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How To Play With Chaos (4 Laws)

How To Play With Chaos (4 Laws)

Summary


Until you make the unknown known, it will dictate your life and you will call it "fate". We live in a world of complexity and chaos — you either drown in it, or you understand it.

How do you understand complexity and chaos?

Through the use of mental models. Mental models are how we understand the world. Not only do they shape what we think and how we understand but they shape the connections and opportunities that we see. Mental models are how we simplify complexity, why we consider some things more relevant than others, and how we reason. A mental model is simply a representation of how something works. We cannot keep all of the details of the world in our brains, so we use models to simplify the complex into understandable and organizable chunks.

Today's video is the first of a new "mental models mini-series". I plan to release new videos weekly that cover different mental models I use to understand the world and make decisions. 

Today's mental model is "Chaos Theory", understanding the 4 universal laws from which infinite complexity emerges. This is a biggy! One video you seriously don't want to miss!  

Check it out and let me know what you think in the comments?


Here's what we cover: 

1. "Mental Models" — the thinking tools billionaires use to understand the world they live in and how to influence it. 

2. Why I'm releasing a "Mental Models Mini-Series" where I share different mental models that I use to make decisions and understand the world around me. 

3. Today's mental model: Chaos Theory — how to deal with unfathomable complexity, uncertainty, and chaos.

4. Why humans are bad at understanding causality and complex, non-linear, dynamic systems (and why it's of extreme importance). 

5. 4 Universal Laws: Why all complexity arises from 4 simple laws. 

6. Law One: Constant pull towards entropy. 

7. Law Two: Sensitivity to initial conditions.

8. Law Three: Importance of feedback.

9. Law Four: Resulting non-linearity.


What did you think of this mental model? Do you want more videos on mental models? Let me know your feedback in the comments below...

To Your Success!

Sam Ovens & the team at Consulting.com.

