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Weekly I/O: Why companies overspend, How Tim Ferriss Spots Next Big Thing, Intrinsic Motivation
#66: Dollar Auction Paradox, Spot Next Big Thing, Intrinsic or Extrinsic Motivation, Choice when Doomed to Fail, 3 Heuristic for Fulfilling Life
Greetings from Mountain View!
This week's I/O involves some useful questions to ask ourselves. Let me know if you have other favorite questions you like to share!
Here's a list of what I'm exploring and pondering on this week.
1. Dollar Auction Paradox: Understanding why companies spend more than what they can potentially earn and why we pay more than the actual value of a product?
Article: Dollar Auction
A dollar auction is a simple game where participants bid for a dollar bill, but with a twist that both the highest bidder and the second highest must pay their bids. Assuming all the participants are rational, what will the winner end up paying for the bill?
Initially, bidding seems harmless and potentially profitable. However, as the bids approach the one-dollar mark, a dilemma unfolds. For example, Participant A bids 90 cents, and Participant B counters with $1. At this point, Participant A faces a choice: bid $1.01 and lose only 1 cent or withdraw and lose the 90 cents already bid.
Why did they bid over a dollar for just a dollar? Bidding more than a dollar for a dollar is not logical. At the same time, losing 90 cents is not as smart as losing 1 cent. As the bids escalate, participants shift their focus from gaining profit to avoiding significant losses. This shift in perspective often leads to bids far exceeding the dollar's face value. This consequence is coined as "escalation of commitment" by the economist Martin Shubik in his 1971 paper to highlight a paradox of rational choice theory. Surprisingly, in a study involving Harvard MBA students, winners even paid up to 20 times more than the face value of the bill!
Examples of the dollar auction game can be seen very often in the real world. Winner-takes-all markets, such as consumer internet with network effects, often create an environment similar to the dollar auction. However, unlike the dollar auction game where only the second-highest bidder loses, all players participating in the market, like consumer internet, will end up with high losses if they don't win. Similarly, bicycle-sharing startups engage in intense battles for market monopoly, resulting in massive losses for all but the eventual winner.
The Dollar Auction Paradox reveals our tendency to escalate commitment irrationally in competitive situations. Ironically, the most effective way to win at a dollar auction game is by not participating in one. Therefore, we should avoid getting caught in a costly bidding spiral before joining a competition.
2. How Tim Ferriss identifies the next big thing? Understand what technical nerds and rich people are doing, and where people are patching together awkward solutions.
Andrew Huberman suggests that if you want to know what will be hot and useful in the next five to ten years, it's worth paying attention to what Tim Ferris is doing now. This is because the revolutionary concepts from The 4-Hour Body and The 4-Hour Workweek have withstood the test of time and are even gaining increased popularity. So, how does Tim Ferriss spot emerging trends and the next big thing? Here's his advice:
Observe Tech Nerds' Side Projects: What are the technology enthusiasts or nerds doing at night or on the weekends after an exhaustive work week?
Analyze Rich People's Current Interests: What are rich people doing now that tens of millions of people will be doing ten years from now?
Identify Areas with Less-than-ideal Solutions: Where are people patching together awkward solutions? Is there room for some innovation there?
Learn from Extreme Examples: Study the outliers such as racehorses, bodybuilders, elite athletes, and billionaires. These extreme cases tend to eventually influence average scenarios. Practitioners are usually ahead of the papers.
Challenge Statements Made in Absolutes: Be skeptical of claims made in absolute terms (e.g. always, never, should). When so-called "experts" employ such language, they are often wrong.
3. Would I still do it If I could never talk about this to anyone? Assess whether our motivation stems from intrinsic or extrinsic factors.
How to determine if our actions are driven by intrinsic or extrinsic motivation? One useful way is to ask ourselves: "Would I still do it If I could never talk about this to anyone?"
Take the example of interacting with a celebrity. Could we enjoy the experience as much without the opportunity to share with others that we met someone famous?
Tim Ferriss provides another example regarding the use of psychedelics. Suppose people do psychedelics primarily because they want to tell the story at a social gathering later. In that case, the motivation is more aligned with seeking social recognition and validation rather than a genuine interest in the experience itself.
I found engaging in activities driven by intrinsic motivation much more fun than extrinsic ones because I can enjoy them fully in the present, independent of things I cannot control, such as external validation. Conversely, when we do something solely because we can later share it on social media, doing that becomes less fun immediately. This is the same as #28.2, "Buy what you would buy if you were the only person on Earth."
4. A useful introspective question for choosing projects: What would you do if you knew you would fail?
What would you do if you knew you couldn't fail? This hypothetical and introspective question is helpful for people to reframe the challenge and think without the constraints of fear. However, Seth Godin introduces a twist and poses an alternative but also helpful query: What would you do if you knew you would fail?
This question forces one to evaluate if something is worth doing even though it won't work. For example, when choosing among five projects to work on, which one would you pick even if you knew failure is inevitable?
Asking this question shifts the focus to what we would do just for the process. This is also aligned with #1.1, "When you choose projects, try to ensure you can win even if you fail. Choose projects based on the skills you'll develop and relationships you'll build".
5. The combination of big ambitions, high standards, and low expectations serves as a heuristic for a fulfilling life
Article: Avoiding Problem
Big ambitions provide direction toward something hard. It makes us pursue something bigger than ourselves, which gives us meaning and connections.
Low expectations allow us to enjoy the journey. Because happiness is equal to reality minus expectation, we can easily be happy when we expect nothing in return.
High standards minimize our future regrets of not giving our best. Holding ourselves to a high bar makes sure we always try hard enough when things get hard.
Having big ambitions, high standards, and low expectations is a useful heuristic for living a fulfilling life. This also reminds me of the Young & Old Test (#42.4): Make decisions that your 80-year-old self and 10-year-old self would be proud of.
That's it. Thanks for reading. Since I always want to know more about my readers, please let me know which input you find most useful or interesting. You can take 5 seconds and reply to this email with a number!
As always, feel free to send me any interesting ideas you came across recently!
Looking forward to learning from you.