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Uncertainty and Innovation

Page history last edited by Ken Davidian 6 years, 1 month ago

INNOVATION REPORTS AND PAPERS

  • 2014 March - PwC The runway to growth: Using market understanding to drive efficient innovation in the aerospace, defence and security industry
  • 2012-07 ESPI Space and the Processes of Innovation
    • 2012-07 ESPI Space and the Processes of Innovation.pdf - This report [by the European Space Policy Institute, ESPI] starts out by making the case for the recognition of innovation economics as an economic paradigm. Today, innovation is a dynamic term of strategic importance in industrial policy and management. The introductory chapter of the report explores the major concepts and authors in the academic literature surrounding innovation and innovation economics. Schumpeter’s concept of creative destruction shows that, by its very nature, innovation should not be touted as a universal benefit but as a complex, disruptive force creating opportunities and challenges to actors in the economic system. In the short term, innovation creates winners and losers. In the long run it is the engine of economic growth, upgrading quality of life and technological progress. Drucker emphasises the need of being mindful of human psychology and the individuals behind the inventions when spurring innovation, indicating that – despite its complex character – innovation is something that can be stimulated and fostered when managed well. (from the Executive Summary)

 

 

ORIGINAL POST

 

The one certainty in entrepreneurial space ventures is tremendous uncertainty. For commercial markets, it's not knowable whether the current commercial satellite industry will be big enough to support RLVs once the prices come down, whether we need an anchor customer like space-based solar power (SBSP), or whether something new will be necessary. In suborbital markets, it's not knowable whether there are multiple markets or whether the tourism market is large enough. In ISRU, it's not knowable whether to pursue pyrolysis, hydrolysis, hydrogen reduction of ilmenite, or some new technology never thought of in order to justify investment. My inclination as an engineer is to pursue more information to resolve these questions. From a practical matter, this is exactly wrong.

 

If we were to ask what technology to pursue to harvest oxygen from the moon, for example, we'd hear answers like, "that depends on how transport back to Earth would be handled and how much it would be used." If we were to ask actors like Odyssey Moon or LunaTrex or the Constellation program how transport back to Earth would be handled, we'd get three different answers, not to be self-serving but because their different approaches are a reflection of their belief is more likely. This continuous multiplying of the possibilities would proceed the farther we go pursuing all of our questions and each of their sources of information. In the book Black Swan: The Impact of the Highly Improbable, Nassim Taleb points out that, from the point of view of a decision-maker, there's no difference between the truly random and "deterministic chaos", circumstances like the "butterfly flapping its wings that causes a hurricane". That is to say, there's no difference between the truly random and a deterministic system so complex that we can't know enough to determine its outcome.

 

That's not a satisfying fact. The discussions I've seen at industry conferences in recent years have often focused on trying to predict which technologies to pursue, and to attempt to build such a strong case for them to justify investment. But trying to describe certainty in this environment increases, rather than decreases, risk, while reducing perceived risk. If it truly is impossible to know who will win, claiming better is risky.

 

Most think that Finance is a craft regarding money. However, it is really the study of risk; money is simply a tool. The recent troubles bring out some ways in which we don't know yet how to do it well, but there's a great deal of Finance that does work. It's a surprise for many technical personnel, but the handling of uncertainty and risk is a "business" decision and not an engineering problem. A company is a ultimately a group of people choosing to come together for a purpose, and that purpose needn't be the pursuit of a particular technology. Both Built to Last: Successful Habits of Visionary Companies by Jim Collins and Jerry I. Porras and Innovation and Entrepreneurship by Peter F. Drucker are key books devoted, in part or in whole, to designing companies with an eye towards innovation and, therefore, uncertainty as all innovation represents some uncertainty. They both, for instance, discuss 3M, an incredible company whose main purpose is, and has been for almost a century, managing innovation and uncertainty.

 

Managing uncertainty is a key element of the signals that prices communicate to larger society. The proper question in relation to this level of uncertainty mustn't be "what outcome is most likely?", but "how do we best manage uncertainty without needing a resolution?" Often, technical people wonder what the point of an MBA or a "business" people is; this is the most important answer. It's always better to be the casino than a gambler, and to be a bookie rather than to bet on the horses.

Comments (4)

Jonathan Card said

at 6:30 pm on Jun 7, 2009

Man, that ending is weak. Does it carry the point?

Jonathan Card said

at 6:33 pm on Jun 7, 2009

Obviously, I'd like comments and questions, but also feel free to link concepts here to explanatory articles, in the wiki or in the broader internet.

Ken Davidian said

at 8:02 pm on Jun 13, 2009

Hey Jonathan!

Thanks for posting this! I forget if I spoke with you at ISDC on a subject very close to this one, but if I didn't, then I *should* have!

I'm in the middle (30% actually) of Black Swan, so I'll wait until I'm finished to start commenting on your post, but I find it interesting that the other two books you cite (by Collins/Porras & Drucker) discuss managing for uncertainty. This strategy is the same (or nearly so) as that proposed in Clayton Christensen's Theory of Disruption.

He says that because the markets for low-end or new-market disruptions are unknowable a priori, companies need to be very flexible and able to fail at the beginning. Most new-market disruptions are not technology problems, but marketing problems. I guess that means that the innovation itself isn't the source of uncertainty, but "who will buy it" is.

I'll save the rest of my comments, especially regarding your "Black Swan" comments, until I finish reading that book...

Again, thanks for posting!

Ken

Jonathan Card said

at 11:01 pm on Jun 20, 2009

We did speak briefly, at SIS; I know we spoke about Black Swan and Entrepreneurship and Innovation. There was a third, which could have been Built To Last. I've been wrestling with these thoughts since listening to Black Swan and Built To Last on audiobook on the drive to Orlando.

And now for something completely different: ever since I started http://www.spacelawwiki.com (pretty unsuccessfully), I've been wrestling with how to use a wiki. My thought (which I never did on the other site) to combine a straight information repository with "entry points" - articles like this to provide different ways into the information. The hope is to combat the "narrative fallacy" by providing many possible narratives for the information and separating out the informational parts from the narrative parts. Obviously, waiting for other people to add references in this article was just lazy. I'll be adding those. Does this seem like a good idea?

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