Transcript / MP3

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Hey, everyone. Sam Ovens here, and in today's video, I want to explain how to play with chaos in business. What I mean by that is how to really deal with complexity and uncertainty and basically deal with chaos. Really, if there's one massive thing that I've learned from being in business so far, it's that you really need to be good at dealing with complexity and chaos because chaos is just everywhere. And the deeper you go in business, the more chaos there is, the more complexity there is, and you really have to get good at making things simple and understanding what's signal and what's noise, and also developing a collection of mental models that you can use to observe the complexities and the chaos through. They're like lenses that you can view things through. When you view what most people see as just absolute chaos and uncertainty, when you develop some mental models and you get used to using them, you can look at that chaos through a lens and it makes things simple and understandable for you. When you have that kind of comprehension, you're able to come in and make decisions and understand what's going to happen as things unfold, and you really get better at making decisions. You get more accurate. You're able to be right more often, which is important. You're also able to just deal with the unfathomable complexity because if you look at everything in the detail, like everything up close, and if you listen to every conversation and every comment and every little data point and every metric, you will get lost and you'll drown in complexity. What I really want to do is cover some mental models that I've used and continue to use in business and in life that have helped me a lot. I think this is going to be a cool series that we can roll out on YouTube on my weekly blog videos, where in each video I kind of explain a different mental model and what it is, how it works, how you can use it, how you can adopt it, and when the right time to use that model is. My hopes in doing that is that, one, I show you a bunch of different mental models. You can adopt those, and then you can use them yourself for dealing with different things in life and in business. In today's video, the one I want to cover is really how to deal with chaos. Chaos is, it's something that's very fascinating. A lot of the time, we see things that are happening in the world and we think we know what causes it or we don't have any idea what causes it, and what's fascinating is when we think we know what causes it, it's often never that and we're wrong. Then when we don't understand what it is, I mean, there is still a cause. Humans are very bad at understanding causality and understanding complex, dynamic, non-linear systems, which is basically everything that is worth, or everything that you should understand is basically a complex, non-linear, dynamic system. So you really need to get good at this stuff. If you want to be a good human, if you want to be a good businessman, you really need to understand it. I'm going to attempt to make things really, really simple in today's video. I'm not going to go into complex stuff. I'm going to try and make it as simple as possible. When you're dealing with chaos and uncertainty, you need to understand the four rules that really govern everything in the universe that, like ... Everything in the universe. I mean business, your human body, your mind, your team, your products, your market, your niche. Everything you could possibly observe in the universe, it follows these four simple rules, and I cover them right now. Number one, the first one is entropy. What entropy is is it's basically disorder and chaos. What you need to understand is that there is a constant pull towards entropy. It doesn't really matter what we're doing, there's a constant pull towards this. For example, a human body ages and it deteriorates over time. That is a constant pull towards entropy. Aging is entropy. If you've got a car, it's going to have a constant pull towards disintegrating. It's going to rust. It's going to get corrosion. It's going to wear out. No matter what it is, even a pair of running shoes, they're going to deteriorate over time. That is like the constant pull that you're working against in business, and it doesn't matter what it is. If you create a product, there's going to be a pull towards entropy. If you're working on your skills, if you're working on your mindset, if you're working on your health and your fitness, if you're working on your sleep, no matter what you're dealing with, it is always going to be pulling towards entropy. I'm going to explain these four rules, and then I'm going to give you some actual examples in business and in real life so that we can really cement these in your mind. The second one is initial conditions. Can you see that? Cool. So initial conditions are basically the factors and basically the experience that different things had in the early stages when they were created. So, for example, you've got initial conditions for when your company was formed. When you form your company, the first few hires you make and the environment and the culture and the principles and the mission that you form when that nexus really is just coming together, those are the initial conditions that your company is formed on. Your initial conditions as a human would be the family and your home and environment and school and social circles that you grew up with. Those are the initial conditions of a human. If we look at different plants in nature, or different animals in nature, their environment and the different factors of their environment, those are the initial conditions there. Why it's important to understand initial conditions is because everything has a tendency to self-replicate. What we see is that when the initial conditions are formed, for example, let's say a company, and this one's a fascinating one. Let's say, let's look at Facebook. Facebook right now, it's having a lot of problems with privacy. A lot of people are up in arms about privacy with Facebook and all of this. Really, if you want to understand how this has happened, all you need to do is go back and look at the initial conditions that Facebook was formed on. If we look right back at Mark Zuckerberg when he was at Harvard, there was privacy concerns with Mark Zuckerberg at Harvard. He almost got expelled from Harvard because he created some kind of online service where you could ... I think it was called Facemash or something. I might get the name wrong, but he basically created some kind of thing at Harvard where you could see images of other students and basically rate them whether