Ethics in business – theory of probability

This is a series of articles and its sequence is important, so before we begin, let’s do it like it’s done on TV, that is with a recap of how the previous episode had finished. It went like this:

Shall we start with a fundamental question on business behaviour? By "fundamental" I mean a question that is worth asking at the beginning. The answer will be the ground for our further consideration, so in short, to start from the beginning, not from the middle. The question is certainly worth considering (and is being considered) in ethical terms. We, however, will consider it mathematically. The question is:

Is the continuous maximization of your own victories, every step of the way, effective?

Alphonse Gabriel Capone was a typical CEO of a very efficient business organization. He handled huge amounts of money earned from trade, entertainment, smuggling, extortions, etc. and he didn’t bother about PIT, CIT and VAT taxes, or whatever they were called at the time. Al Capone, as he is better known by the short version of his name, is an example of a dynamic and very characteristic career. Both he and his business sector (gangs) come very useful to the purpose of this article. The extremity of this example is an illustrative advantage. The processes are the same as in any other business sector, except that they are located elsewhere on the intensity scale. This is a clear example of maximizing your own victories in every step of the way. As you can hear in today’s corporate jargon, "my win is more important than yours". Here and now. No gratuities to come later, tomorrow doesn’t count. In the case of Al Capone, the ?win” of any other party was simply inadvisable. Everyone was to know who’s the boss, every minute and in every case. For him to win, others must lose and acknowledge his reign. In business today, some would say that he was an example of a strong manager, uncompromising, ambitious, always aiming and bidding high. Some would add (with admiration): we need such managers now. He started off as a bodyguard and became a "CEO" at the age of thirtysomething (a seriously injured predecessor gave up, anointing Al). He was caught before the age of forty. For tax evasion, not for being a gangster. He shined with wealth but couldn’t document his revenue and that makes him a self-righteous arrogant. Later, he was sent to Alcatraz, suffered from progressive dementia and died before he turned fifty. Luckily to him, in his own bed, as for the last few years he was more of a vegetable, practically forgotten.

The second example of a similar "CEO" is Pablo Escobar. Same career model - you do what I say or you die. Each step is maximization. No compromises. This is also great arrogance and the belief that you are the chosen one and accidents happen only to others. He made it to the Forbes list of world’s wealthiest, so the whole world was watching the hunt for him. He was pursued by police and special forces of several countries, competitors and... commandos of victims' representatives. Referring it to the realities of our environment: he worked in increasingly difficult business conditions. He earned this with his style of business management. Shot dead at the age of forty-four. Proud pictures of "hunters" over his riddled and bloody body are easily available on the Internet, despite their rather drastic message. As for the world’s seventh richest man, he did not enjoy life for a long time.

These are just two examples of "strong, uncompromising managers" who, let me repeat that, always bid the highest stakes. What’s important is that they get to the top. So they are an example that acting in this way you can reach the top. This creates legends, or kind of fairy tales if you wish. We could go on and on with further examples of such careers (with the same ending). Bonnie and Clyde or Dillinger are just icons of the same approach. And when you get lower in the hierarchy of such "businesses", you can find a lot of corpses. Looking at it briefly, you can get a feeling that gangster-sector itself is an extremely efficient, high-margin, great and profitable business. However, being a gangster in the style described above (always take everything) often ends badly rather than well. By "well" I mean reaching a peaceful, calm life, without the need to hide all the time like a rat, and natural death of old age, in your own bed, not from the excess of lead in your body.

Why do we need this whole introduction and the business cases mentioned? Because it makes it easier for cold mathematics to enter the room now. Let us translate the described scenario "maximization in every step" into its language. Capone and Escobar could have worked according to many scenarios. Consciously or not, they chose the extreme one, which means bidding high every time. The world, the other participants of the game, have to give in to it. The total probability that anything will happen is 100%. Extreme scenarios are the riskiest, because there must be a number of favourable circumstances. What’s more, you antagonize other participants of the game, i.e. cause them to interrupt. In this case, the higher risk means a relatively low probability of success. But it is obviously higher than zero.

