Upside decay - why some people never get lucky

by brianlui4 min read8th Oct 202013 comments

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Note: This was originally published at https://brianlui.dog/2020/10/06/upside-decay/. This concept is important because many people are self-interested, and this provides a convincing self-interested reason for being virtuous. Being virtuous is good, but it's also practical!


Upside decay means that an organization doesn’t get any lucky breaks.

If we think of average luck as a normal distribution of outcomes, this is what it looks like:

The reduction in area under the curve (the orange part) represents the loss of positive outcomes. The total loss is small, but it’s concentrated in the tail of the curve where the extreme successes happen. This is upside decay and it’s catastrophic.

 

Why upside decay is so harmful

Here’s a per capita GDP chart for the United States.

GDP per capita has increased for two centuries, driven by improvement in Total Factor Productivity, also known as technological inventions and breakthroughs.[1] This comes from many people trying out different things, each of them individually unlikely to succeed. The ones that do succeed, though, create an outsized impact. Like in venture capital, one big discovery creates enough progress to subsidize all the others that didn’t work out.

This means that progress happens in bursts, when everything goes right and a new invention or discovery happens. For example, we might need six things to go right for a successful discovery. Under normal circumstances each one has a 50% chance to succeed.

1.56% isn’t a very high chance, but we’ll get there with time.

It’s a different story when there’s upside decay. With only a 30% chance of each one working out instead of 50%, this is what happens:

Our 1.56% chance of success is now only 0.07%. Upside decay hits low-probability events hardest because so many things have to go right.

 

Finding upside decay doesn’t help us

Upside decay is hard to spot. It’s invisible if we’re not specifically looking for it, because the absence of rare positive events is unexceptional. Even when people finally notice something is wrong, they’ll attribute it to malign actors, imaginary enemies or conspiracy theories.

You’d think that being on the lookout for missing positive tail events would be enough to spot upside decay. But it’s too late to be useful. We need to observe an organization over a long period of time or have access to a generous chunk of its history. By the time we identify the presence of upside decay, it will already be far advanced.

What’s worse, upside decay has corrosive effects on organizations. Trying to connect with people becomes sluggish and hard. Things which were easy become longer, slower, more tedious. Problems that are left unattended will metastasize. Motivated people can still push projects through and deal with problems, but it takes all their time and energy and burns them out.

 

An example: China

China was free of upside decay for decades, rapidly growing its economy while enjoying relative social and political stability. In recent years, though, the Chinese Communist Party (CCP) has found its goals being thwarted.

Its primary economic goal is to enjoy the benefits of globalization and keep its export engine humming. Additionally, it would like to move up the manufacturing value chain and master cutting-edge technology. China also wants to preserve its supply chain dominance, which has made it the World’s Factory even as wages have increased.

Its primary political goal is domestic stability. The CCP wants greater control over its people, especially in its periphery, as it believes that instability is a threat to its power. It wants to secure its “living space”, the area in its near abroad that assures the safety of its trade and supply lines. This includes the South China Sea, the East China Sea, the Himalayas, and Taiwan.

China wishes to control the maritime territory bounded by its rather optimistic “Nine-Dash Line”, as shown in the above picture, in order to ensure its own security.

Things aren’t looking good. International events are threatening China’s economic goals. The United States now treats it as an enemy, with the destruction of Huawei as a recent example, and is attempting to decouple from China. Even Germany, long focused on the money it makes from transferring its technology to China, is having second thoughts.

The political landscape has worsened even more. In its pursuit of stability, the CCP has applied its Tibetan repression techniques to other peripheral areas, such as Xinjiang, Hong Kong, and Inner Mongolia. There is considerable pushback to its newest round of repression. As another example, its South China Sea takeover previously met minimal opposition, with Obama merely producing verbal admonishments and smaller countries surrendering to its fait accompli. But it is now experiencing strong pushback from the United States and other interested parties.

This newfound resistance is an unpleasant shock for the CCP. But it shouldn’t have come as a surprise, because China is in an advanced stage of upside decay. China will enter economic stagnation regardless of its policies. Politically, it faces an unpalatable choice between open confrontation (economic failure) or strategic retreat (political failure).

 

How to identify upside decay early

China is a particularly clear example of the causal mechanism of upside decay. Upside decay is preceded by a lack of virtue.[2] The frequency and severity of the CCP’s unvirtuous actions has accelerated in recent years. The most recent instance is its coverup of Covid-19, refusal to take responsibility, and spreading of a conspiracy theory about its origin. But there are others, such as

There’s a good reason why lack of virtue causes upside decay, and why virtue isn’t just a feel-good luxury: weak ties.