they were hot or not. How Zuckerberg got this information is he basically hacked into the Harvard server and he pulled all of this information, which was private, from there and displayed it on this application. That was a privacy violation and he almost got kicked out of Harvard for that. Zuckerberg has had this constant run-in with privacy since before Facebook was formed. Then when Facebook was formed, it's always been privacy. If you look back throughout Facebook's history, they've had constant issues with privacy. Really, if we look at the initial conditions there, we can kind of see exactly what's going to happen later because what happens with initial conditions is they have a tendency to self-replicate just at larger and larger and larger scales. You imagine a pattern that exists at a very small scale. Well, with time and with scale, all we see is just an extrapolated, magnified version of that pattern. It just gets more and more extreme. That's how we can see that. This is why it's so important in business to pay attention to initial conditions. One thing that is so important that I don't think anybody thinks of is their first few hires and their culture and their principles and their vision and their mission. These different elements come together to form the nexus, and how that comes together in those initial stages dictates everything, and I mean everything. If you want to look at Google and how it was formed at that small scale, they were ruthless about only hiring the best talent. They would hire, on average, one person for every 10,000 resumes that they received, and so it was painfully slow to make these hires at the start, but now what we see with Google is a massive, like one of the world's biggest companies that is a self-replicating talent machine, probably some of the smartest people in the world work at Google. I think last time I looked, there was 98,600 of them full-time employees at Google, and all of them are of an extremely high standard. Now, how did they get to be like that? How did Google build such a massive self-replicating talent machine? You just need to look at the initial conditions. How did Google organize so much of the world's information? Well, you just need to look at the initial conditions. What was their mission statement? What did the founders believe in? Also, what were their standards on hiring and who were the people on the team, and what were their principles and values? Then if you understand that, then you can see what's going to happen at a later stage. It's like a fractal pattern, and a fractal keeps repeating itself. This is exactly what happens in the initial conditions. A lot of entrepreneurs do not pay any attention to this. They think they can cheat their universe like, "Oh, we'll just hire some really bad people. We won't have any principles, and we'll just do some dumb shit and piss off some customers and things, and then later on we'll change it round." Never happens. Also, I watched this documentary called the Fyre Festival, and it's ... Actually, that's not the name of the documentary, but if you Google "Fyre," F-Y-R-E, "Festival documentary," I think there's one on Netflix and there's one on Hulu. Both are good, but this guy was like a massive fraud and he basically held this festival, hyped it up to be this thing that was going to be the best festival in the world and it turned out to be the worst festival in the world. If we want to understand Fyre Festival, all we need to do is look at that guy's initial conditions. What did he do before that? Well, he just ripped off a bunch of millennials, promising the world and giving them nothing, so of course that's what he's going to do at a larger scale with Fyre Festival. These things, there's always ... The initial conditions tell you a lot, and so things to take from this is, one, pay attention to the initial conditions. Like pay attention to your hires. Pay attention to how things are forming because they have a tendency to self-replicate. As hire As, and Bs hire Cs, and Cs hire Ds. And if you have Ds, you're fucked. Really, if you have anyone other than As, you're fucked. Really, this is something a lot of people don't pay attention to. Once you get, because of number one there's a constant pull towards entropy that you, as an entrepreneur, you have to be combating entropy everywhere. We have a standard in our company that we'll only hire As, and then once we have one, the next hire must be better than our existing hire. When we have like our software engineers, once we've got a really good software engineer, the next software engineer we hire must be better than that one. If they're just as good or worse, we will not hire them. This is an anti-entropy strategy because what it is is it's saying that we're not going to even accept the same because there is a constant pull towards entropy anyway that even if we try to just get people that are the same in terms of talent, we will go down. There's no such thing as maintenance in the world. You can't maintain your body and it will live forever. It's not going to happen. Even if you try your hardest to maintain, it's aging. Sure, you can do things to combat it and not age as fast, but there's no maintenance in this world. There is only entropy. In business, you can do some things to combat it. One of them is to constantly lift the standards of everything, so once you think you've found the smartest people in the world, the next people you hire have to be better. Then once you think you've released the best product you can possibly release and you've given it everything, and it is the best by a large margin, the next time you release one, it has to be even better than the last one was. It is a constant trying to make everything better. Because there's a constant pull towards entropy, we have to do this. Same with initial conditions. You want to really pay attention to these things. For those people who have used Facebook ads, so we see both of these things with Facebook ads. Entropy, I mean, how long does an ad last before it starts to go down and then die? Not very long. Facebook, entropy occurs on most people's campaigns that I see after about five days, it starts to go down. Most of Facebook is fighting entropy, and we see this happen there. But we also see initial conditions with Facebook. Facebook even has this thing that it says "learning." When you first launch and ad set and you're optimizing for conversions at the ad set level and you set a conversion, it might be leads or opt-ins or something, so that algorithm is going to start learning. What it's basically doing is it's grabbing a combination of variables like audience, image, and ad and placement and time of day, and