Nerds…they know a thing or two so listen and learn
Monty Hall, John Nash and Kevin Spacy
Nerds…they know a thing or two so listen and learn
Michael Shea PA
Senior Partner | Business Broker @ Transworld Business Advisors
August 27, 2024
I’m a bit of a nerd….my father-in-law used to call me Socrates as I would go off on tangents of inane data points and history on topics we were discussing that I thought pertinent and relative. My father had the same curse…his golf pro called him “Brit” as in Encylopedia Britannica.
Let’s see if today’s piece can add some value with some inherently nerdy data points. Several years ago I attended a body of coursework sponsered by the M&A Source at Kennesaw State to secure my Certified M&A Professional (CMAP)certification. Hands down the best portion of the course was a portion where we discussed game theory.
To lead the couse the instructor plated a pretty well known scene from the film A Beautiful Mind:
In this scene, young John Nash and the other mathematicians are “vying” for the attention of a blond in a group of girls. Their amorous jockey couched in the theory of competition laid out by Adam Smiths’ Theories on competition and economics.
Que the music….Nash, after some thought states “Adam Smith Needs Revision”. He notes correctly that if all 5 of the men chase the one blonde (think of her as the diamond in the rough) they create competition for themselves and alienate the others…. canceling each other out and blocking themselves from their ultimate amorous goal ( I will leave that to your own imaginations) …he notes aptly that the odds of said goal increase for all if they go shift their attention to the other ladies…..now if the message here in is lost on your from a business standpoint well…stop reading as you are a lost cause.
Now for your brave souls for whom the lesson immediately became obvious lets continue:
NOW LETS NERD OUT ON VARIABLE CHANGE: “Let’s Make A Deal”
In mathematics, Variable Change is defined as a technique that replaces original variables with functions of other variables to simplify problems. The goal is to make the problem easier to understand or equivalent to a better-understood problem when expressed in new variables. What does that mean well watch this:
What the clip here outlines it what is known as the “Monty Hall Problem”. Now those of us old enough to remember The Price is Right here is how it worked:
Choose a door. You pick one of the three doors.
Monty reveals a goat. Monty, the game show host, who knows where the prize is, opens one of the other doors to reveal a goat.
Switch or stay? Monty then asks you if you want to switch your choice to the remaining unopened door.
Why switch? Because the odds switch….when one element is removed the odds/percentage shifts by some 33%…you should always switch your choice because the math changes.
Small Businesses should be very very attuned to both Game Theory and Variable Change. Let’s explore just a few examples of how they rear their heads in the SMB marketplace.
1: There are three pizza parlors: Qualitatively the same in product, labor costs, and cost of goods. But one has opened on a variable SBA loan that shifts with the rise of interest rates due to monetary policy at the federal level. Said rate hike not only impacts the business costs but also the costs of mortgages for their consumers, and the cost of their car loans (because Americans borrow…borrow a lot) Net effect is a decrease in sales for all three stores but the store with the heft debt hits bottom and bankruptcy faster. Variable Change
2: Three realtors are in the market (think 2007 -2008). Things are good volume high…2 of the realtors pivot up to doing mega-mansions and big houses because they are relatively new stick with the smaller to median houses servicing consumers with jobs in hospitals, trades, and civil service. The great recession hits and the larger volume of homes stop selling and the jobs of those consumers go away as they are not in demand. The broker who serviced Main Street thrives not only due to the segment that they are in is still doable under the refined finances but because they serviced a market and built relationships in a market when the others did not…allowing them to thrive and others to falter and fail. GAME THEORY
3: (My all-time favorite) Covid occurs…Florida for political reasons is a state that remains open. Millions of people move to the state driving housing costs up. Florida is a Big State but due to being a peninsula the mass of housing and metro development is coastal. Thus the millions that are added (variable change) drive the cost of housing through the roof. Smart investors move inland between the two major metroplexes recognizing that labor from an affordability factor will have to move there. Developers plant apartment complexes quickly on the massively available land to catch the opportunity driven by population change. Those with real estate holdings bought on the cheap decades early see massive price changes and arbitrage in their land value. Variable Change
All around you these two theories play out but we allow our human emotions and desired to hedge our ability to use them to see opportunity and crises alike. Math and reason are great razors to assist us if we only use them to tame our human tendencies and natural inclinations.
For more on small business contact Michael Shea at 321-287-0349 or email him at mike@tworld.com