What is upside decay?
The reduction in area under the curve (the orange part) represents the loss of positive outcomes. The total loss is small, but it’s concentrated in the tail of the curve where the extreme successes happen. This is upside decay and it’s catastrophic.
Extreme success
GDP per capita has increased for two centuries, driven by improvement in Total Factor Productivity, also known as technological inventions and breakthroughs. This comes from many people trying out different things, each of them individually unlikely to succeed. The ones that do succeed, though, create an outsized impact.
Hard to spot
Upside decay is hard to spot. It’s invisible if we’re not specifically looking for it, because the absence of rare positive events is unexceptional.
Too late to fix
We need to observe an organization over a long period of time or have access to a generous chunk of its history. By the time we identify the presence of upside decay, it will already be far advanced.
Weak ties over time are more important than strong ties
Weak ties are inconspicuous but numerous, and help in unexpected ways. When weak ties are activated, they can be more helpful in aggregate than strong ties. But weak ties will not help an unvirtuous organization! Weak tie assistance is voluntary and altruistic. This means that they only help those they think are virtuous.
Depending on strong ties only leads to mercantilism
Without weak ties, organizations resort to strong ties and hard assets. This leads them to adopt a mercantilist approach.
Only the disappearance of good luck
This also explains why their good luck disappears but they don’t suffer much additional bad luck.
Build a virtuous culture
Avoiding upside decay is simple but difficult. The organization needs to build a virtuous culture that leads to a positive feedback loop. At the same time, it needs to punish bad actions that have short-term benefits.
Example of Facebook in mercantilism
Most companies follow Facebook’s path to unvirtue. At every turn, given the choice between virtue and advertising revenue, Facebook chose revenue.