different cross sections of that audience, and it's basically taking these elements, and it's trying all sorts of possible combinations and arrangements of these variables, of which there are many. It's taking these little samples, showing them to people, and seeing which ones work the best. By best, I mean show that someone's going to convert. It actually says in brackets "learning" when you first launch an ad set. This is initial conditions going on. Facebook could just say in brackets "initial conditions occurring," so this is what's happening. I sometimes refer to this as the Garden of Eden phase that a Facebook ad is going through. So in the first one day to four days, those are the initial condition that are happening, and those are very important. What you'll notice is with Facebook ads, you can take an ad and an audience that works. You know it works because you can see it. It says it's working, and you can try this experiment yourself. Then just duplicate that ad set. It's a carbon copy. It is identical in every way, shape and form. Then we launch it, and the duplicate doesn't work. So this confuses the hell out of most people. Their brain just goes boom because they're like, "How does this work? I just saw. I know this works. I can see it's working, and I created a carbon copy of it and it doesn't work." This is why you need to understand chaos and initial conditions and entropy. Why does that happen? I'll tell you how it happens, and no one knows this at all. I talk to a lot of people about this sort of stuff, and I've never met anyone that really could tell me this. What happens is in those initial conditions, Facebook is basically ... I'll draw it so it makes a bit of sense here. Let's say you have an audience of 100,000 people that you specify, and you have an ad like this, and you also ... Let's say that's what happens. You create an ad and then you specify an audience that's roughly 100,000 people, and then you tell Facebook to go. Well, Facebook doesn't just take your ad and the 100,000 people and just run it like that. There is another element that no one really understands, which is the algorithm here. What the algorithm's doing is it's cutting a cross-section of this 100,000. So it's going to cut samples of all different parts of this. It's going to basically take a random sample of this 100,000. Then that random sample, let's say it's only going to be about 1,000 people. It's going to take a random sample of 1,000 of that 100,000, and it's going to take this ad and the different placements, because it could've put it on the newsfeed for mobile, the newsfeed for desktop, and it's going to try this ad with placements and it's going to try it with this cross-section of 1,000 people. It's going to be testing to see which people in this random sample of 1,000 are most receptive to this ad on what placement for the ultimate goal of this conversion event. It's going to calculate these things. This is the initial conditions occurring. This is when Facebook says in brackets "learning." When it's doing that, it will decide what cross-section of this 100,000 has the highest probability of working with this ad. Then it's going to basically cut out a cross-section of, let's say, it's going to cut a cross-section of 10,000, and this initial conditions period's over, and it's going to take the ad, it's going to show it to these 100,000, and it's going to use whatever placements worked best. Now, what this means is that it isn't actually the same thing. You're not just showing the same ad to the same 100,000 people because the first time you launched it, initial conditions occurred that were different because different people would've seen the ad and interacted with the ad. What happens is if somebody sees the ad and clicks on it and likes it, and they're not really the right person to see the ad, click on it, and like it, then that's going to skew the evolution of that ad and make it vector into the future not good. It's going to evolve into something that doesn't work. This is all due to something that happened in the initial conditions. The ad's the same. The audience is the same. But because of a few different actions that could've happened in the initial conditions stage, it skews the evolution of this thing and it doesn't work. Or if the right people see the ad, if the right people click on it, if the right people take these actions, then Facebook's going to select the right 10,000 people to show it to, and it's going to show to them and it's going to work, and it's going to have a good future and it's going to be profitable. This is initial conditions occurring on Facebook because this is what is going on, and most people don't understand this, but it's absolutely what happens. The same thing happens with a Facebook group or a community. The first people that you invite into a community, or the first customers you have in a customer community, and the culture that takes place there and evolves at that nexus stage, that is so important because all that's going to happen at a larger stage is just an extreme version of what happened in the initial conditions. If we take an ad set that evolved on Facebook and it had good initial conditions, we scale it, we're probably going to see it work well even at larger scales. But we take an ad set that had bad initial conditions, we scale it, we're just going to see an amplified loss. This just doesn't happen on Facebook. I mean, initial conditions happen everywhere. Hopefully, this is starting to make sense. But even if we get good initial conditions and the ad is good, the audience is good, the initial conditions are good and it works, we are still fighting entropy. Even when we get everything right, we still are fighting entropy. It's still going to have a pull towards chaos and it's still going to have a pull towards death. I can tell you that I've had some combinations that worked really well on Facebook. The longest that I've had in production lived for one year. Might've been a little bit more than one year, but it was a Facebook ad and it was called like "26-year-old punk." And it worked for one year. Most people's Facebook ads don't work for longer than about four or five days. This is an example of what you can do when you understand chaos and entropy and initial conditions is you can understand why things in a complex system do what they do, and you can understand how to influence and manipulate and improve your chances for success. Now, the third one is importance of feedback, and we'll just call this feedback. Now, feedback is extremely, extremely, extremely important, and most people don't understand it. How feedback basically works is it's best shown if I just grab, if I