 

Weak ties control upside decay

Unvirtuous actions cause upside decay through the mechanism of weak ties.

Strong ties are conspicuous. Weak ties are inconspicuous but numerous, and help in unexpected ways. When weak ties are activated, they can be more helpful in aggregate than strong ties.

But weak ties will not help an unvirtuous organization! Weak tie assistance is voluntary and altruistic. This means that they only help those they think are virtuous.

Without weak ties, organizations resort to strong ties and hard assets. This leads them to adopt a mercantilist approach. Their zero-sum mindset alienates others and makes them even less virtuous, because their positive-sum actions are now viewed suspiciously by others. Left with no choice but to double down on their zero-sum approach, they’ll antagonize all their weak ties and enter upside decay.

This also explains why their good luck disappears but they don’t suffer much additional bad luck. Weak ties mostly aren’t motivated enough to hinder an unvirtuous organization, but they’ll gladly refuse to help.

 

How to avoid upside decay

Avoiding upside decay is simple but difficult. The organization needs to build a virtuous culture that leads to a positive feedback loop. At the same time, it needs to punish bad actions that have short-term benefits.

This is hard because investments in a virtuous culture have no visible effect at the start, so they will tend to be unrewarded. Punishing unvirtuous actions is also difficult because the bad actor can point to the tangible benefits, while the long-term upside decay is invisible. It must be vigilantly enforced from the very top of the organization.

Most companies follow Facebook’s path to unvirtue. At every turn, given the choice between virtue and advertising revenue, Facebook chose revenue. Facebook won’t be able to escape upside decay; even when it tries to acquire healthy teams, they tend to quit soon afterwards. Like Zuckerberg, most CEOs tend to focus on profitability and growth instead of culture, because that’s what they are rewarded for.

There do still exist some examples of good corporate culture. Warren Buffett’s Berkshire Hathaway has created this culture over many decades, so that it benefits from a “seamless web of deserved trust”. I’d expect Berkshire Hathaway’s culture to survive the transition from Buffett to his successor for at least a few decades. Costco is likewise known for its virtuous culture, and it too looks secure. In fact, one of the warning signs for decay in Costco’s culture would be if their profit margins started increasing!

Virtue takes decades to build. What better time to start than now?


[1] Total Factor Productivity also includes better processes and organizational methods, but I consider these process technology and organizational technology respectively. Solow model!

[2] I use virtue to mean moral actions. For example, helping someone in need is moral. Stealing their wallet is immoral.

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I liked this post for introducing upside decay, which seems like an important concept I didn't have before. At the same time, upside decay feels like a very general concept, so it felt a little odd to tie it so strongly to virtue in particular.

The mechanism of "being admirable makes weak ties more inclined to help you out" does sound plausible. But I'm not sure why that would be connected to upside decay in particular. Using the example of scientific discovery, it feels like a major country could have assets such as high investment into education and R&D that helped it have lots of rare discoveries, even if its foreign policy didn't do it any favors and lost it weak ties.

I also feel like the introductory example frames upside decay as something like "the value that you lose that you otherwise would have had", which feels like a bit of an odd framing since there's no "default value that you would have in general", just the sum of many different factors. Imagine that this was something like a game where each "resource point" translated to a 0.1 percentage point increase in the probability of a positive event per some unit of time. Maybe someone has "3 points" worth of weak ties but "5 points worth" of R&D investment and "14 points" of other assets, for a net of a 2.2% chance of a positive event - outperforming the 1.8% chance of someone with 10 points of weak ties but only 3 of R&D and 5 of other assets. (All numbers pulled out of a hat.)

Yeah I think it's an empirical question what fraction of upside is explained by weak ties.

Paul Graham wrote this essay which identifies weak ties as one of the 2 main factors behind the success of startup hubs. He also says that "one of the most distinctive things about startup hubs is the degree to which people help one another out, with no expectation of getting anything in return".

I think upside decay is most applicable to venturesome things. So for example, a plastic chair factory is not very venturesome because the technology and processes are well established. The factory manager can be a real jerk and people will still buy his chairs. On the other hand, things like creating a startup, making smaller semiconductors, or new energy technologies are much more affected by upside decay.

Using the example of scientific discovery, it feels like a major country could have assets such as high investment into education and R&D that helped it have lots of rare discoveries, even if its foreign policy didn't do it any favors and lost it weak ties.

