Thursday, 21 January 2010

#5: Schrödinger's cat

Throughout Jan I will be posting installments of the "12 entrepreneurial lessons I learnt from 2009" series

So far: Introduction, Lesson #1, Lesson #2, Lesson #3, Lesson #4

Schrödinger's cat is a thought experiment which was devised by Erwin Schrödinger to highlight the absurdity of quantum mechanics.
It'll do just the same, however, to highlight the absurdity of business plans.

Business plans are, at best, a guestimation of what might occur if a particular set of variables fall out in a particular manner. At worst, they're a work of fanciful fiction.

Either way, they represent an attempt to model the future which often spans into a delightful set of parallel universes because, well .. it's unlikely you're in the business of predicting the future. So, you'll probably have the version where you barely get by, the one where you'll have your own private island before you're 30 and the one in the middle where you've averaged out all of the highs and lows to reach reason. Most people tend to go with the one in the middle.

In Schrödinger's thought experiment he envisages a box into which you sadistically put a cat and some poison before closing and sealing the lid. You would them head off for an hour, (presumably to work on your business plan!) and after 60 minutes the following question is posed:
Is the cat alive or dead?

Now, without looking in the box, you cannot tell. The cat could be alive but equally it could be dead, having succumbed to the poison. So, one version of the experimental outcome states that as long as you cannot tell which is true, the cat is both simultaneously alive and dead. However, we know rationally that when we do open the box, this is the one outcome that cannot actually be evidenced.

I would argue that business plans are like Schrödinger's cat. While on the one hand the only way to predict the future is to assume a mixture of good and bad outcomes, this does create a tendency for startups to write business plans around impossible averages; forgetting that 'in the real world' cats are either alive or dead, not both.

An example: We're in for two funding bids where, in each, there is a 50% chance we're going to win £10,000.
Odds are, we'll get £10,000 in one or the other. My fantasy business plan says we get £20,000, my worst case scenario says we get zip, nada, niente.
My "most likely scenario" business plan would model this as a £5,000 income in each case. Despite the fact that getting £5,000 is the one truly impossible condition. We'll win £10k or nothing, alive or dead.

...Yes it seems simple now! but #5 was truly a lesson learnt the hard way:

Is Schrödinger's cat in your business plan?


Anna said...

Good old Schrodinger's cat, he gets everywhere! It's true - so much time is spent creating business plans which we need to accept will never be exactly how things pan out. An interesting article "Delusions of
How Optimism Undermines
Executives’ Decisions"
by Dan Lovallo and Daniel Kahneman. Also shows how we need to temper our expectations to create a slightly more realistic view of projects we are going to undertake. You make the comment that when you have the three choices (broke, bahamas by 30 or somewhere in the middle) that most people pick the middle choice. But if that middle choice is still based around far too optimistic assumptions than even that option will end up being unachievable.

Andrew said...

Finally someone willing to expose business plans for the waste of time they are...

Amanda said...

Anna: Good point! As with all things, the statistics you get out are only as good as the data you put in; thorough and accurate market research is truly the key here. Thank-you for the reference, also, I'll look that article out.

Andrew: I don't think they're a waste of time. Writing a business plan is an extremely important process to go through when researching a business idea or starting up an enterprise. It is vital to be able to articulate in detail your plans for the business and reference sufficient evidence to support your claims. Arguably, you don't need to actually write a business plan to thoroughly know the content of one, but the question would then be if you really could commit it to paper (or silicon?!) why not just do it? It is undeniably useful, if not vital, to have the document to show to mentors / backers / accountants etc and for your own sake I have also found that it is important to have the document to refer back to when you inevitably get lost and can't 'see the wood for the trees' so to speak. My point was simply that they often don't model 'real life' all that accurately and one should bear this in mind. They're very important but, yes, they're far from gospel.

Thank you both for your comments, I appreciate you taking the time to post and I hope you'll continue to follow/discuss the 12 lessons series. Hopefully some of what we debate and share here can be put to good use by others :)