create a small diagram here. I think I can do it using this space. With any system, we basically have inputs, outputs, and processes in the middle. With any system, we put things in, processes occur, outputs come out. Now, outputs are basically like results and inputs could be different combinations of variables. Let me give you an example because this is an abstract thing. With Facebook, what are the inputs? Well, we have the ad. We have the images for the ad. Then the ad has headlines. We might have different variations of headline. Then there's audiences, and we might have different variations of audiences. Then there's other things like placements. Like is it desktop, mobile, right-hand side, or whatnot? These are the inputs we put in. The processes is basically what occurs on the platform, so the algorithm is taking all of these possible combinations. It's combining them in unique ways, and it's iterating through all of these possible combinations and finding the string in the combination of variables that is most optimal to achieve the end that we seek, which is like conversions, whatever conversion event we've specified. That's an example. Or inputs when you're starting a company, that is the people you hire. That's probably one of the main inputs. Who is on the team? Also, another one could be like what are the principles, or what are the core values? Also, what's the culture like and what is the goal? What is the objective? Based on these inputs, then the processes that occur, that's the day-to-day interactions and what's going on when these combination of things are combined. The output we see is basically the products, so what products come out? We also see what results come out, how many customers? How much profit? How much revenue? How much clients do they have? That is an output that comes from those inputs. This is basically how a system works, and this is how everything works. You can apply this system mental model to anything, the same way you can apply these different chaos theory principles to everything as well. But the point of what I'm saying with here is actually through a feedback, so what is feedback? Well, this is where it gets interesting. With most systems, we see outputs and we see inputs. One thing confuses a lot of humans, and it's this. Let's say here we have a chart. Let's say here is, let's put time here and then let's put results here. Results could be number of customers, amount of profit or whatever, and what we see is, and I'm just going to draw on this because that green is hard to see. We've got time, results. What we see with a lot of things is like a flat kind of trajectory. Someone might be trying to get more customers or make more money, but it's a flat curve, and it's not even a curve. It's just flat. Or it might be a steady decline. Maybe, if somebody is working really hard and making little incremental improvements, maybe they can get a linear improvement over time. Right? Most businesses, most people and pretty much most human beings, they produce linear incremental improvements or no improvements or decline. Really, no one really maintains. So this middle line doesn't really exist, but I'm putting it in here for an example. But then there's a few rare exceptions and their curve looks like this. It goes exponential. It has that hockey stick kind of curve to it. A lot of humans see this and they're like, "How does that happen? How does that occur? That's a really good question. How the hell does that do that? What causes that? Most people don't know, and I can tell you what causes that. Whenever you see something do that, it means that feedback is present. What feedback basically does is let's imagine that with the flat chart, or the one that's going linear up incrementally or linear down incrementally, that one will have a relationship where, let's say, we put in a one as an input and we get out a two. So we're trading ones for twos. We put in a one, we get out a two. We put in a one, we get out a two. What I mean by that is let's say that if I work for a full day and we count that as one, then I make 200 bucks. Then tomorrow, I put in a day, I make 200 bucks. I put in another day, I make 200 bucks. I put in another day, I make 200 bucks. This is how most people's life is and this is how most businesses are, or someone might know that if I make five sales calls a day, I'll get one client. Also, with Facebook ads or any type of paid advertising. If I spend a dollar on ads, I'll get out $2 on ads. You spend a dollar on ads, you get out $2 from ads, and you might spend the same or you might slightly increase your budget and you'll see an incremental curve. This is what happens with most people, and don't get me wrong. Trading ones for twos is pretty good, but it still doesn't give us this. It doesn't give us the exponential curve. So how do you get an exponential curve? Feedback. What feedback is is it's when we take the output and we feed it back around as the input. This is how we get exponential behavior. Now imagine this. I put in a one, I get out a two. Now, I get that two and I put that in here. I put in a two, I get out a four. Alright, now I get that four, I put it in here and now I get an eight. Then I grab that eight, put it in here. Now I get out a 16. This is how you grow exponentially and how you have one of these curves is you need feedback. That is when we have a system where we get out more than we put in, so you have to build one of those first, which is quite a bit of work, but that's what a business is. A business is basically an instrument where we get out more than we put in. It's net positive. We could build a business that is net negative, where we put in something and we get out less. Now, any system where we put in something and get out less is going to die quickly, so that's not what you want. What you want is a system or an instrument where you put in something, you get out more. That is net positive. That is a business that is profitable and that can function and survive. However, once you've achieved that, you want to play with feedback. You want to start taking your outputs and feeding them back around. Now, this is how I scaled my business a lot very quickly. I started out, in my first year I made $0. Then in my second year, I made about a hundred grand, and then I think we grew to like 500 grand, and it took like three years to get to about 500 grand. Then, within four and a half, five years, we're making $18 million a year, and now we're up at like 30 something million a year, and only really like six years have accrued, so that's pretty exponential. How does that happen? I can tell you. What I did is when I started to make money, I reinvested that money and I