Tue 24

A Business Fable

Writing Once upon a time a boy went to business school. The boy was not sure he wanted to go into business, because what he most loved was writing stories about aliens and monsters and girls who did not love him back. But he knew he could not hope to earn a living from such stories, so business school it was.

The boy learned many interesting things, until he began to think perhaps business was for him after all. One day, he attended a class in which students were divided into groups and asked by the lecturer to solve the following puzzle:

“A man buys a horse for $400. He feeds it, trains it, and sells it to a racetrack manager for $500. However, soon he regrets his decision, and asks the racetrack manager if he can have the horse back. The racetrack manager, being a good capitalist, asks for $700. The man objects, seeing no reason why the horse should be worth so much more than the day before, but eventually he relents and accepts the loss. Some years later, he finally sells the horse to neighbor for $800. Question: What is his total profit or loss?”

The boy’s group began to discuss this puzzle. The boy thought the solution was fairly obvious: the man bought and sold the horse twice, making $100 profit each time. However, his teammates were seduced by the puzzle’s suggestion of a loss, and insisted this be accounted for. They thought the man broke even.

The boy tried to explain his reasoning a different way. He added up the man’s outlays and revenues, showing the difference was $200. The group agreed, but insisted this was then canceled out by the loss. The boy tried again. “Imagine it’s not the same horse,” he said. “The man buys and sells one horse, then buys and sells a second horse.” The debate became heated. There was no second horse, the group insisted. There was one horse, and the man broke even.

After a few minutes, the lecturer halted the exercise and asked each group for its verdict. Only unanimous decisions would be accepted. Every other group in the class declared their belief that the man broke even. The boy’s group hissed at him to bow to the majority opinion, but he could not bring himself to do it. They informed the lecturer that they could not agree.

The answer, said the lecturer, was that the man made $200 profit. However, the exercise was not about that. It was designed to test teamwork. He had observed most groups working effectively: establishing leadership roles, managing divergent opinion, and finding common ground to reach a shared solution. The boy’s team, however, was a textbook example of failure: it had allowed a disruptive element to block them from consensus. It was then that the boy decided business was probably not for him.


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Chris McBride (#1977)

Location: Belfast, N.Ireland
Quote: "Plagiarism saves thinking time"
Posted: 5116 days ago

The day I learned business was for me was when I noticed that some idiot was selling horses for $400.

Machine Man subscriber Alan W (#1427)

Location: Spokane, Washington
Quote: "Corgis are like potato chips"
Posted: 5116 days ago

Max is awesome, as usual, but what about the expense of raising the horse?

Stable + food + time.

The man surely lost out big time.

The boy, on the other hand, is win!

This post is another reason why I am an engineer instead of business.

Niccalo (#2313)

Location: Duluth, GA
Quote: ""STOP! Don't Shoot!""
Posted: 5116 days ago

The boy is Steve Jobs; who went on to agree with no one and build a muti-billion dollar enterprise.

I'm a poor engineer too.

Machine Man subscriber Katrina (#847)

Location: SF, CA
Quote: "Good sex is like good Bridge: if you don't have a good partner, you'd better have a good hand." -- Mae West"
Posted: 5116 days ago

The people in the group who insisted on breaking even are the idiots. Don't ever give in to stupidity, even if you are part of a team. That way lies monumental mistakes later in life...

But yeah, not buying the horse in the first place and putting the money in savings would make more money total. Get a cat instead. ^_^

Perrorist (#3640)

Location: Central Coast, NSW
Quote: "No flow, no go."
Posted: 5116 days ago

Cost of horse: $400.
Sale of horse: $500 - Gross profit: $100.
Repurchase horse: $700 - Net loss: $600.
Resell Horse: $800 - Gross profit: $200.

Until I worked it out that way, I thought it would break even, too.

Joe (#2270)

Location: Campbell, CA, USA
Quote: "I'm subverting the system from the inside. I think."
Posted: 5116 days ago

Replace this example with "should we invade Iraq" and you see a similar dynamic. Even today, in the US, people who opposed the war in Iraq "too early" are seen as untrustworthy, "not serious", and excluded from positions as senior policy advisors by both parties (the Republicans because they still think it was a great idea, the Democrats because they are afraid of being called a bunch of hippie peaceniks).

Simon (#3192)

Location: Melbourne
Quote: "I'd rather be arrogant than wrong"
Posted: 5116 days ago

Max were you on Celebrity Masterchef or was that your doppleganger?