I think this country would be good at incremental discoveries, improvements, some types of development, and commercialization. But it wouldn't be good at generating rare discoveries. Using your example of a board game, weak ties can be translated into "Victory Points" at different ratios depending on the type of activity you're looking at.

I had trouble understanding how the different facts and judgments in your post are connected between each other and with the concept of upside decay.

But I want to say that I really appreciate the concept, because something very similar occurred to me once, though at the time I didn't give it a name. I was studying the careers of creative artists, and there is a lot of discrimination in these fields. Against women, against people who start out in less prestigious institutions, and so on.

My idea was that because many people were excluded and diversity was stifled, this reduced the probability of "hitting the jackpot" with an extremely brilliant artist that would be the far right of the "artistic potential" curve and end up being the next Picasso. I wanted to model this intuition and verify it in the data, but eventually my project changed and I moved on. The idea, anyway, is that you reduce the chance of getting outliers (or even black swans) in the tails, but you only care about positive outliers.

This started out interesting - a name for a potentially-useful concept.  I didn't follow why it was "upside decay", though, instead of just "skewed-left distribution" or "truncated outcomes".  The change-over-time element that "decay" implies to me is missing in the description.  

And then it jumps into weird geopolitical issues and a very tenuous concept of "virtue".  Lost me.

Thanks for your thoughtful response! I chose China as an example because it concisely illustrates the contrast - China dominates all the segments that don't need upside, but struggles for those that do. It also explains the narrow definition of virtue I use. It assumes a moderate knowledge of current affairs which is definitely something that's boring for a lot of people, but I'm personally more familiar with China and less familiar with other possible examples like cryptocurrencies or AGI. 

The problem with using examples that are as political as China is layed out in Politics is the Mindkiller

If you want to make a claim like "China is a particularly clear example of the causal mechanism of upside decay. Upside decay is preceded by a lack of virtue". It would make more sense to use a historic example that actually showed that upside decay followed the lack in virtue instead of merely making a prediction that you think that China will suffer upside decay in the future. 

This closely relates to the concept of black swan farming.

The typical argument I've read is that we should take more risk, because risk taking widens the distribution and gives us more probability of ending up in the tail.

However, blind risk taking widens the distribution symmetrically. So we need to find ways to increase the positive tail probability, while taking more risk. You propose 'weak ties' and 'virtue' as a solution.

I'm going to take the leap and assume you mean virtue signaling, or any other form of signaling that makes you look like a good ally. With such signaling, others will be more likely to become your ally and help you out when you undertake your risky venture. This would increase your probability of success. Doing the opposite would reduce your probability (decay your upside).

Great comment; you're right that in addition to avoiding upside decay, we can also try to increase the positive tail!

Also good spot that virtue as defined here is relative (e.g. during the Cold War the USA would be considered "virtuous" by dint of being less mean than the USSR).

It wants to secure its “living space”, the area in its near abroad that assures the safety of its trade and supply lines. 

I haven't seen any claim that China wants more then just it's historical boundaries which would be implied by the term “living space”.  Ensuring safety of trade and supply lines is basically what the US military does around the world which is qualitatively very different from what used to be advocated under the banner of “living space” (or the German “Lebensraum”).

One response is that China currently has a lot more than it's historical boundaries, to the extent that those can even be properly defined, given that it hasn't truly been a continuous country. See https://medium.com/@millwarj/we-need-a-new-approach-to-teaching-modern-chinese-history-we-have-lazily-repeated-false-d24983bd7ef2 for a recent article I read that discusses it.

I've been referring to a similar concept as 'average decision quality.' But upside decay more crisply captures the key important aspect, thanks!

I'm confused by the examples in this post. I don't dispute that Costco and Berkshire Hathaway are successful, but they are more stable than high-upside. As well, China and Facebook hardly seem to be failing on the whole. The situations are also different between the successful and the upside decay examples, because both Facebook and China are titans compared to Costco. The thesis of this post seems to be that unvirtue causes a loss of weak ties which decreases upside which causes failure. That a lack of virtue loses weak ties seems obvious, and I accept it, and I accept that a loss of weak ties or public favor damages prospects in general. But I don't see the justification for why losing weak ties takes a cut specifically out of the upside. Even the symptoms China and Facebook experience from losing weak ties don't seem to be lack of upside, but rather clear downside (pushback from geopolitical rivals, loss of strong employees).