{"id":4975,"date":"2018-11-26T09:05:46","date_gmt":"2018-11-26T09:05:46","guid":{"rendered":"http:\/\/chief-exec.com\/?p=4975"},"modified":"2019-02-04T12:15:19","modified_gmt":"2019-02-04T12:15:19","slug":"maxwells-entrepreneur-finding-the-edge","status":"publish","type":"post","link":"https:\/\/chief-exec.com\/?p=4975","title":{"rendered":"Maxwell\u2019s Entrepreneur: finding the edge"},"content":{"rendered":"<h4><span style=\"color: #333399;\">If there is a powerful take-home message from last week \u2013 for chief-execs and business students alike \u2013 the succinct observations of Ray Dalio, founder of Bridgewater Associates, on \u201cthoughtful disagreement\u201d would be hard to beat, writes <em>John Egan<\/em>.<\/span><\/h4>\n<p>\u201cThoughtful disagreement, \u2026 that doesn\u2019t seem to be the way most of corporate America operates,\u201d observed Barry Ritholtz, the host of the Masters of Business podcast on Bloomberg.<\/p>\n<p>\u201cThat\u2019s our edge\u201d, replied Mr Dalio with understated surprise as if the idea wasn\u2019t already obvious.<\/p>\n<p>It is quite an edge. One that has enabled Bridgewater to become the world\u2019s largest hedge fund, managing more than $160 billion in assets and, according to Forbes, Bridgewater has made more money for their clients than any fund in history.<\/p>\n<p>\u201cIt has been a big deal for us\u201d, concluded Ray Dalio. So, what is thoughtful disagreement?<\/p>\n<p><iframe src=\"https:\/\/www.bloomberg.com\/multimedia\/api\/embed\/iframe?id=8098cc01-5239-4657-bee2-ce07a82fcf79\" frameborder=\"0\"><\/iframe><br \/>\n<strong>Ray Dalio \u2013 thoughtful disagreement <a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a><\/strong><\/p>\n<p>The key success factor is to create a space where ideas can co-exist, co-operate and compete constructively so that you can develop the capacity to think differently from those who might represent the current market. It is equally essential to be right.<\/p>\n<p>To think differently is always a risky business and discomfort is proportional to the distance one is away from the prevailing consensus. It can never be entirely eliminated, but each step to reduce risk creates value by increasing the probability of being right. It is the beating heart of entrepreneurship.<\/p>\n<p>As is customary on <em>Chief-Exec.com<\/em>, we will interpret Ray Dalio\u2019s method of thoughtful disagreement as an innovation mechanism.<\/p>\n<p>Imagine an enterprise as a box with a single port of entry for its inputs \u2013 its supply chain materials and its labour and capital. If this entry port simply feeds in the external environment, the consensus is merely replicated within. Opportunities for added value creation above the background are eliminated.<\/p>\n<p>The entrepreneur essentially takes the role of an infamous physics personality named <a href=\"https:\/\/en.wikipedia.org\/wiki\/Maxwell%27s_demon\" target=\"_blank\" rel=\"noopener\">Maxwell\u2019s Demon<\/a> who, if left unchecked, can willy-nilly break the second law of thermodynamics and create energy from absolutely nothing (see below).<\/p>\n<p>Just as Maxwell\u2019s Demon must eventually pay for the energy he creates by forgetting what he knows, our entrepreneur must pay for the inputs into the enterprise in a more conventional currency. Nevertheless, the role is the same, to select the people and materials with valued attributes \u2013 to incorporate independent thinking. The enterprise inputs combine within the box in an environment also conceived by the entrepreneur \u2013 in the case of Bridgewater being radically open minded and having radical transparency. <strong>An \u201cideas meritocracy\u201d for value creation is born.<\/strong><\/p>\n<p>It is worth noting that in the above construction energy appears in the creation of valuable information. The principles apply equally for the creation of hard goods when one sees these as the embedded information that specifies the product and its means of fabrication. It is the same information that communicates a sense of the value to consumers.<\/p>\n<p>Of course, when the alchemy of the enterprise has been set to work, its endeavours \u2013 derived from the ability to think differently \u2013 must be valuable to the outside world. They must create a new consensus. When the differences exposed through thoughtful disagreement have been reconciled to raise the probabilities of getting at the best answer, the collective intuition of those who do the thinking must have the best chance of being right. The risk of failure is reduced.<\/p>\n<p>In investment business the concept of thoughtful disagreement is especially important as it provides the means to beat the markets which, as explained by Ray Dalio, \u201cdiscount the consensus\u201d. It may well also have more universal appeal.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><strong>Maxwell\u2019s Demon and the value of information<\/strong><\/p>\n<p>To state that information can be valuable is hardly controversial.\u00a0Information can be extremely valuable.\u00a0Knowing information that could affect a company\u2019s stock value can lead to financial gain.\u00a0High frequency trading can expedite access to this information by milliseconds, a short interval that also can be lucrative.<\/p>\n<p>Information is physically encoded in many forms.\u00a0Indeed, whether it is the storage of information in DNA, in computer memory or in the neural circuits of people, one can assume that information is at least, in part, formed through the organisation of some physical material.<\/p>\n<p>The organisation of a physical system with higher information content is associated with the system\u2019s energy. This is most famously demonstrated by Maxwell\u2019s Demon.