Let's move to the theory of probability in the basic version. Suppose that the probability of an event is 10% (0.1). It's still a lot, given the risky variants of the game for the maximum stake (anywhere, in a casino, business, a gang). What is the probability of two such events occurring one by one? Probability multiplies, not sums. So the aforementioned chance of success is 0.01, or 1%. It’s dropped quickly from 10%, hasn’t it; already in the second step. And if we bid risky five times... we have a chance of... 0.00001. That is precisely one in ten thousand. The sixth success in a row is one in one hundred thousand, seventh - one in a million, and so on. Capone and Escobar, apart from their character traits, were incredibly lucky, building a “it can be done” legend. The probability of success was as low as you can imagine, and they acted like they did for a good few years. Let’s not forget that in the course of their lucky careers (at least for some time) hundreds or thousands of others have fallen/died much earlier, defeated by the laws of mathematics. It's also easier for us to look at the careers of Capone, Escobar and a number of ordinary business bosses acting like in “shoot'em all” computer games. Get out of the circle of myths created by movies, the Hollywood version of reality. The constant maximum risk (exploiting all people) is a recipe for suicide, in real life or in business. Here, maths supports ethical reasons not to do so.

But... there’s even more to it. A moral such as "do not maximize endlessly, for you will end up like Capone/Escobar/Bonnie & Clyde because it’s been proven by the postulates of both ethics and mathematics" is not enough. The history of “gangster” business sector brings even more to the argument. Another question that we have to ask ourselves is: how do we know if alternative scenarios are better because mathematics is just mathematics and we could use a tangible proof.

We actually got it. The example is another gangster - Lucky Luciano and his business concept. He probably wasn’t too good at mathematics nor did he study ethical essays. However, by observing the effects, he came to the conclusion that running business like his contemporary Al Capone couldn’t be done anymore, the approach simply ruins it. It is ineffective in the long-run. He began in a typical manner, that is, in a short period of time his men murdered two key bosses who were constantly fighting and worked the Al Capone way (constantly at war with everyone). Then he sat the heads of the families at the negotiating table, where the principles of cooperation and methods of doing business were established. One of them was a conscious departure from the killing of policemen, journalists and politicians. For humanitarian reasons? Probably not. It was more about not making noise and antagonizing other participants of the market game. To implement a scenario with a greater likelihood of long-term success. There were even episodes of cooperation with the US government and special forces (World War II, Cuba). No more The Goodfellas, it’s an organized business. A transition from a tribe to a corporation. By the way: one of the "business units" was the section of specialized assassins. It acted as an internal audit because it dealt mainly with its own gang members.

What happened? The leaders changed the business model from extremely aggressive to one that recognizes market participants and their interests. One that looks further than the next step maximizing the victory of the moment. One that targets a larger profit in time and stability of running a business. Did the gangsters do it for ethical reasons? Probably not, though whether they wanted it or not, they moved in that direction. They did it because in the long run it just paid off, especially with the growing scale and complexity of the business. The risk of putting all your eggs in one basket is most easily taken when we don’t have much. Having at one point too much to lose (and everyone assesses this by themselves), the wise ones change the scenario. In most cases, intuitively, though... we learned it in maths classes at school. It’s just it was explained with other examples, seemingly irrelevant in our everyday life.

Let me remind you – the gang business is just a vivid example of processes, which are, however, universal and also fit into regular business, the one that surrounds us every day. The same processes, only elsewhere on the intensity scale.