Machine Man subscriber Len (#4292)

Posted: 5116 days ago

I tell you, I see the mob mentality win out in daily business, and it so suffers for it. Teamwork, is not always a success, which I do believe is your point.

Additionally, one might consider additional factors like what Alan W, said, expenses, vet ... and profit!?

After all, if he raced the horse, did it win? Did he rent the horse to riders? Did he ride it to work and replace automobile expenses?, ..., probably the only expenses that would far surpass the cost of maintaining a horse. ( Ok, I might have gone too far with that one. )

I do use the elipsis too much, hehe.

Machine Man subscriber gstein42 (#585)

Quote: "That's not change! That's more of the same!"
Posted: 5116 days ago

@Alan - i agree with you... he might have made $200 profit while buying and selling the horse, but he also spent housing, feeding, grooming, training the horse

if the item in question was a block of steel, i'd agree with the $200 profit... seeing as steel doesn't need to eat.

Robert (#413)

Location: Los Angeles
Quote: "A positive attitude will not solve all your problems, but it will annoy enough people to make it worth the effort."
Posted: 5116 days ago

The first time I read this question I too thought the guy broke even, but I re-read it right after I answered and it's obvious that he made 200 dollars, but now I'm trying to figure out why I ever thought he broke even and I just can't do it.

Ihor (#4349)

Location: Ukraine
Quote: "“All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind” Adam Smith"
Posted: 5116 days ago

Was Max's hidden message in the story, that we shouldn't follow mob rule and teamwork and cooperation can only get you so far and that overall the individual should be valued, and further that working together and agreeing on a resolution just because most everyone agrees upon it is stupid cause in actuality the minority could be correct, and truth is far more important then cooperating.

That's what I got when I read this.

shabooty (#637)

Location: D.C./V.A/M.D.
Quote: "I will shake your foundation. I will shake the f**cking rafters. Nobody'll be the same -Danny Bonaduce ....& go visit my blog @:"
Posted: 5116 days ago

did that boy's name rhyme with Dax Larry?

Machine Man subscriber Max

Location: Melbourne, Australia
Quote: "I'm my number one fan!"
Posted: 5116 days ago

Why yes, yes it did.

Dave (#4589)

Posted: 5116 days ago

Sorry, Max. I've been part of very similar things actually in a business environment, where I've been the disruptive thinker (convinced I was right (and it turned out, I was)), but a decision was never made as a consensus was never reached (and thus a business opportunity was missed).

The failing was with me (and you, in your example). It's one of hardest parts of being smart and correct - convincing the wrong and stupid. If you (or I) couldn't get the true answer across to the rest of the group, then that's something that you're doing wrong, rather than the rest of the group.

It's the most important business lesson I ever learnt. It's not enough just to be right, you have to be able to convince others that you're right.

Hugo Edwards (#3925)

Location: Philadelphia
Quote: ""Science!""
Posted: 5116 days ago

Dave, I'm fairly sure the point is that having to simply agree with everyone else whether or not it is what you think is wrong, and not something he (or any of us) can enjoy.

Dave (#4589)

Posted: 5116 days ago

I'm aware of that, Hugo. I'm simply saying that consensus is a good goal, but it's the responsibility of those who are correct to ensure that it is the correct consensus that is reached.

Machine Man subscriber coolpillows (#3749)

Location: new york general sort of vicinity
Quote: ""It's not working" -- Joseph Clark"
Posted: 5116 days ago

I think Charlie should blow everyone away with his gun arm. (oh, sorry...inside joke for "Machine Man" readers.)

Machine Man subscriber Ben (#3924)

Location: Alberta, Canada
Quote: "I don't wanna ride the elevator."
Posted: 5116 days ago

@Dave - Bull. If you are part of a group where the consensus not reached is whether jumping off this cliff here (imagine a cliff in front of you) will make you millions, and as a result of you disagreeing noone dies, you win. Okay so its not a cliff you say, well no, your right, its stupidity. Following a incorrect path in order to take a business opportunity that is a bad one, is a failure, therefore not doing so, even as a result of being a pain in the rear, is a success. Refusal to contemplate a position presented to you, often by a single source, because you believe yourself right, robs you of your intellect. Who are you if you never give a disputing position reasonable thought?

@coolpillows - I agree.

C B (#4591)

Location: USA
Posted: 5116 days ago

This is called Groupthink theory.

It's actually a really bad thing to have. If the teacher thought this was a beneficial exercise, he was incompetent and/or sadly mistaken.

