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August 24, 2005

Words of wisdom from John Kay and Charles Babbage

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Yesterday's Financial Times column by John Kay explored the nature of probability and its underlying power in determining how things turn out.

He wrote:

    The strongest argument for learning about probability theory is that people who don't understand it lose money to people who do.

    On those African savannahs where modern brains evolved, rational calculating individuals won money at dice from hunters whose irrational exuberance brought in the wild game that fed the tribe.

    The same phenomenon today explains, not just the race track and Las Vegas, but why derivative markets are so profitable — for the people who run them.

Tell you what: those three sentences alone are worth the price of a year's subscription to the FT.

But wait: there was more in the very same issue.

From Morgen Witzel's column:

    But it is not just creation of knowledge that is important.

    Knowledge must circulate through the business so that employees can do their jobs.

    Here the "lifeblood" metaphor becomes particularly important.

    Preventing the flow of knowledge can be a little like blocking an artery.

    People who do not know what is going on in the rest of the business can feel cut off and their performance suffers.

    The implication for management is that knowledge has to be kept circulating.

I am struck by the similarity of knowledge to money: both have no value when static but only acquire power in motion.

James Buchan's great book on money, "Frozen Desire," took this as its stepping–off point.

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If people are not willing to exchange and accept a given currency it has zero value, regardless of what its holders may believe.

Likewise with knowledge: if one person has it but shares it with no one else that person may benefit but society as a whole does not; furthermore, the death of the individual/loss of the knowledge leaves that society unchanged, no better off than it was originally.

If the knowledge has been transmitted to others, however, it becomes leveraged by incremental improvement, somewhat akin to how source code, when open, can be improved to the benefit of the person who initially created it.

Those who continue to create barriers to access to information will be swept aside as the tsunami–like sweep and power of the distributed intelligence of the collective web washes them away.

Just as a shark will die if held immobile while immersed in still water even though the water is saturated with oxygen, so will those with information who sequester it and hinder its flow perish in the midst of plenty.

The allusion in the headline of this post to Charles Babbage draws on Witzel's noting that Babbage,

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the mathematician and economist better known as the inventor of the computer in the nineteenth century, "argued that better use of knowledge and technology could both make businesses more profitable and raise the standard of living for workers."

August 24, 2005 at 10:01 AM | Permalink


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Comments

After I read an interesting article recently in Smart Money about the burgeoning field of behavioral finance, I had to do a little research last night about it. (I compared the stock market to a modern jungle too!) I found some interesting information - including some terms for the probability factor that you site above:

http://everythingandnothing.typepad.com/mississippi/2005/08/dont_fight_the_.html

And I don't read the WSJ, the NYT or the Financial Times anymore. I trust you now, Joe. I know you'll tell me if there's anything there I should know. Thank you, thank you, thank you!

Posted by: Shawn Lea | Aug 24, 2005 10:56:29 AM

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