The Apollo Report - July 11th, 2017 - The Lindy Effect

The Apollo Report deals with one or two concepts, ideas, or events every day. Some of it is timely, some of it is not. Most of it is probably wrong, but hopefully some of it is somewhat right. Please feel free to contribute your thoughts on anything written here and I would be more than happy to engage in discussion of the material in the comments. 

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I recently came across an idea that resonated with me given how much time I've been spending on cryptocurrencies, economics, and blockchain technology. This idea is called the "Lindy Effect". 

If you want to read more about the history (and maths!) of this idea, please checkout the Wikipedia article which will link you to a bunch of scholarly work that further explores the matter. I'm going to limit the scope of this post to thinking conceptually about the Lindy Effect with relation to economics, business, and technology.  

Oversimplifying the concept a little bit for the sake of time, the Lindy Effect occurs when an item's future life is proportional to its past life. This means that the longer something has existed, the higher the probability that it will continue existing in the future. As you probably saw from the Wikipedia article, the most prominent example given by Nassim Taleb was that of a book, where the longer the book has been in print, the longer it is expected to stay in print. 

This is, on some level, quite intuitive. Things that have survived time do exhibit certain characteristics that enable it to continue withstanding it with no natural upper limit. The Pyramids of Giza have survived severe weather conditions, wars, and earthquakes for thousands of years and are still standing. It would make sense to assume that they will continue to stay standing for several more thousand years rather than suggest that they have exhausted most of their natural lifetime. 

However, how does the Lindy Effect play out with technology? 

At first, you could suggest that the Lindy Effect can indeed be observed with technology since the industrial revolution. Countless technological advancements have been achieved since then and many inventions were brought forth, but not all of them survived. In fact, closer to the date of "inception", the longer some piece of tech continues to exist and be utilized the higher its chances were of surviving longer in an age of fierce technological competition. 

But with technology, as opposed to books or buildings, I would suggest that it would in fact have a natural limit, but one that is harder to define than the perishable nature of an apple. That natural limit seems to be Utility. 

I believe this is different than the concept of "health" suggested by a few authors. Sure, you could have a company - and let's call it Company A - that has existed for a hundred years but is now in a terrible financial position and not expect the Lindy Effect to continue its manifestation. Company A has indeed survived for a hundred years, but it has now internally changed. The generations of great management could have been hard to replace, or the state of the current economy could make it cash-strapped or nearing bankruptcy, or it could have faced labor shortages, etc. In this example, the limiting factor for the item was its health and not age. Meaning that if it maintained its internal health, its age would have contributed to its continued existence. 

But let's take another example, another company. Let's assume that Company B has also been around for a hundred years. It continues to have great management, the economy has been somehow continuously in its favor, it has not faced shortage of labor, its machinery did not breakdown and was in great shape, and everything was great. Company B is old and healthy, and as such, it is to be expected that it will continue to exist for many years to come. 

Enter Company C. Company C operates in the same industry as Company A and Company B. Company C is young, very young. The odds are stacked against it. If we consider age and health, Company C seems doomed. But, if we consider utility, then the picture begins to change. 

Company B's products have been around for ever, and are in great demand. It is the oldest of all companies in that industry and is in good shape and as such its survival for many more years seems certain. When Company C comes along, it provides the same product, almost. Let's also assume that the product targets the same customers as company B. But, Company C's product is slightly different; somehow, it's more useful*.

The rest is history. Newspapers and social media, Nokia and Apple, etc. 

While the Lindy Effect is useful in thinking about certain things, I believe it has quite a few limitations in business and technology, particularly when business is heavily influenced by technology. A book or a building can not change. The ideas expressed in the book can not be altered, and a building can not modify its own structure. When you put such items in nature and they withstand the test of time, there is little that could change that would introduce them to unprecedented threats. 

However, when you're dealing with things that are inherently malleable, health and age now matter much, much less. Companies can shift their strategies, launch new products, change their management, expand to new markets, explore different business models etc. New technology can also advance and replace other established technologies. It all depends on the utility of the company or the utility of the technology. The question to ask is "does this item/thing continue to provide value compared to other items?" As soon as the answer is no, it's history. 

Now, the question is, is this what we're witnessing with fiat and cryptocurrencies? Can one of them do something the other never can? I'll leave my thoughts on that to another post. 

Finally, I have one small thing to add: in the case of a book, you could possible advance the argument that its continued existence is both a product of its age AND utility, in the sense that if it had lost its appeal to readers for any reason, it would be out of print. Similarly with buildings, if they lost their utility (even historical significance for people), they would be demolished to make way for other things despite how old they are. In both these instances I think we would be placing such items under the test of time while also including humanity as an essential component of time. Once an idea or a materialization of an idea (such as the Pyramids) sticks in people's minds by a myriad ways, they're very hard to get rid of. 

In strength,
A.

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*Useful in this context can mean many things. Seth Godin has written quite a bit on what makes people buy things and how that has changed in the 21st century. Usefulness doesn't have to be tangible. A product can be more useful to you than another simply because it just makes you feel better psychologically despite having no tangible difference from another product.