I submit this is usually a result of rational behavior. The reason is straightforward: the job of business executives is nominally to increase the share price, but what this actually entails is exploiting their capital as efficiently as possible. This matches what we would expect rational people to do on a couple of levels:
This is what formal training consists of during an MBA; there are formal processes for conducting the analysis; capital efficiency is included directly in financial analysis by investors on Wall Street. It would be very weird for successful corporate titans to go screw process and Wall Street all the time.
Even in the basic person trying to do their best case, what do I have and what can I do with it is as fundamental an approach as possible.
These two examples carry in them an implicit assumption, which I want to point to as a good predictor of the phenomenon: the new investment will decrease the value of investments they have already made. In other words, it will cannibalize value.
This is the logic behind Blockbuster/Netflix; if they had bought them, all the gains Netflix made at the expense of Blockbuster stores would have looked like shooting themselves in the foot. Let us consider the counterfactual case of Blockbuster buying Netflix for a song: their stores continue to get hammered yielding definite losses; the titanic success of Netflix is uncertain and in the future (deeply uncertain; would they have made the further transition to digital from mail-order? Could they have managed the state-of-the-art IT infrastructure to make it work if they had? Would they have had the foresight to invest in original content?). Would the investors have spared the rod after setting their capital on fire for such uncertain gains?
You can also consider another interesting case: Kodak and the digital camera. Now as it transpires Kodak didn’t miss the boat so much as miss the shots it took, but I posit a causal mechanism at work: Kodak’s primary investments were in chemicals and paper, so their leadership was not positioned to implement decisions well, even when they made strategically good ones.
So I say it is rational because they are doing what a method that a lot of smart people have worked very hard on refining says to do (usually successfully). I say the predictor for when it will happen is that it makes what they are already doing less valuable, and therefore they are ill-positioned to execute and even if they do they will be punished.
I submit this is usually a result of rational behavior. The reason is straightforward: the job of business executives is nominally to increase the share price, but what this actually entails is exploiting their capital as efficiently as possible. This matches what we would expect rational people to do on a couple of levels:
This is what formal training consists of during an MBA; there are formal processes for conducting the analysis; capital efficiency is included directly in financial analysis by investors on Wall Street. It would be very weird for successful corporate titans to go screw process and Wall Street all the time.
Even in the basic person trying to do their best case, what do I have and what can I do with it is as fundamental an approach as possible.
These two examples carry in them an implicit assumption, which I want to point to as a good predictor of the phenomenon: the new investment will decrease the value of investments they have already made. In other words, it will cannibalize value.
This is the logic behind Blockbuster/Netflix; if they had bought them, all the gains Netflix made at the expense of Blockbuster stores would have looked like shooting themselves in the foot. Let us consider the counterfactual case of Blockbuster buying Netflix for a song: their stores continue to get hammered yielding definite losses; the titanic success of Netflix is uncertain and in the future (deeply uncertain; would they have made the further transition to digital from mail-order? Could they have managed the state-of-the-art IT infrastructure to make it work if they had? Would they have had the foresight to invest in original content?). Would the investors have spared the rod after setting their capital on fire for such uncertain gains?
You can also consider another interesting case: Kodak and the digital camera. Now as it transpires Kodak didn’t miss the boat so much as miss the shots it took, but I posit a causal mechanism at work: Kodak’s primary investments were in chemicals and paper, so their leadership was not positioned to implement decisions well, even when they made strategically good ones.
So I say it is rational because they are doing what a method that a lot of smart people have worked very hard on refining says to do (usually successfully). I say the predictor for when it will happen is that it makes what they are already doing less valuable, and therefore they are ill-positioned to execute and even if they do they will be punished.