It is interesting how humans adapt to systems and even more interesting when you consider that humans created the systems. The idea I outline here has a remarkable parallel in Jaron Lanier’s thoughts about how people react to computers. It also may translate into thoughts about how much we pay CEOs.
Years ago in sailboat racing there was the International Offshore Rule. The IOR rule was, like all of the rating rules before and hence, intended to be a fair way to handicap boats that were different so they could race against each other. And racing rules like the IOR go through a predictable cycle just like businesses and cause people who think they are rational to do the most irrational things. I submit that the phases for sailboat rating rules are invention, adoption, popularity, optimization, insanity, and retirement; and bear a fair amount of similarity to business cycles.
- Invention happens about the same time the prior rule is in the insanity phase and one person wakes up one day and says that the current way of doing things is crazy and there has to be a better way.
- Adoption is when that one person comes up with a better way and convinces others to follow. Of course a better rating rule is no good to one person because the whole idea is to race against other people and without others – there is no point.
- Popularity comes about when enough people defect from the old rule to the new rule (in sailing this is usually a process of getting your boat measured so you can get the new rating number, and then switching to sail in races governed by the new rule instead of the old one).
- Optimization happens as the stakes get higher. Now that a lot of people are sailing under the new rule and their natural competitiveness causes them to make changes to their boats to improve their ratings. The funny thing about this is often the changes make the boats slower or more difficult to handle but the rating benefit more than offsets the performance handicap. That is right, racing sailboat owners voluntarily make their boats slower in order to be more competitive.
- Insanity comes at the extreme end of this cycle when people spend hundreds of thousands of dollars to have new boats build with extraordinary shortcomings that could only be induced by the rating rule itself. Strangely, and presumably for the same reasons that Jr. High boys find the outcome of flushing bleach down the toilet an irresistible attraction, this insanity phase can last for some time. Eventually though the seeds are sown for next rating rule and usually by someone we usually brand as a geek.
- Retirement of the old rule happens as the new rule gets to the popularity phase.
Followers of Schumpeter would call this a healthy market and a productive use of resources in the pursuit of higher performance. And they could be right. The most insane of the boats under the old rule really cannot convert to the new rule and get sold to outlying markets where the old rule has not yet run its course. Depending on how insane the insanity was there is a reasonable counterargument that the resources invested at the end of the cycle do not produce anything useful – excepting maybe creating a fertile environment for the new rule.
During the insane period of the IOR era the custom built boats had a distinct hollow section in the shape of their hulls where the measurements were taken that sucked the boat down into the water - so the boats were very squirrelly sailing downwind when it was windy. This hollow section and other elements of the rule induced the designers to put up massive amounts of sail area downwind with oversized spinnakers. So here you are going downwind in heavy wind with these giant sails pulling the boat forward while the back of the boat is getting sucked into the water by the hollow section and the combination would induce a death dance of wild rolls from one side to the other - and yes you can put the mast of a 15 ton racing sailboat into the water rather decisively.
There were only a few people on the planet that had the right combination of skill and bravado to drive one of these boats downwind in a breeze. You had to steer very aggressively and often times at the end of a roll, right before you could wipe out, the rudder would start to lose its effectiveness and the best thing to do was just let go, watch the wheel spin wildly and then decisively grab the wheel to reestablish flow over the rudder and send you down the next wave – if you were lucky. It was quite a thrill and even with the reverence in the business for accomplished downwind IOR helmsmen, most people were quite glad not to be driving. The strange thing is that the properly designed boats with clean lines needed less sail area, stepped up on a plane going downwind in a breeze, and actually got more stable. And they could be driven by mere mortals and with very little drama. So, who should get paid more, that crazy guy in the IOR boat driving like a madman while everyone else holds on for dear life, or the guy in the properly designed boat with almost no visible effort and the hearts of his crew beating hard because of the thrill and not the terror?
Bear in mind that when the IOR boat wipes out the race is pretty much over, and some big checks are going to have to be written to sail makers and the boatyard. And the boat not designed to the IOR rule? It would actually be going considerably faster through the water. This is why we pay CEOs so much these days – let’s hope someone invents a new rule soon and makes their skills obsolete.