Business Is An Optimization Problem: Why You Can’t Ignore Second Order Effects and Unintended Consequences


When I was 14 my family went to Oklahoma City on vacation. At the time, there was an attraction called Enterprise Square that was part museum part interactive exhibit, and my dad is one of those guys that makes sure he sees everything in the tourbook on vacation, so of course we went, but couldn't spend much extra time because we were off to the next tourist trap, I mean attraction. Enterprise Square had a room full of video games that dealt with economics and business. I remember playing one where I could adjust the interest rate, money supply, and other such variables, which in turn changed the unemployment rate, national debt, and similar things. After fiddling with the variables for several minutes I became agitated because – I could not win. If I changed something to make unemployment go down, it would change something else that I didn't want to change. I gave up, angrily, and told my sister, "don't waste your time on that game – it's stupid."

Fast forward to August of 1994. I was a freshman at the University of Kentucky and a large group of us had spent the day watching videos (sponsored by UK) about how to be successful in college. We were told to have a healthy social life, exercise regularly, study hard, attend class, yada, yada, yada. At the end of the day one student pointed out that it was impossible to do all of the things they recommended because there were only 168 hours in a week, and the studying plus classes plus good nights sleep plus social activities, etc. added up to more than that.

How to Keep Your Employees Happy Without Giving Them a Raise

Fast forward two degrees and I was working as a hardware engineer in Florida and I still hadn't learned my lesson. For some reason I thought I could change a small part of VHDL code (a programming language used to design hardware) and that it wouldn't have any unintended effects. After all, I knew the design better than anyone because I had done it, and I didn't see how changing one small thing could possibly cause an error nanoseconds away in another part of the circuit. But it often did because I didn't test it. I didn't think I needed to test it.

I finally looked stupid enough times that I decided it was better to spend some extra time looking for unintended consequences than spending days tracking down a problem after I had made several more changes on top of the one that cause the issue in the first place. I always considered myself a quick learner, but this lesson took about ten years to finally sink in.

And that leads me into what I really want to talk about – business. By the time I started my own business I had a come to accept two important facts that would forever change the way I approached problems. First, that there were constraints on everything. Time constraints are particularly common, but other resource constraints are an everyday part of business. Secondly, I realized that the effects of a decision or action could be far reaching and often unpredictable. So what does that mean for business? It means that it isn't the simple linear problem that people try to make it – it's an optimization problem.

Let me explain that in more detail.