance favours only the prepared mind.” In a way pretty obvious? After all, if you haven’t done any groundwork what are the chances that you will even recognise an opportunity? I think Pasteur was encouraging us to keep slogging away and that when opportunity strikes, we will be ready, and hopefully willing and able, as well. So, no great insight but it perhaps hints that a lot of new ideas and breakthroughs occur because of serendipity and that most annoyingly slippery concept – pure chance. And the best thing we can do is to be well placed to take advantage of it, if it comes our way.

The late Professor David Ingvar a Swedish neurobiologist found that a specific area of the brain, the frontal/prefrontal cortex, handled behaviour and knowledge along a timeline and it also handled action plans for future behaviour. Ingvar’s research demonstrated that damage in that area of the brain is found to result in an inability to foresee the consequences of one’s future behaviour. He concluded that the brain is ‘hardwired’ to do this and that plans are created instinctively every moment of our lives; planning for the immediate future, that day, that week and even years ahead.

As these plans can be retained and recalled, Ingvar called them ‘memories of the future ‘.
We can illustrate this with a simple example of personal experience which we have all come across. Imagine you are taking up a new interest or perhaps sport, let’s say skiing. Before the new interest our minds had no particular focus or thoughts on the topic – but now suddenly we find there seems to be lots of magazine articles, perhaps special sales offers on ski equipment, and we notice more and more people seem to be talking about skiing! A coincidence or something weird is going on? In fact, it’s neither, for as Ingvar’s research demonstrated we are now tuning our minds to potential future pathways and outcomes – in this case skiing. As a result, we are building a memory of the future that centres around future skiing trips and adventures.

But perhaps we can go one step further and will things in the future? Many people seem to be enamoured of the idea that we can “manifest” the future, and somehow “cosmically attract” success to ourselves. This seems a rather far fetched if not totally absurd idea but is much in vogue with luminaries such as Oprah Winfrey and her assertion that “It’s true, the way you think creates reality for yourself”. Unfortunately for the Queen of daytime tv, the Roman philosopher Cicero quickly punctures this. He points out the inconsistency of divining something that in truth is based on pure chance or old friend good luck. For him it’s all superstition and illogical, and he wrote about this in 44BC! Same old stuff always seems to be about and has been refuted over and over.

So, what to do? Work hard and keep weather eye, a la Pasteur, for that next opening or chance meeting, or perhaps as Ingvar demonstrated, recognise we intuitively focus our brains towards information on topics that we find interesting; or accept Cicero’s advice to seek expert advice when faced with challenges and difficulties, and that wishful thinking won’t make things happen.

If none of the above offers you sufficient guidance hope or comfort, we can all fall back on the great advice and catch phrase of the late great Irish Comedian Dave Allen, “May your god go with you!”

One of my main areas of interest is financial risk and in particular how markets and their participants behave.

To have any serious understanding of this it is also necessary to have an idea of the forces that act on markets, of which geo-politics is a major factor. To that end I have found these three books both fascinating and illuminating.

The Power of Geography: Ten Maps that Reveal the Future of Our World by Tim Marshall

Material World: A Substantial Story of Our Past and Future by Ed Conway

End Times: Elites, Counter-Elites and the Path of Political Disintegration by Peter Turchin

Back in May I took part in a podcast recording for Human Risk at the World Famous Abbey Road Studios.

Here is how Christian Hunt of Human Risk describes the podcast (and also gives a link to the first part)

https://www.humanriskpodcast.com/rory-sutherland-gerald-ashley-paul-craven-at-abbey-road-part-one/

Some suggestions for holiday reading

The Lunar Men: The Friends Who Made the Future 1730-1810

Hell’s Cartel: IG Farben and the Making of Hitler’s War Machine

The Master and His Emissary: The Divided Brain and the Making of the Western World 

Samuel Pepys: The Unequalled Self

Civilisation – The West and the Rest

The Spy Who Disappeared: Diary of a Secret Mission to Russian Central Asia in 1918

12 mins on Systems Thinking by the late great Russell Ackoff. Really ought to be compulsory viewing for anyone in #risk or #decisionmaking roles.