The Voltage Effect

Summary

According to John List, the “Voltage Effect” is a compilation of 5 “vital signs” of the scalability of a business idea.  He describes this effect in his book of the same name, together with a collection of miscellaneous tips for how to scale up well.  His writing comes from real-world economics experiments run over several decades.

The 5 vital signs are:

1. No false positives in small scale tests (get statistically significant results in the variables that matter), 

2. Have a representative audience in small scale tests (ensure representative sampling),

3. No reliance on hard to find human talent or resources (they get harder to find as you scale up),

4. No spillover effects (no unintended consequences that appear when scaling an idea up),

5. Improving unit economics (the cost per unit completed must stay flat or ideally go down as you scale up).

Tangible

• Always get a second (or even third or fourth) opinion before making a substantial medical decision such as surgery or intense courses of medication.

• A reminder about some classic economic theory: marginal thinking. Basically, the world is a dynamic environment and so, rather than thinking about the historical average when making decisions, it is important to more heavily trust recent results as the trend may have changed recently and so recent results will be better predictors of future results. 

  • Lachy’s note: there are a lot of caveats here, but generally it is true that trends are gradual and so looking at the most recent result of the trend is a good predictor of near future results.

Resonant

• False positives in early results of any experiment are dangerous so be extremely careful when selecting samples and analysing them.

• Independent replication or assessment is an easy way to remove biases in results or decision making. Eg. Have someone who has no skin in the game verify/decide.

• Quitting is for winners. Always generate additional good options to ensure good quitting decisions as you better understand your opportunity cost.

  • Lachy’s note: see also Annie Duke’s Quit.

Surprising

• There is experimental research showing that differences in competitiveness between women and men correlate to childhood societal structures (matriarchal vs patriarchal). See research about the matriarchal Khasi society in India. (Note I found it surprising that this data existed; I was less surprised about the conclusion.)

• Imagine what success would look like and then work backwards to identify non-negotiable hypotheses to test early. 

  • Lachy’s note: See also Working Backwards.

• Spillover effects at Uber were very surprising. 

  • When Uber tried to increase their driver wages they initially succeeded. However, as the wages were better more drivers joined which created an oversupply of drivers. Ultimately driver earnings returned back to the prior amount but with the spillover effect that drivers were working longer.

  • Separately, when giving regular riders discount vouchers, they initially got more riders but ultimately ended up with fewer riders due to not having enough drivers to support the increased demand resulting in poorer service.

Links

Check it out yourself! The Voltage Effect