I know just how you feel, though. I enjoy computer science, software engineering, and databases, but I'm stuck in the IS program at my university with the business students. These sorts of stories are all too true for me as well. The incompetence that runs through the business schools makes me want to go postal sometimes.

Kyle Towns (#4590)

Location: Tasmania
Posted: 5116 days ago

This sounds personally familiar, despite the familiar haunting reminder of today's burgeoning socialism.

Machine Man subscriber Thomas Rice (#952)

Posted: 5116 days ago

Conclusion: Persuasion is a required skill in any group environment, and being right isn't enough.

Machine Man subscriber Thomas Rice (#952)

Posted: 5116 days ago

Alternative conclusion: Avoid group environments, because nothing exciting comes out of consensus thinking. :)

Phill Sacre (#1822)

Location: London, UK
Quote: "Computers are like air conditioners. Both stop working, if you open windows."
Posted: 5116 days ago

If you're going to get on in the business world, you have to realise that you cannot cope without meetings. People who get things done without meetings are to be shunned.

"None of us are as dumb as all of us"

Machine Man subscriber Yawnder (#1840)

Location: Brossard, Qc, Ca
Quote: "Smile, Tomorrow Will Be Worse... - Murphy"
Posted: 5116 days ago

As anyone working realizes after a few weeks :
The validity of what you say is not what matters. What matters is WHO is screaming, and how loud he can scream it.

@Phill Sacre: I took all those despair things, I put them as my wallpaper and each day (well, not each day, but once in a while..) I change them.

Nowdays is « Dysfunction : The only consistent feature of all your dissatisfying relationships is you. » :-P

Jack (#2443)

Location: Australia, Bendigo
Posted: 5116 days ago

Doesn't mean shit if they worked together, if in the end they were still wrong. The individual is always more important than the group anyway.

In this instance I think the boy who refused to be a team player should be congratulated, he didn't go along with the stupidity of everyone else, didn't agree for the sake of agreement.

towr (#1914)

Location: Netherlands
Posted: 5116 days ago

And people wonder how we got into a global financial crisis...

Machine Man subscriber dabbeljuh (#4114)

Posted: 5116 days ago

as a trained physicist, i really do not see the argument for the even hypothesis, can someone explain why it should not be 200 dollar gain? (minus costs )

nicely written but I cannot really imagine a group of people getting it so wrong ~

Dave (#4589)

Posted: 5116 days ago

@Ben: I'm not saying that you shouldn't consider all points of view. You absolutely should, in order to make the best decision. I'm only saying that if you think you're right, then don't just offer your dissenting opinion and sit back, thinking, "My work here is done." If you're right, it's your responsibility to convince the rest of the group.

Abgrund (#3357)

Location: Atlantis
Quote: ""Redeem your mind from the hockshops of authority." - Ayn Rand"
Posted: 5115 days ago

As any engineer could tell you, it depends on how many years elapsed, what the time value of money was, and what other expenses were incurred. Whether it was a good decision might also depend on what other options were available - even if it made a profit, it might have been a bad investment.

Engineers can't hide behind committee reports when a bridge falls down. We have to do it right. If companies weren't run by business majors, they might not need trillion dollar bailouts to survive.

Machine Man subscriber Max

Location: Melbourne, Australia
Quote: "I'm my number one fan!"
Posted: 5115 days ago

@dabbeljuh: Mathematics is not a pre-requisite for business school. I was the dumbest guy in my high school advanced math class, and a genius in my first year at B-school. One girl I worked with had never heard of the order of operations.

Some good debate in these comments! Personally, I can see the argument for making a decision and going with it, even if it's sub-optimal, over paralysis. That's probably important in organizations. But I weep for the idea that you can have an opinion about addition.

Machine Man subscriber Neil (#4050)

Posted: 5115 days ago

Interesting one. Ultimately the lecturer had a valid point about decision making, but was rather stupid to choose an example where the answer was knowable and certain in advance (at least as far as the question as stated goes)... but that's pretty much what Max has just said. If presented with that problem, I would have assumed that it was supposed to illustrate business students' ignorance of economics.

(I would never have made that mistake, but I can see how it came about. On the assumption that the posters acting bemused really are, and aren't doing it for rhetorical effect... the people who said the man broke even were either subtracting the 700 from the 500 after subtracting the 400 from the 500 and then subtracting the 700 from the 800 instead of subtracting the 500, or (more abstractly) they were subtracting the amount by which the revenue was less than it might have been from the actual revenue. This may have some significance in business, but it's certainly not profit.)