had built instruments where I could get out more than I put in, so I basically created funnels and processes where I could feed them with ads. Let's say that my inputs is traffic, web traffic, clicks, people on the internet clicking on things. That is my input. What is my process? This triangle. That would be like the funnel that I build, so for consulting accelerating, it's an automated webinar and I built that process and that sequence. Then what was the output? The output was getting customers at a profit, so I could spend a dollar on ads and I could get out like $5 in revenue. And I could put in a dollar, get out $5. Put in a dollar, get out $5. I started with small budgets, like $50 a day then up to $100 a day, and I just kept feeding it back around. I got it up to the point where we were spending $40,000 a day on ads. And people don't understand this. I think a lot of people never are able to reinvest their earnings because they never build a system that's net positive anyway, so your first priority in business should be build a system or an instrument that's net positive, where you get out more than you put in. Then figure out a way to feed that machine, something with a lot of volume, something like paid ads, something you can scale. I like paid ads because it's a tap that you can open a little bit and just get a trickle out of, but then you can open that thing right up and you can get a big flow. When you can get things to work at a small scale and when you get the initial conditions right, and when you build a system that at a small scale is net positive and it gets out more than you put in, then what you can do is you can just open up the tap and keep pumping it and keep feeding it back around. This is what you do. Then, this is also why there's that quote from Albert Einstein that says, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." This is true. Einstein knew about what we're talking about here. Einstein knew about initial conditions and feedback. There's a reverse one of these, and that is debt. If you have debt, then I borrow a dollar today, then in the future, I owe more than $1 for that $1 I took, so it's net negative. Then that accumulates interest with time, so as time accrues, I owe more and more and more money for that dollar I took. It's a really bad deal. So if you have debt, you go down, but if you have savings that earn interest, then it's going up because if I have a million dollars in my bank account and I'm earning 10% interest, then I'm going to have at the end of the year, 1,100,000. Then the next year, I'm going to earn 10% on that, and it's going to keep growing and keep growing and keep growing. If you look at Warren Buffet's net worth over time, you'll see Warren Buffet's net worth curve and you'll see it looks like this. It's exponential over time. It has that hockey stick nature, and it's because Warren Buffet understands feedback really well. He understands all of this. Basically, what he's tried to do is create Berkshire Hathaway as an instrument that can take in capital and, over time, produce more capital than is put in. It's net positive. That's why Berkshire Hathaway, its shares have gone up exponentially. Warren Buffet's net worth and all the shareholders of Berkshire have gone up exponentially, and it's because buffet understands feedback. When he makes money from something, he doesn't take it out and buy a Lamborghini. Alright? If you take the money out of the system and you spend it on something stupid, like a Lamborghini, there is no feedback. Let's say you make 100 grand. If you take that 100 grand out of the business and into a personal account, now you owe taxes. You owe a lot. If you pay taxes on that, that's going nowhere. You may as well light that on fire. Now you've got a car, and that car isn't going to make you any money. Actually, that car's going to take your time, energy, attention and focus away from your business, which is going to double-fuck you because now you've paid a lot of tax and you also don't have money in the business because you took it out, and worse than that, now you've got to maintain this car. It needs insurance, it needs gas, and it needs to be cleaned, and it needs maintenance and all of that, so it's going to cost you more money over time. Then when you sell it, you're going to get back less than you spent on it. Not only that, but it's going to take your time. Because you spent so much money on this thing, you're going to say to yourself, "I need to use it to get my value's worth." Now, your using of it is taking your time and energy and attention and focus away from the company, so you're getting screwed on about five different dimensions. That is why people like Warren Buffet don't do stuff like that, because they understand feedback and they understand that you want to keep the energy within the system and you want to keep feeding it back around. Once you have something that works like that, you don't take it out. You keep feeding it back around and feeding it back around. There's a good observation of a feedback loop present in nature, or in the world, which I'm sure a lot of you have heard yourself. I'm sure you've seen someone with a microphone and they've turned it on, and then there's the speaker like right next to the microphone. A microphone is the input. It's taking a sound wave from someone speaking and then it is the process is it's amplifying it. It's taking that sound wave and it's grabbing that pattern, and then it's boosting it right up. Then the output is the sound waves coming out of the speaker at an amplified rate. Then what happens is because the microphone's sitting next to the speaker, it comes out of the speaker and back into the microphone. Now because it's come into the microphone again at an amplified rate, now it's amplifying it even more. It comes out the speaker, boom, and again, and it's going voom, voom, voom, voom. That's why you'll hear a feedback loop occur with the microphone. It will go, "Boop, boop, boop, boop," and it keeps going bigger, bigger, bigger and you swear the thing's going to blow up. Sometimes it might. Other times, someone might quickly turn it off. That is a feedback loop. These things, while what I'm explaining to you here are concepts, these are abstractions and mental models that we can use to understand the world around us and understand the nature of things and how we can interact with them and influence them, but really this stuff, it happens. And you can prove it with simple little experiments. You can prove entropy. You can prove initial conditions, and you can prove feedback. I've given you a lot of different use cases, too, and examples of real life companies, people, situations so