Thursday, October 16, 2008

Success Master Skills: Entropy in Human Achievment, Part 2

Why Remove entropy from our lives?

I have two friends who are traders. One works day and night, listening to every news story on CNBC, subscribing to 10 websites with different price patterns, options strategies, stock picks, etc. This person often loses sleep keeping up with all the developments worldwide. He is an unending fountain of the latest economic, business, and political opinion on all aspects of the stock market, the state of the US dollar, interest rates, etc. etc. etc.

The other guy is a total bore. All he does is trade a couple of systems. Over and over again, that’s all he does. System says buy? He buys/ System says sell? He sells. He has no knowledge of who is being interviewed on CNBC. He doesn't subscribe to IBD, WSJ or FT. Nothing to say at all on the weighty subjects of currencies, trade, or the Baltic Dry Index.

Oddly, the second guy is doing better than the first guy. Why? Because he has removed vast amounts of entropy from his trading process. The amount of random energy coming into the “system” is small.

On a much more lofty scale, consider Warren Buffett and Charlie Munger, the avuncular billionaires of Berkshire Hathaway. Warren Buffett has made tens of billions of dollars restricting his investments to those he feels best fit into his “circle of competence”. He sees no payoff in pursuing investments that don’t fit into that circle. Classic entropy reduction. On the other hand, consider an example where a successful , high-performance achiever, basketball star Michael Jordan, decided to try his hand at baseball, a deliberate injection of randomness and disorder (entropy) into a successful career. The result was, predictably, a less-than-stellar outcome.

Why are high-performance people generally hard to reach, or even loners? Because they are consciously reducing the entropy in their lives. They reduce the flow of randomness into their lives by reducing access. High achievers have 1,2 ,3 things to do that are vastly more important than the other 90 things other people want them to do. They know the payoff from their highest-value tasks so, the elimination of a $10.00 task in order to succeed at a $1000 task is a no-brainer for them. The higher the value of the payoff from an activity, the more the high-achiever “loses” by concentrating on a lower-value task. This “loss” is also known as “opportunity cost”. This is the most obvious reason for reducing entropy: you reduce opportunity cost.

Consider McDonalds. Here is a classic example of entropy reduction. Could anyone have imagined at the inception of McDonalds that removing entropy from the production of a 10 cent hamburger would create a multi-billion-dollar industry? Staggeringly, that’s what the McDonalds brothers did. They focused their attention very tightly on reducing disorder in the area of food preparation. Not only did they drastically restrict their menu, but they painstakingly injected more and more order (“negentropy”) into the process, specifying activities down to the smallest detail. If that’s what entropy reduction could accomplish for the lowly burger, imagine what it can do for us in our areas of personal achievement?

One final example of the “why” of removing entropy: the concept of division of labor has been the single most colossal force in lifting mankind out of the primordial mud in which we have been trapped for a million years of dark, agonizing existence. From the very moment that the first “farmer” declared himself into existence, the well-being of the entire human race was drastically improved. Every single product we use, every idea we employ, every drama we watch on TV, every pill we take, is unimaginably better than anything we could create on our own, because they were created by reducing entropy: concentrating on “the one thing” instead of “the many things”. As labor divides, subdivides, and subdivides again, entropy continues to be reduced, the value of the work done increases, and mankind lifts itself p by it’s bootstraps.

Don’t believe me? I’ll cook for you sometime and you will beg me to return to my higher-valued tasks.

Here is a summation of the "Why" of reducing entropy:

1. Controlled attention leads to increased knowledge

2. Specified actions lead to more predictable results than unspecified actions

3. A quantity of energy directed into fewer channels leads to better output than the same quantity of energy directed into many channels

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