@Max: What did you do immediately after this epiphany?

John Reynolds (#2534)

Location: New York, USA
Posted: 5115 days ago

I see why people say that business majors are stupid. How is it not completely obvious that the man makes $200?

Machine Man subscriber Max

Location: Melbourne, Australia
Quote: "I'm my number one fan!"
Posted: 5115 days ago

@Neil: I'm not sure I did anything immediately. But this annoyed me mightily, and still does 15 years later. I was RIGHT, dammit. I was RIGHT.

Rene (#2458)

Location: Austria
Quote: "To live is to die - Cliff Burton"
Posted: 5115 days ago

Which is just the reason, why I hated every Instant of that "project management" course I had to endure in school...

Machine Man subscriber Mapuche (#1184)

Location: Darwin, Australia
Quote: "Inconceivable!"
Posted: 5114 days ago

It's a misaccounting for the $200 loss on buying the horse back being set against the two separate $100 profits on selling the horse.

$100 profit, $200 loss, $100 profit = break even, failing to take into account the fact that the third transaction includes (and offsets) the $200 loss (without it his position would be up $400 buying the horse at $400 and selling it at $800).

Yes Max, you were RIGHT dammit! I have always valued being right over consensus, but consensus is important, but not to the point of being more important than being right.

Machine Man subscriber Yawnder (#1840)

Location: Brossard, Qc, Ca
Quote: "Smile, Tomorrow Will Be Worse... - Murphy"
Posted: 5114 days ago

@Abgrund : Well, you're probably aware of the underlying requirements to make the statement of the story true, like the cost of funds, funds limit, risk, etc., but most people aren't awared of all those so he kept the story simple! :-P

For example :
Would the guy have had only 1000$ to invest, and would have had an opportunity to invest 800$ risk free and get a 50% return over the same period of time, he would have LOST 200$ by « investing » in that horse.

Would the inflation have been 50% over each « buy-sell » period, he would have lost about half his purchasing power with those investments.

As for the risk, it wouldnt have changed the profit made after the facts, but it would have made it a wise (or stupid) decision, at the time of the investment.

But hey, who am I to talk about risk in Max Barry's blog.. he's the one to blow minds with a lecture on risk! :-P

Machine Man subscriber hammer256 (#4122)

Posted: 5113 days ago

That's why I like science and tech better than politics and business. There's a reality check for both. Will that bridge collapse? Can that theory hold up to the data? Can that data be replicated? Fraud and anything deviating from the truth will be shown to be wrong, eventually, and only the right can prevail. Of course, there's still the political maneuvering and all that (a natural product of human interaction, it seems), but that reality check ultimately has the final word.

Joe Sherrod (#947)

Location: Rockville, Maryland, USA
Posted: 5110 days ago

Sorry about this Max, but your professor is a bit of an idiot, but only in the same general sense that business schools are idiotic. He didn't account for the fact that taking care of a horse for some years can be much more expensive than that $200 difference, and there was no indication in the story as to whether or not the man was satisfied with his horse for the duration of his ownership of said horse.

Machine Man subscriber Katie Ellert (#207)

Location: Calgary AB Canada
Quote: "Where's Lola? WHERE'S LOLA?!?!"
Posted: 5108 days ago

So this is off topic, but I definitely just noticed that your new header has little phrases that change when it refreshes... mine currently says "dangerous when aroused"

Karan (#1376)

Location: Sydney, Australia
Quote: "Quid Quid Latine Dictum Sit, Altum Viditur - Anything said in Latin sounds important"
Posted: 5105 days ago

Dear god, so depressingly true -_-

Manssour (#4634)

Quote: "Price of Greatness Is responsability"
Posted: 5092 days ago

Ya but :

Cost of horse: $400. Feeding: $100 (Total costs = $500)
Sale of horse: $500 - Gross profit: $0
Repurchase horse: $700 - Net loss: $200
Resell Horse: $800 - Feeding: 500$ (after years)
Gross profit: $100

And not $200.... Sorry it's my businessman side who make me answer you like this :D

Johnny Ringo (#4850)

Posted: 4949 days ago

Consider how much money the guy spent on the horse and how much money he actually ended up with.

1. Spends $400
2. Receives $500
3. Spends $700 (that's $200 more than he received)
4. Receives $800

He spent $1,100 total out of pocket for the horse. He ended up getting $800 back but then he doesn't have the horse. He lost $300 on his trades in addition to the expenses of maintaining the horse.

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