that you can understand these. This is part of what I'm trying to teach you in this new little series is the power of mental models, and the power of seeing chaos and seeing complexity, and seeing things that most people cannot comprehend and run away from and hide in their room and eat McDonald's and watch Netflix because it's just too scary. Well, you can understand these things if you have the right mental models, and then it's actually fun. Life is like a little experiment where you get to tinker with things and you get ... It's really quite fun. It's like playing a video game with life. Now, let's talk about the fourth one, which is non-linearity. We've kind of already covered this, but when we understand that there's a constant pull towards entropy, disorder, we have to have methods for fighting entropy. We have to always be thinking, "How can we protect this against entropy?" There's initial conditions. In the initial stages, when a combination of elements come together and form a nexus within an environment, then whatever happens at that moment in time in those initial conditions, that is of extreme importance, and it's something you need to pay very close attention to. Whether it's your team forming, whether it's your culture forming, whether it's you have a kid. If you have a kid, then those initial years are extremely important. Those are the initial conditions that the kid is experiencing. If you look at a lot of serial killers and then look at their upbringing, it's pretty haunting. A lot of the time, we don't see these serial killers that had perfect, normal upbringings just go off the rails. There's generally initial conditions that have come in and had massive hand in this. It's like the invisible hand. When you understand chaos and you understand all of these things, it's like you understand that invisible hand and it comes in and it moves things and it influences things that most people can't see. But when you learn how to see, you can really see the invisible hand doing its thing and you can influence it, too. Then we've got feedback. Now, feedback and exponentially help you, but it can also exponentially harm you. If we use debt, because it's an instrument that has feedback attached to the, because the output comes back around and it becomes the input. For example, if we earn interest, it's going to have an exponential helpful effect. However, if we have debt, it's going to have an exponential harmful effect. Another one is like your mindset, so like your psychology. Imagine this scenario. I actually see this. This is a phenomenon that has been observed a lot. The relationship between the birthdate of children and their athletic performance and their athletic career. I forget the exact dates but if you Google this you'll be able to find it. If children are born near the start of the year, then that means that they get a full year's head start of other children that are playing in that class of sport. Basically, the way sports work is in early, and I never paid much attention to sports, this is why my explanation of it is bad, but you'll get the point I'm trying to make. When they're forming teams and they're forming different competition levels, they use your birthday and when you were born to see if you should be in that grade or that grade. Children who have a birthdate, I think it's towards the start of the year, they get more practice time compared to other children who are at the end of the year, so they've got an unfair advantage. When you have an unfair advantage in the initial conditions, it is amplified with feedback. The result of that is non-linearity. Let me explain this string. You have a bit of a headstart, a bit of an unfair advantage. Not huge, but a bit because you've been practicing longer. You're a little bit bigger, you're a bit stronger than the other kids. What happens? Well, at practice, because the coach quickly realizes, "Wow, that kid, that kid's good." So now coach is giving you additional attention. Now, with that additional attention, you start to think, "Whoa, the coach is giving me additional attention. I must be good." Now that you think you're good, you start playing better. Now the coach is like, "Whoa, I saw that I gave that kid attention and it made him way better. Now I'm going to give him more attention." Then the kid thinks, "Oh, I'm getting more attention from the coach. I must be really good." So now they think they're even better, now they start playing even better. Voom, voom, voom. Feedback loop is occurring. Now the other kids on the team are like, "Whoa, the coach really likes that kid and that kid was good and now he's way better." So now the other kids on the team praise that kid, and now that kid thinks he's even better. Feedback loop. Now what happens is during game time, because all the other kids and the coach think that this kid is better, then the other kids pass the ball to that kid more frequently, more often, and the coach keeps that kid on the field longer than other kids and puts him in the position where he's going to learn the most. All of this happens. Now the audience in the crowd is watching. They're observing this and they start talking about this kid. Now the team thinks the kid's even better. This keeps going. Now, some talent scout sees the kid who's way better than the other kids, and then they offer that kid a role in a position in another, more professional team. That kid gets there and then it goes boom, boom, boom, boom, boom, up, up, up. Now, you get someone like Michael Jordan or something. So that explains what happens here. Initial conditions, that was the first little practice round and this one kid had a small advantage. Not very big. Small. But a small advantage in the initial conditions gets amplified exponentially with feedback, and the result of this is non-linearity. Non-linearity is basically a curve that's exponential, or it's basically non-linear. It's not a straight line. It has a curve to it. This is what happens, happens everywhere. I also saw that there was a study done on goldfish and the initial conditions. If you ran an experiment and you had some goldfish that are the same species, same age and everything, and you put them in a pond, they're identical in every way, shape and form, even age, everything. However, one of those goldfish has a slight size advantage. For whatever reason, it's just a little bit bigger. Now what happens? Well, when the goldfish swim to the food and try to get it, the big goldfish can beat them away from it and get it. Now, the big fish is eating more food. When the big fish eats more food, it gets bigger, bigger, bigger until you end up with this one massive fish and then a bunch of other fish. The