\u00a0In 1867 Scottish physicist James Clerk Maxwell imagined an intelligent being capable of operating a trap-door in a wall inside a closed gas-filled chamber and thereby segregating fast moving \u201chot\u201d gas molecules from slow \u201ccold\u201d ones where normally these molecules are randomly mixed together.\u00a0By making this selection the Demon can produce a machine that does mechanical work (a <a href=\"https:\/\/en.wikipedia.org\/wiki\/Entropy_in_thermodynamics_and_information_theory#Szilard's_engine\" target=\"_blank\" rel=\"noopener\">Szilard Engine<\/a>), converting pure heat to mechanical energy.\u00a0This is impossible according to the second law of thermodynamics \u2013 it suggests perpetual motion is possible and that time can reverse its direction!<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-4977 size-full\" src=\"http:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2018\/11\/Maxwells-Demon.jpg\" alt=\"\" width=\"608\" height=\"224\" srcset=\"https:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2018\/11\/Maxwells-Demon.jpg 608w, https:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2018\/11\/Maxwells-Demon-300x111.jpg 300w\" sizes=\"auto, (max-width: 608px) 100vw, 608px\" \/><\/p>\n<p>It appears that to resolve this Maxwell\u2019s Demon paradox, the intelligent Demon must identify each fast-moving molecule, operate the trap-door and then forget the information before repeating the cycle (or at least have a finite memory).<\/p>\n<p>It is in the act of deleting information that energy (heat) is released and the entropy of the universe is increased to remain compatible with the laws of thermodynamics.\u00a0In a more practical sense, this same concept appears in <a href=\"https:\/\/en.wikipedia.org\/wiki\/Landauer%27s_principle\">Landauer\u2019s Principle<\/a>. It has shown that the irreversible deletion of information in a computational operation must be accompanied by a dissipation of energy as heat.\u00a0On the other hand, the replication of information does not necessarily require any additional energy input.\u00a0Such considerations lead to a physical theory of information <a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a>.<\/p>\n<p>In the entrepreneur\/enterprise version of the Maxwell Demon concept (above), the demon entrepreneur responds to information on what constitutes a valuable economic input rather than a fast-moving particle. The entrepreneur pays the monetary cost of these valued inputs as the demon pays in the energy to forget. This triage of highly valued inputs then provides the thermodynamic &#8220;edge&#8221; in the energy to drive the innovative activities of the enterprise.<\/p>\n<p>&nbsp;<\/p>\n<h4>Notes<\/h4>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> Full version of <a href=\"https:\/\/www.youtube.com\/watch?v=cKWlx_P56N4\" target=\"_blank\" rel=\"noopener\">Ray Dalio Bloomberg \u2013 Masters in Business podcast<\/a><\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> Further explanation of the theory of information and its thermodynamic background is given by M. B. Plenio and V. Vitelli in <a href=\"https:\/\/www.researchgate.net\/publication\/2185806_The_physics_of_forgetting_Landauer%27s_erasure_principle_and_information_theory\">The physics of forgetting: Landauer\u2019s erasure principle and information theory<\/a>. \u00a0Contemporary Physics vol 42(1): pages 25- 60, 2001<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright size-medium wp-image-508\" src=\"http:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2016\/10\/Egan-VB2-300x146.jpg\" alt=\"\" width=\"300\" height=\"146\" srcset=\"https:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2016\/10\/Egan-VB2-300x146.jpg 300w, https:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2016\/10\/Egan-VB2-768x373.jpg 768w, https:\/\/chief-exec.com\/wp\/wp-content\/uploads\/2016\/10\/Egan-VB2.jpg 804w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/p>\n<h6>Headline Photo Credit: Lightspring\/Shutterstock.com<br \/>\nMaxwell Demon graphic: Htkym\/Wikimedia Commons licensed under <a href=\"http:\/\/creativecommons.org\/licenses\/by-sa\/3.0\/\" target=\"_blank\" rel=\"noopener\">CC-BY-SA-3.0<\/a><\/h6>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If there is a powerful take-home message from last week \u2013 for chief-execs and business students alike \u2013 the succinct observations of Ray Dalio, founder of Bridgewater Associates, on \u201cthoughtful disagreement\u201d would&#8230;<\/p>\n","protected":false},"author":5,"featured_media":4982,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[128],"tags":[126,132,58],"class_list":["post-4975","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-encipia","tag-encipia","tag-energy","tag-innovation"],"_links":{"self":[{"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/posts\/4975","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/chief-exec.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4975"}],"version-history":[{"count":10,"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/posts\/4975\/revisions"}],"predecessor-version":[{"id":5014,"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/posts\/4975\/revisions\/5014"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/chief-exec.com\/index.php?rest_route=\/wp\/v2\/media\/4982"}],"wp:attachment":[{"href":"https:\/\/chief-exec.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4975"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chief-exec.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4975"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chief-exec.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4975"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}