Friday, February 27, 2009

Another good observation from Robert J. Shiller's lecture:
...insurance, like any other risk management device, is an invention. Every risk management device relies on a design and the design is usually complex and has--it all has to work together. In order for a design to work well we have to have every component there. If one component is missing we may have a failure. All these components have to be compatible with each other and it has to work according to a plan, which ultimately is informed by this theory.
What's important here is the completeness principle. In order to perform its function, a system has to be complete. This may sound very trivial, but even experienced inventors forget about the principle. Some are not even aware of its existence. Furthermore, large successful corporations make this mistake. For example, when first MP3 players came out they relied on poorly designed third party software to manage and transfer content from a PC to the player. Apple's iPod, besides being a well designed device, was made even better in combination with iTunes. The complete user experience propelled iPhone to the top of the pack, and created a base not only for other iPods, but also for iPhone. The completeness principle played a huge role in the success of the latter, because it came with iTunes, the software service with almost infinite choice of programs to try and buy. When a system is complete, it is very difficult for the competition to catch up. That's why Microsoft had incredibly hard time with Zune, and now struggles to maintain its initial advantage in software for smart phones.

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