Re: Google vs. Your Boys (but really about amazon)

We had a very pleasant lunch, as we always do. He is an old and good friend. He was amused by my unhealthy fixation with Amazon. And so he sends me this gentle barb a few days later:  Google is coming! [Links to WSJ article.] 

Uh-oh, a threat to Amazon's AWS cloud computing service. I get these challenges with some frequency from people that have learned of my obsession. I love them. Not so much because it offers a chance for debate and I consider myself the superior debater. I'm not. It's more because the challenges keeps me honest. 

It reminds me of the verse from Rudyard Kipling's "If": 

...If you can trust yourself when all men doubt you,

But make allowance for their doubting, too...

It's the only way to keep a kernel of intellectual integrity in his game of investing...look for challenges to your theses. Not to fight back and counterpoint the opposing argument, but for the strength and the wisdom the challenge could bring, giving you the opportunity to improve your models, test your reasoning. It's possible to find something nearing sublime in approaching the debate with philosophical detachment, shunning dogma as best as our bloated egos allow.

Unfortunately, our tendency is to seek out those of like-minded opinions, forming echo chambers for our views and doubling down on the risk of our wrongness being compounded in a confirmation marketplace.

Below is my reply to my good lunch friend:

Thanks for passing this on, T. I'm fascinated by this impending convergence of the major tech giants. They're all sitting on these enormous and valuable assets, mainly large customer bases and some combination of tech gear, tech infrastructure, and customer captivity. As a sort of manifest destiny, they are all compelled to extend and expand the use of their infrastructure...those assets. It's inevitable, as if the combination of management ego and economic drive for higher profits, creates a siren's song for the businesses to expand. I've started calling it the growth imperative, a set of behaviors I've noted in other industries, too.

So it becomes interesting with Amazon, Apple, Facebook, and Google. [See The Great Tech War of 2012 by Farhad Manjoo in Fast Company back in October 2012.] Their markets, as they expand, are overlapping more and more. They must compete, not only to grow, but also to make sure one of the competitors doesn't gain some advantage that allows them to attack their core markets....sort of like offense is the best defense.

A theory I've considering works something like this: cloud computing is a huge market that Amazon entered early and has pretty much controlled. Amazon is taking great pains to commoditize the industry - making the services non-branded - so it will be defined by who can offer computing at the cheapest price to customers. Amazon has demonstrated its willingness to make AWS (its cloud computing) cheaper and cheaper, having lowered prices 20 times since launching. Jeff Bezos has thrown down a gauntlet and dared others - IBM, Microsoft, a slew of tiny players, and now Google - to follow. Amazon has said it will make it all about price.

That creates a fascinating dynamic, and this is where the theory part kicks in. What company can afford to offer cloud computing the cheapest? Both Amazon and Google have deep cash reserves, so they can duke it out on low price there while subsidizing any losses with their own cash. That could be a painful war, and we must ask who would win.

My bet would be with Amazon, and for a simple reason...Amazon has demonstrated both an indifference to how the stock market perceives it as it pursues long-term dominance of an industry, and it has demonstrated a capacity to suffer while its stock price is getting killed because it is losing money in pursuit of dominance. Jeff Bezos frequently says he's comfortable being misunderstood for long periods of time.

So let's consider this like a game theory scenario...you have two giants pressing on the gas, hurling their dragsters at each other in a business that one of them (amazon) is willing to define by price. They will both take losses. The more they fight, the deeper those losses will be, and the more likely their stocks will tank as long as the war persists.

Jeff Bezos is fond of saying something to the effect of ..we want to sell the same thing as everyone else, but because we run more efficiently than they do, we can sell it cheaper. So if they want to have a price war, they'll go broke 5 percent before we do.

He's signaled to the world his intentions and his willingness to be a fanatic in pursuit of them. Now, how crazy is google willing to be as it enters the cloud computing market? How deep is its capacity to suffer? And remember, there's a lot of catching up to do since Amazon has been in the market since 2006.

In this game theory game of chicken, my vote is with crazy Jeff Bezos. That dude's a fanatic!

Confirmation Marketplaces and Ideological Amplification

Here's a thought in the early stages of baking in my mind...

In his 2009 book, The Big Switch, Nicholas Carr describes a experiment in which researchers brought together one group of politically liberal-minded folks and an off-setting group of conservatives. They surveyed each participant beforehand to understand his pre-existing views on topics such as same-sex marriage, affirmative action, and global warming. This was the baseline. Then they put the liberals together in one room and the conservatives in another and basically said talk amongst yourselves.

When discussion time expired, the researchers surveyed the individuals again, asking the same questions as before. How did the discussion with like-minded participants influence the initial views as expressed in the baseline questionnaires?

In short, people's views became more extreme and more entrenched on all three issues. The liberals came out more liberal, and the conservatives came out more conservative. 

Deliberation thus increased extremism...every group showed increased consensus, and decreased diverstiy, in the attitudes of its members.

The researchers came to call the effect ideological amplification. It's one of those funny wiring glitches of the human brain, and its effects go far beyond matters of politics. 

Throughout the weekend I found myself thinking about this tendency and its potential to create trouble. If you're in a profession that requires complex and nuanced logical thought - think scientific discovery, philosophical truth-seeking, medical diagnosing, investing - it's imperative that you find ways to root out the bias that inevitably creeps into your process of thinking. You must design thinking mechanisms for identifying them and then formulate the discipline to root them out.

Yet this is hard to do. Very, very hard. It's so difficult to challenge your own ideas. Our natural tendency is to find ways to support what we're thinking, not to disconfirm it. And this becomes more true the more we develop the idea, especially if we begin promoting it to the world. 

And since we're social creatures, too, we often take our ideas to the world in search of support. It's a rare person that takes his ideas to groups of people that are likely to shoot them down. More often we take our ideas to Confirmation Marketplaces...supporting family members and like-minded colleagues. Or industry conferences, email listservs and online forums whose tendencies we already recognize to be aligned with the bent of our existing thoughts. 

What happens here, and I don't think we sufficiently account for this in our thinking process, is ideological amplification. These groups and forums become places for us to feel better about what we're thinking. To confirm our existing thoughts - and often to promote them - rather than challenge them. 

Such confirmation is probably fine if you're idea is already well-threshed out and true. But more often than not, the ideas require a healthy dose of intellectual pummeling to verify and/or deny the reasoning behind them. Disconfirming challenges to off-set our natural confirmation biases. If we seek out the echo chamber of confirmation marketplaces, we're not likely to get that.