difference in size was not that extreme in the beginning, but because of feedback from initial conditions, we see non-linearity. So that is chaos, and this is a excellent mental model to use to understand the world and business and yourself and your mindset and your psychology. Once you start to think like, "I'm good at doing this," and then the result of you actually doing it proves that you are good and you do get good results, then that comes back around and now you're like, "Whoa. I actually am good." Now your output is even greater, and now you're like, "Whoa, I'm really good." Then it keeps going like that. So sometimes just getting an initial win, or that first ... I remember my first ever client. For one year, I had no clients, but that first client I had just totally changed the game because now I had this confidence. Then when I had that confidence, I got more clients. Then I had more confidence, and it's just gone around and around and around like this. So it works with skill. It works with your mindset and your confidence. It also works with money and finances and growing your company. It also works with products. It works with everything. There's always these things: entropy, initial conditions, feedback, and non-linearity. And you want to learn to think like this. Whenever you are observing something, try to understand what is going on. Try to understand what is the system here? What are the inputs? What are the processes? What are the outputs? Is there feedback present in this thing? And if there is feedback, what is it? Because whatever things have feedback attached to them, that is something that is going to cause massive shifts and changes. Whenever feedback is present in a system, you see massive things happen. For example, I always try to engineer feedback into my company. An example is paid advertising. We build something that is net positive, where we put in a dollar, we get out more than one dollar, and then we start feeding it back around and we just take it to the moon. We take it as far as we can, but it goes further than that. Then when it comes to hiring, I want to make sure that we hire the smartest people and that our standards are excruciatingly high. Some people might argue way too high. Then by doing that, we attract those people, we get those people on the team. Now our results are better. Now our return on investment is better. But now what happens is we've got more money and we've got people on our team that are really smart, so now we can afford to pay and get even smarter people. Then we get them and then that happens again, and now we can afford to get even better people and even better people, so you can see how this happens. Then the same thing with products. Like I release a product and then we have customers go through it, and then customers give feedback. With that feedback, it's even called feedback for God's sake, customers give feedback. You can choose not to listen to their feedback, and then you won't have a feedback loop. But if you listen to it and you think, "How can we make this better?" Then that feeds back around to the new version of the product, the new version of the course. Then you make it even better. Now you've got even more feedback and it keeps going like this. This is why every time I release a new version of a product, it gets better, better, better, better, better because I'm feeding it back around. Then it goes deeper than that. It even comes into engineering network effects and things. So as we release content and we grow our website's content, then we get a higher ranking in Google for different search terms. The higher our ranking in Google, the more traffic we get. The more traffic we get, the higher our ranking in Google. There's a feedback loop here. Then the more money we make. Then the more talent we can get. Then the more rankings we can achieve, the more traffic we get and it keeps going like this. It's a flywheel, a feedback loop. And even more than that, we try to get testimonials from clients. We help a client, they get testimonials. Well, we get testimonials from them. Now, other people thinking about buying this see those testimonials and then they're like, "Okay. I'm going to buy it." Now we get a testimonial from them and then it grows exponentially. That's why we've got like 3,500 testimonials. Feedback. More than that, we even have a refer a friend program so that every customer we get, we get a testimonial from them. We get some money from them, which we can use to improve our talent and our products, but we also get feedback from them, which we use to improve our products. But we get more than that. We even ask them to refer our product to other people, and then it grows. There's network effects present in the system at that point. We're basically trying to grow the viral coefficient because if you get a viral coefficient of greater than or equal to 1.5, then you don't need any outside influence for a system to grow. Facebook is a prime example of that. Facebook never spent a dollar on ads or anything like that because if someone got onto Facebook, they would invite other people onto Facebook. Then when they invited other people onto Facebook, they invited other people onto Facebook. And so it went like this, and so that's how we saw it explode and get to like 2 billion users or whatever it's got right now. Network effects are a function of feedback and all of this. So that's basically it for this video. How to play with chaos in business, how to create abstract mental models of the world that you can use as a lens to view complexity through so that you can understand it and you can predict it and you can influence it and change it, and be right more often. Not always, but more often. And use entropy, initial conditions, feedback, and understand non-linearity as a function of these things. So that's it for today's video. Let me know what you think in the comments below. Do you like these mental model videos? This is the first one I've done on a mental model. Now, if you like them and you tell me through feedback, remember this, then I'll make more of them. But if you tell me you don't like them, I'll make less. Might make none. So let me know in the feedback and let this system do its thing. Also, click that like button if you liked it and then subscribe. There's a subscribe button beneath. Click subscribe if you want to receive the other mental model videos that are going to be coming out if that feedback is good. I release one of them every week on a Tuesday. So that's it for today's video. Hope you enjoyed it. Give me some feedback, click subscribe, and I'll see you in the next one soon.

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