Portfolios, bets, and living systems
Endeavors evolve by sensing, adapting, and renewing their bets
Organizations don’t grow through plans; they grow through portfolios. Each initiative is a bet with its own metabolism - some exploratory, some exploitative, some quietly decaying. Amazon’s culture of experimentation is simply this biological truth made operational.
When we see our work as a portfolio of living bets, we stop asking “Is this project good?” and start asking “What role does this project play in the system?”
Miller’s Living Systems reminds us that enterprises behave less like machines and more like organisms - they sense, adapt, shed, and regenerate:
All adjustment processes have their costs, in energy of nonliving or living systems, in material resources, in information (including in social systems a special form of information often conveyed on a marker of metal or paper money), or in time required for an action. Any of these may be scarce. (Time is a scarcity for mortal living systems.) Any of these is valued if it is essential for reducing strains. The costs of adjustment processes differ from one to another and from time to time. They may be immediate or delayed, short-term or long-term.
How successfully systems accomplish their purposes can be determined if those purposes are known. A system’s efficiency, then, can be determined as the ratio of the success of its performance to the costs involved. A system constantly makes economic decisions directed toward increasing its efficiency by improving performance and decreasing costs. Economic analyses of cost effectiveness are equally important in biological and social science but much more common and more sophisticated in social than in biological sciences. In social systems such analyses are frequently aided by program budgeting. This involves keeping accounts separately for each subsystem or component that carries out a distinct program. The matter-energy, information, money, and time costs of the program in such analyses are compared with various measures of the efficiency of performance of the program.
How efficiently a system adjusts to its environment is determined by what strategies it employs in selecting adjustment processes and whether they satisfactorily reduce strains without being too costly. This decision process can be analyzed by a mathematical approach to economic decisions, or game theory. This is a general theory concerning the best strategies for weighing “plays” against “payoffs,” for selecting actions which will increase profits while decreasing losses, increase rewards while decreasing punishments, improve adjustments of variables to appropriate steady-state values, or attain goals while diminishing costs. Relevant information available to the decider can improve such decisions. Consequently, such information is valuable. But there are costs to obtaining such information. A mathematical theory on how to calculate the value of relevant information in such decisions was developed by Hurley. This depends on such considerations as whether it is tactical (about a specific act) or strategic (about a policy for action), whether it is reliable or unreliable, overtly or secretly obtained, accurate, distorted, or erroneous.
Which of your current bets are alive and learning; which are being kept on life support out of habit?
Seeing initiatives as living bets helps us understand why some thrive and others decay. But sensing and adapting aren’t enough; we also have to price reality correctly. That requires a shift from biological metaphors to economic discipline.