To sum up, the calculation shows that regardless of the rapidly decreasing probability of success of the game being played repetitively at the highest stake, the success is, of course, still possible. The key issue is to withdraw from tempting fate at the right moment. Complete withdrawal (I am leaving for the tropical countries and I don’t need to do anything anymore) or change of the game's scenario even to limited cooperation, nonetheless, and taking into account other stakeholders. Obviously, there is no sign saying "this is the right moment". The fact it is simply about the ability to make a hard decision about leaving/change. Preferably, after prior (!) determination of the exit criteria; for example, accumulating a certain amount of money, gaining market share, turnover, etc. Can we do it? That's the problem. So far, I have highlighted things that can be grasped by reason (theory of probability). At this crucial moment, the reason most often gives way to emotions. Hardly anyone can leave the casino with a prize. Business successes are equally addictive. I succeeded a few times, so... it's my genius and divine intuition (I can feel the business!), not merely “I got lucky”. Even though we know perfectly well that the longer we play, the more our chances decrease, and the casino's chances grow. That's why casinos are such a profitable business. It is a perfect victory of emotions over reason, that is, over soulless mathematics. Dostoyevsky pictured it beautifully in The Gambler.

What does this mean for business? The conclusion is simple: if you think you always have to play to maximize your victory regardless of anything and nobody, you are no different than a casino gambler or an ordinary low-level gangster. So most likely you will end up like them: in the trash or six feet under (metaphorically). Of course, we tend to look at the examples of the few who succeeded, if only for a while. We try not to see and remember thousands of those who, due to obvious mathematical reasons, lost and disappeared because they were bidding high. Let me repeat it - you cannot fool the theory of probability. If ethical postulates don’t appeal to you, then maybe mathematics will. Only with this in mind let everyone decide for themselves how and if to bid, when, and according to what criteria to withdraw, or change the rules of conduct to be even more successful. And of course, if you even have to be a bad guy at first, instead of immediately acting according to the scenario of a greater likelihood of success. Only then you have to use more time and reason than your instincts. And many people have problems with this because it’s their nature, that blood clouds their judgement the minute they start acting.

It turns out that mathematics has little to do with primitive social Darwinism, which some people fear. On the contrary, it says something completely different than this primitive Darwinism "you kill or you die, always, every step of the way". Mathematics says that this is the best way to lose, literally or symbolically, in business or in a casino. Secondly, the mere use of the word "Darwinism" is an abuse. Darwin would roll over in his grave. His theory is about species adapting to survive, not acting like an ape with a razor. Survival does not mean planned extermination of everything that moves, with my "win" being the most important, because there is no tomorrow. Perhaps there is a tomorrow, and we should aim at our company lasting a bit longer than here and now?

These simple considerations make us move away from the scenario of continuous maximization of effects in every step. That is, acting only from the perspective of just one step, not the whole road. The repeated “extreme gambler” scenario statistically loses. Coming back to the opening question - cold and emotionless mathematics supports ethical considerations and postulates. Statistically.

Bearing this in mind, the time has come for question number 2:

What is minding others, possible cooperation and interaction with other market participants really about?

Cooperate, but how? In the next article we will learn what mathematics has to say in this matter. Bigger things await. Ethics, be hopeful or afraid, for your faith is in its soulless hands.

PS I promised you pirates, so here we go... These famous businessmen from hundreds of years ago provide equally good examples. Blackbeard's scenario – notorious high bidder, shot dead at the age of about 43, as well as many others like him. Henry Morgan - made a deal with the king, ends up as a nobleman and a respected vice-governor of Jamaica... fighting other pirates. Sir Henry Morgan, that is.

PPS For whom is this article? For everyone, of course; but mostly for young managers, who are shaping up their habits and business vision through reason, rather than Hollywood myths spread by some God-given coaches. Also for all those wise people, for whom the "Wall Street Wolf" is a cult training film, and who hang Gordon Gekko's portraits in their bedroom.

PPPS The more inquisitive may come up with another reflection. If the probability of each event is less than certain (less than 1), then does any cycle of events lead to the final probability of success close to zero? Something like this. All empires fall, after all... Here comes another queen of sciences, Physics. One of its fundamental laws says that entropy only increases. And all our efforts are just a temporary local disturbance of this process. But this is a topic for a completely different article about philosophy and other sciences.